A tax on luxury goods as an alternative to the now-scrapped VAT hike or the recently increased fuel levy, as proposed in some quarters, would be unlikely to generate substantial revenues.
This is according to Michael Zahariev, co-founder of the pre-owned luxury goods retailer Luxity, who spoke with Business Times recently about the luxury goods resale sector. His remarks come after the National Assembly passed the third budget to be drafted by finance minister Enoch Godongwana this year.
During Godongwana’s first two attempts at tabling a 2025 budget, the EFF, MK Party and some NGOs said the minister should implement luxury goods and wealth taxes instead of VAT. The VAT hike was ultimately scrapped in favour of a fuel levy hike.
Asked about the prospect of generating high revenues from a tax on luxury goods, Zahariev said the prospects for revenue hinged on how a luxury goods tax was implemented.
“If it applied only to new luxury goods, it would be a great thing for us because it would just make us more affordable compared to new luxury goods,” he said. “Additionally, it would support the local circular economy.
I don’t necessarily think it’s a good thing, as it might not bring in as much income in for the government as far as the luxury goods items we sell. Perhaps in a broader cycle of luxury cars and houses, it will bring in income, but those sectors will not fare well because those things are at a much higher price point than a bag
— Michael Zahariev, co-founder of the pre-owned luxury goods retailer Luxity
“If it applied to all luxury, the demand would stay very much the same, but the [spending] will shift more overseas where it is already more affordable. Price hikes in luxury goods don’t tend to impact the demand that much, but price differences would shift [spending] out of the country.”
Zahariev said a luxury goods tax was likely to cut some buyers out of the market, in which there was already a shortage of luxury goods players investing in operations in Africa and South Africa.
“At the same time, I don’t necessarily think it’s a good thing, as it might not bring in as much income for the government as far as the luxury goods items we sell. Perhaps in a broader cycle of luxury cars and houses, it will bring in income, but those sectors will not fare well because those things are at a much higher price point than a bag.”
He said the luxury goods resale industry would “certainly survive such a thing”, but he did not believe the revenue gains would be substantial.
Zahariev pointed out that the luxury goods resale industry was beginning to outpace the sale of new luxury goods in South Africa. He said pre-owned shops like Luxity often offered buy-now, pay-later deals and reservation plans, which were not seen in sales of new luxury goods.
“This outpacing is starting to happen because there is an aspirational element. Customers are trying to aspire to something greater. They are also trying to shop more sustainably. And pre-owned is allowing them access to both those things.”
According to a study by Luxity, local jewellery brand Brown’s was reselling at 66%, and Cartier was reselling at 74%. Zahariev said this showed that South Africans valued local luxury brands and designers in the country were creating compelling products that aspirational consumers wanted.
Matthew Parks, Cosatu’s parliamentary liaison officer, said the federation had tabled alternative revenue and expenditure proposals that would raise similar funds to VAT without squeezing struggling families.
“These include removing tax loopholes exploited by wealthy individuals and corporations as well as raising taxes upon the rich through income, inheritance, estate and luxury goods duties,” Parks said.
“The South African Revenue Service [Sars], which has been allocated R7.5bn and has already delivered an additional R9bn in revenue collection, should be given space to tackle the R800bn in outstanding taxes.”
Tiaan Herselman, head of advice and proposition at Old Mutual Wealth, said there has been significant discussion and speculation regarding a potential wealth tax, with the standing committee on finance recommending addressing revenue shortfalls projected at R22.3bn for 2024/25 by exploring taxes on luxury items and wealth taxes.
“On this front, the Sars commissioner’s wishes have been granted, with Sars receiving an allocation of R3.5bn in the current financial year and an additional R4bn over the medium term,” he said.
“This funding will support Sars in collecting and analysing wealth-related data through its high-net-worth individuals' unit. However, it is important to note that no final decision has been made regarding the implementation of wealth taxes in South Africa. This remains an area we will closely monitor.”
In a submission to the ANC after the first attempt at tabling the budget, the Institute for Economic Justice (IEJ) recommended a 25% luxury VAT rate to raise R9bn a year, and freezing personal income tax brackets, which raised R16.3bn last year.
“Implement a social security tax with the potential to raise R64bn. Tax wealth effectively by implementing a net wealth tax, which can raise R70bn to R160bn annually. Implement a small financial transactions tax (0.1%), which has the potential to garner over R40bn in revenue,” the IEJ said.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.