This article focuses on customs duty in South Africa, including the role and status of the South African Customs Union (SACU).
In South Africa, customs duty is levied on all products imported into SACU. Interestingly, SACU is the world’s oldest customs union and has its origin in a convention held in 1889 between the British Colony of the Cape of Good Hope and the Orange Free State Boer Republic. Today the SACU membership comprises South Africa, Botswana, Lesotho, Namibia and Swaziland – and each country is a member of the World Trade Organisation (WTO).
The beginning of the South African customs duty structure
Before the formation of SACU, customs duty was first imposed in South Africa when the Dutch East India Company (DEIC) arrived in the Cape of Good Hope. The DEIC began to collect customs duty in 1678 on imported and exported goods as a source of revenue. In 1795, the Cape came under the control of Great Britain and, as the majority of goods were imported from Great Britain or its colonies, preferential duties were introduced. In other words, goods originating in Great Britain or its colonies were generally imported into the Cape ‘free of duty’ while goods originating from other countries were subject to duty. Great Britain effectively used customs duty as a barrier to market access and to today this remains one of the main purposes of customs duty.
The South African Revenue Service
The South African Revenue Service (SARS) was established by legislation to collect revenue and to ensure compliance with the law. The Customs administration is part of the SARS structure and the customs function is to collect customs duty on imported goods and to control such goods by restricting or prohibiting goods classified, for example, as contraband.
Customs duty defined
Customs duty, broadly defined, is a type of tax. There are two main types of taxes: see diagram below.
Customs duty is classified as ‘indirect tax’ as it is paid on goods imported or exported. Customs duty’s specific definition is a financial charge, in the form of a tax, imposed on goods at the time of importation. Market access is conditional upon the payment of the customs duty.
How to calculate customs duty
In South Africa we use different methods to calculate customs duty. For example, there is specific, ad valorem or mixed customs duty. A specific customs duty on goods is an amount, for example a duty of 77c/kg on tobacco refuse. An ad valorem customs duty on a good is an amount based on the value of that good. It is a percentage of the value of the imported good, for example, a 20% ad valorem duty on padlocks. In that case, the duty on a padlock worth R50 will be R10. A mixed, or compound, duty is a customs duty comprising an ad valorem duty to which a specific duty is added, or, less frequently, subtracted.
Ad valorem customs duties are by far the most common type of customs duties, and they are preferred to specific and mixed duties.
The purpose of customs duty
Customs duties or tariffs serve the following three different purposes:
1. Customs duties are a source of revenue for governments. This purpose is less important for industrialised countries with a well-developed system of direct and indirect taxation.
2. Customs duties are used to protect domestic industries. The result may be that domestic products are cheaper, giving them a price advantage and some degree of protection from import competition.
3. Customs duties can be used as an instrument of an economic development policy, for example, to promote the importation of capital goods (e.g. industrial machinery) and discourage its use for the importation of luxury goods (e.g. perfume).
Duty collections within SACU
SACU’s aim is to maintain the free interchange of goods between member countries and to provide a common customs and excise duty to its members. The duty collections are paid into a revenue fund of which South Africa is the custodian. The revenue is then shared among members according to a revenue-sharing formula.
Customs duty collection during an economic crisis
During the economic crisis of the 1930s, countries began to discriminate against other countries by applying trade restrictions to protect their own interests. Historians now regard these discriminatory policies as an important factor that contributed to the Second World War. Similarly, there is talk today of restricting international trade to protect our domestic industry and employment.
SARS’ response to the recession will be to develop initiatives to yield additional revenue, improve their risk management and audit capacity, and encourage business to make voluntary disclosures for non-compliant tax behaviour.
It is a good time for businesses to take stock of their supply chain activities to identify savings and at the same token minimise non-compliance.
In our next edition we will turn our focus to customs valuation and consider its role within Customs and how it impacts on the customs duty paid at the time when the goods are imported into South Africa.
Ronnie van Rooyen is Senior Manager Customs at Deloitte.