South Africa: Sars increases customs duties

PHOTO

The clothing and textile industry has faced widescale criticism for controversial Environmental, Social and Governance (ESG) practices. South African consumers may imagine themselves to be far from the hub of these issues, but we are all participants in the global supply and demand for fashion.
Recent changes to the imposition of customs duties on online retail orders shine a light on some of these issues.

In this article, we unpack the impact of the adjustments on consumers, as well as some considerations for the South African fashion industry.

Despite being a relatively new player in the global fashion sense, South Africa's textile industry plays a significant role in the country's economy, contributing to job creation, economic development, and export earnings.

The textile industry, which includes the production of fabrics, apparel, and home textiles, has a rich history and has undergone significant transformations over time.

Today, South Africa's textile industry is a diverse and multifaceted sector, encompassing various segments such as spinning, weaving, knitting, dyeing, finishing, and garment manufacturing.

The industry primarily serves the domestic market but also exports to regional and international markets.

Although there is potential for growth in the South African clothing industry, consumers still purchase significantly more imported products as compared to locally produced clothing.

According to the South African Revenue Services' (Sars) trade statistics for June 2024, China remains the primary source of textile imports for South Africans, with an average monthly import value of approximately R4.2m.

Imported goods are subject to customs duties and a 15% VAT rate based on their value, which must be paid to Sars. The rate of customs duties differs depending on the type of goods imported and the country of origin.

Goods that can be sourced locally through the local manufacturing industry, would typically be taxed at higher customs rates.

This ensures that South African manufacturers and suppliers are not disadvantaged. This is often why an item from a foreign e-commerce website may appear to be affordable, but once shipping costs are calculated (which often include customs duties), the final price at checkout makes one abandon their entire shopping cart.

Many online retailers, such as Shein and Temu, have been able to use the de minimis rule, which means that imports of R500 or less have been subject to a standard customs duty of 20% on the value of the goods without VAT.

This was in contrast to local retailers who pay up to 45% customs duty on imports and 15% import VAT.

In a significant move aimed at bolstering local businesses and streamlining the customs process, Sars has increased customs duties on imports from popular online retailers such as Shein, Temu, and other similar platforms.

This decision is expected to impact many South African consumers who frequently shop in these international online stores.

Understanding the new customs duties and import VAT increases

The new regulations, which came into effect on 1 September 2024, modify the way customs duties and import VAT are calculated. The changes are grounded on the Customs and Excise Act, No. 91 of 1964, the Value-Added Tax Act, No. 89 of 1991 and the World Customs Organisation (WCO) framework.

The WCO developed the "WCO Guidelines on Immediate Release" in the early 1990s, which classify goods into four distinct categories that account for different tariff thresholds.

Effective 1 September 2024, VAT is added to the current 20% flat rate customs duty as a temporary measure. By 1 November 2024, the 20% flat rate will be restructured to align with the WCO categories.

What is being adjusted?

Customs duties are calculated based on the declared value of the goods, including any applicable shipping costs and insurance. Sars has adjusted the duty rates to make importing small, low-value items less economically attractive.

This adjustment is intended to discourage the frequent, low-value imports that contribute to inefficiencies and unfairness in the local market.

Import VAT is levied on the total value of the goods, customs duties and a 10% upliftment on the customs duty value. This 10% upliftment represents an amount in lieu of shipping and insurance costs.

According to the VAT Act, the standard rate of VAT is 15%, but the recent changes may result in this rate effectively increasing for certain categories of imported goods due to higher customs duty rates.

Reason behind the increase

Sars has justified the increased duty rates as a broader strategy to promote local businesses, by making international imports more costly, particularly small, frequent orders that can disrupt local markets and supply chains.

This encourages consumers to shop from South African retailers, boosting the domestic economy and creating more opportunities for local businesses.

It also reduces market clutter. Small, frequent international orders contribute to logistical and administrative burdens. By increasing the costs associated with these imports, Sars hopes to mitigate the strain on the local customs system and streamline the processing of imports.

Broader impacts on the South African import/export market

SARS is not the only organisation seeking to rejuvenate the local clothing industry at the moment. In South Africa, various government bodies and agencies oversee and regulate importing and exporting within the Clothing, Textile, Footwear and Leather (CTFL) sectors.

These bodies ensure that trade practices align with national standards, international trade agreements, and compliance with regulations.

These regulatory bodies include SARS, the International Trade Administration Committee, the Department of Trade, Industry and Competition, the Clothing and Textiles Competitiveness Programme, the South African Bureau of Standards and the National Regulator for Compulsory Specifications.

The industry's regulatory monitoring has been regulated by policies, such as the 2030 Master Plan for South African Retail, Clothing, Textiles, Leather and Footwear Value Chain (RCTFL Master Plan).

This is a strategic blueprint aimed at revitalising and growing the sector by 2030. The key goals are to boost local production, create job creation, revitalise sectors, and substitute imports.

The South African textile and clothing market is currently characterised by a mix of locally produced goods and imports. The market is a mix of established local brands and retailers, with a growing interest in affordable, fast-fashion imports and luxury, local products for niche markets.

The retail sector, which includes both huge chains and independent stores, is a key driver of demand. Consumer preferences have shifted towards more affordable and fashionable products, resulting in increased competition from imports, particularly from China.

This shift can be due to economic factors, globalisation and a lack of innovation in South Africa.

South Africa exports textiles and clothing to various markets, including the United States, Europe, and other African countries. The African Growth and Opportunity Act (AGOA) has been a significant factor in boosting exports to the US, allowing duty-free access to certain products.

South Africa's exports include Australia, Botswana, China, Democratic Republic of Congo, Eswatini, Germany, France, Ghana, Kenya, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, Tanzania, Uganda, Zambia and Zimbabwe.

However, the industry faces challenges in maintaining competitiveness due to rising production costs and competition from low-cost producers.

The textile industry remains a significant employer in South Africa, particularly in KwaZulu-Natal and the Western Cape. The sector provides jobs for thousands of workers.

However, employment has declined over time due to automation, globalisation, and competition from cheaper imports. As consumer preferences evolved towards more affordable and fashionable products, South Africa faced increased competition from imports.

While South Africa still produces and exports various products to local and international countries, items that South Africa mostly imports are finished products such as footwear and clothing, with its top imports coming from China, Eswatini (particularly non-knit men and women's suits and knit women's suits), Lesotho (wool and bedspreads) and Mauritius (non-knit men's suits, knit T-shirts and light rubberised knitted fabric).

With SARS' stated goal of bolstering local business, the restructuring of import duties may pave the way for the South African clothing industry to boost employment and competitiveness in local production and consumption.

The future of the South African clothing industry

The South African clothing and textile industry is an important industry to watch due to local policies and regulations, as well as regional opportunities such as the African Continental Free Trade Agreement (the AfCFTA).

The AfCFTA in particular is a game changer and presents a real opportunity to create a "Made in Africa" sustainable textile industry, which relies on the various strengths and resources of the members of the AfCFTA.

The successes of Africa's automotive regional value chains teach us how to create "hub-and-spoke" supply chains with some countries acting as main hubs and others as supportive hubs depending on relative specialisation. Special Economic Zones also play an important role in the growth of manufacturing and industrialisation.

There is also a real opportunity for international players to set up textile manufacturing hubs in Africa, while continuing to rely on Asia or other regions which are more mature for innovation International players can then benefit from regional trade agreements such as the African Growth and Opportunity Act (AGOA) or the SADC-EU Economic Partnership Agreement (EPA) to export finished products to their export markets, while benefiting from preferential duties.

The global clothing and textile industry's complex supply chains make it more difficult to get 'locally made' clothing than we may believe. Import duties alone may not rejuvenate the South African clothing industry, but the accountability and traceability of locally produced clothes are clearly beneficial.

Human rights breaches are common in labour-intensive industries, including child labour, unfair labour practices, sexual harassment and abuse. South Africa is not immune to these issues, but monitoring and evaluation can be worked into a local production model.

Protecting local production also highlights the industry's ability to foster opportunities for skills development and entrepreneurship, particularly among young adults.

The AfCFTA emphasises the importance of creating these opportunities for women and youth, a cornerstone of development that is critically important in Southern Africa.

As doors open for growth in the fashion industry, a focus on local production and consumption represents a crucial opportunity to foster an industry that is sustainable, incorporates fair labour practices, and takes advantage of regional trade opportunities.