Warning about big change in South Africa’s petrol price
Experts have warned that the government’s plan to reduce petrol prices by reviewing South Africa’s fuel pricing formulae will have significant tax implications.
President Cyril Ramaphosa first mentioned the plan on 18 Jul 2024 during his Opening of Parliament Address at the Cape Town City Hall.
Ramaphosa said one of the key priorities of the new Government of National Unity (GNU) was tackling poverty and the high cost of living.
As part of this priority, he said the government would undertake a comprehensive review of administered prices, including the fuel price formula.
This review aimed to identify areas where prices could be reduced.
Simply put, the government wants to cut petrol prices by changing the fuel price formula.
Ramaphosa did not provide details on what changes the government is considering or when they may be implemented.
Mineral and Petroleum Resources Minister Gwede Mantashe reiterated the government’s plan during a parliamentary question and answer session.
Mantashe responded to Thalente Kubheka’s question about the steps his department has taken to lower the fuel cost.
The minister said his department removed a 15% premium from the freight rate last year. This is the cost of shipping fuel to South Africa from international markets.
The Mineral and Petroleum Resources Department also repealed the 10 cents per litre demand-side management levy on ULP 95.
Mantashe then highlighted that the Cabinet recently announced a Ministerial Task Team to ‘holistically review the fuel pricing formulae’.
He did not provide further details on which parts of the formula would be reviewed. However, it is assumed that the taxes and levies will be targeted.
More recently, Mantashe said petrol and diesel should cost R14 per litre “The state must intervene to bring energy prices down in the interest of the South African community,” he said.
Mantashe argued that these levies distort the price of fuel. “Let’s find a formula to separate the price of fuel and the levies. Let’s make it visible,” he said.
To explore the issue, his department started discussion with the National Treasury about the fuel price formula and administered prices.
If the government significantly changes the taxes it collects from fuel levies, it will have to compensate by increasing other taxes.
Collecting taxes through the fuel levy and related taxes is highly efficient and does not cause major unhappiness among citizens.
This means that changing the fuel pricing formula will mess with one of the country’s core revenue generators and put the government in an unenviable position.
Expert opinion about fuel prices and taxes
Charles de Wet, an executive at ENS Africa’s Tax Practice, explained that fuel taxes are a gold mine for the government.
He explained that taxes account for R6.18 of the price of a litre of petrol and R6.06 of the price of a litre of diesel.
These are only the taxes levied by the National Treasury, which include the General Fuel Levy (GFL), Road Accident Fund (RAF) Levy, and a carbon tax.
The Department of Mineral and Petroleum Resources enforces additional levies, such as the slate levy and petroleum products levy.
This means that R6.40 per litre of petrol goes towards paying taxes and levies – over 25% of the total price for fuel at the pump.
The GFL is a major source of government revenue, making up around 5% of all taxes collected in South Africa and worth R93 billion in the current financial year.
This tax’s importance and the ease with which it can be collected mean that the state is unlikely to reduce this levy.
De Wet said the GFL may be reduced from R3.85 per litre of petrol and R3.70 per litre of diesel over time.
However, this is very unlikely to be touched in the short term.
The Road Accident Fund (RAF) levy of R2.18 per litre of petrol or diesel goes straight to the RAF to fund its operations.
The RAF is in dire financial straits and requires additional funding, which means that this levy is also unlikely to be touched.
Implementing the government’s planned changes to reduce the petrol and diesel prices would disrupt these revenue streams, which is dangerous.
Economist Dawie Roodt is more positive about reducing fuel prices. He argued that the problem is excessive state spending and reliance on high fuel levies revenue.
Roodt said the state is far too big and highly incompetent, which is costly and requires a lot of money.
“Effective management and cost-cutting within the fiscus could easily remove the need for the current levels of fuel levies, which would cut fuel prices in the country,” Roodt said.
Read: Even more good news for petrol prices in November – with a warning