Tax revolt warning in South Africa

Economists and business groups warn that further tax hikes in South Africa will likely lead to a widespread tax revolt in the form of tax evasion and tax avoidance.

This is because South African households and businesses are already overtaxed, and the country’s strained tax base is at its limit.

Finance minister Enoch Godongwana will table his second attempt at balancing the country’s books on Wednesday, 12 March 2025, with tough compromises widely expected.

The original budget was shelved in February after a proposed VAT hike to 17% was met with backlash from within the Government of National Unity (GNU).

The VAT hike was to raise R60 billion to fund the government’s spending in 2025, with consolation tax relief coming in the form of another freeze on fuel levies and below-inflation adjustments to tax brackets.

However, with the VAT hike now off the table, at least at that scale, warnings have sounded that other tax measures will now be necessary to cover the shortfall.

Potential tax measures include:

• Hiking fuel levies.
• Increasing personal income tax rates (PIT).
• Increasing corporate income tax rates (CIT).
• Implementing a smaller VAT hike (cira 0.5% pts).
• Introducing a wealth tax on the country’s richest people.

According to Business Unity South Africa (BUSA) CEO Khulekani Mathe, turning to tax hikes is not a viable solution.

He said South Africa’s already narrow tax base cannot bear further burdens, and tax increases will stifle economic growth.

“Increases in PIT and other fees and levies will weaken consumer spending, reduce household disposable income, and erode investor confidence,” he said.

International experience has shown that annual net wealth taxes often do not result in significant additional revenues, stressing that the opposite could be true.

“The costs of compliance and administration are high, as avoidance and evasion become commonplace,” he said.

This echoes a position expressed by many economists, who have warned that increasing the tax burden on South Africa’s tax base may push people to be less compliant in their tax affairs.

This is part of a concept known as the Laffer Curve, which theorises an “optimal tax rate” that maximizes government revenue without discouraging compliance, investment, and economic growth.

Any move beyond that optimal rate has the reverse effect, lowering revenue either by deterring investment or encouraging non-compliance.

Many experts believe South Africa is at or even past this point. Aluma Capital chief economist Frederick Mitchell urged the National Treasury to consider the Laffer Curve when tabling the new budget.

He warned that South Africa’s small and heavily burdened tax base is already under intense pressure. Any tax increases would increase the high cost of living and taxation, pushing them over the edge.

BUSA’s Mathe said the South African government should focus on expanding the tax base rather than hiking taxes.

This can be done by strengthening the South African Revenue Service’s (SARS) capacity to improve tax compliance, enforce controls on illicit trade, and improve revenue collection efficiency.

South Africa’s quiet tax revolt

South Africa heavily relies on a small group of people to fund the nation, with a small percentage of individuals and businesses paying most of the taxes.

The shelved 2025 budget review revealed that just under 980,000 South Africans, or 1.5% of the population, pay 60.9% of all personal income tax,

Narrowing it further, around 235,000 people pay a third of all income tax. Putting more pressure on this base will lead to a revolt.

While many South Africans think of a tax revolt as simply not paying taxes, this isn’t true. The efficacy of SARS makes this virtually impossible.

The Revenue Service is mandated to collect what it owes and has far-reaching powers to do so, including the ability to take money out of individual bank accounts directly.

However, even with its reach, the SARS still faces an uphill battle with tax compliance and tax morality in South Africa. Some R800 billion is owed to the taxman and has yet to be collected.

South African taxpayers who are pushed over the Laffer Curve typically find ways to legally pay as little tax as possible or, in extreme cases, cut ties with South African tax residency altogether.

SARS lost R3 billion in collectable tax in 2024 due to 38,000 taxpayers ending their tax residency.