Warning over more tax hikes for South Africa

The National Treasury says that a host of tax adjustments will be considered when sniffing out an additional R20 billion in tax revenue for 2026, including the taxes that were completely off the table for 2025.

Responding to the debate on the 2025 Budget, tabled on 21 May, the Treasury outlined its reasoning for changing the revenue package in the third attempt at a budget.

The most obvious and fundamental change to the revenue side of the budget was the removal of the reviled VAT increase.

This resulted in revenue projections being adjusted down by almost R62 billion over the next three years, forcing the finance department to find other measures to boost collections.

According to Finance Minister Enoch Godongwana, the only additional tax measure for 2025 was the inflation-based increase to the fuel levy.

In previous budgets, the fuel levy was left unchanged as a way to give relief to consumers for the VAT hike. However, with no more VAT hike, this relief was no longer necessary.

Treasury noted that the fuel levy had been left unchanged since 2022, and it was time for the tax to be adjusted to keep up with inflation so that it can still be relevant and effective in its actual objectives.

The fuel levy is South Africa’s fourth-largest revenue instrument, contributing about 5% to total tax revenue despite being zero-rated for VAT purposes.

Importantly, the Treasury noted that the fuel levy isn’t being increased to raise revenue, with the hike being neutral on the revenue side of the budget.

“As these inflation-related adjustments for main revenue instruments are assumed in the baseline revenue outlook, no additional revenue will be raised from the fuel levy adjustment,” it said.

The May 2025 Budget already includes R18 billion in tax revenue increases for 2025/26, almost all of which are from personal income tax increases.

Not adjusting the fuel levy would have reduced revenue by around R3.5 billion in 2025/26, which would have required a smaller increase in expenditure.

The finance department also justified the increase in other ways, by pointing out that consumers barely benefited from the three-year freeze, as retailers and transporters pocketed the gains.

“Once fuel prices have been increased, it has been observed that fuel prices tend to be sticky downwards, i.e. despite fuel price decreases, the benefits are rarely passed on to the final consumer as businesses will pocket the difference in the prices of goods, and taxi fares rarely decrease,” it said.

It added that the higher tax also encourages better driving habits, more efficient fuel use, and the adoption of newer, cleaner technologies.

More tax hikes are on the cards

National Treasury said that it has received a host of feedback and proposals on revenue measures, some of which are worth investigating and others not.

It said that it’s important to understand that any tax increase has negative impacts, so the main policy question is about the trade-offs of different options.

“As expected, most commentators are critical of the tax increases, but diverge on nuance,” it said.

Some commentators advocate no tax increases and suggest that spending reform should be implemented.

Others suggest revenue collection efficiencies be pursued or that specific areas like illicit financial flows, be targeted.

Some groups have proposed direct taxes, such as:

• Increasing top personal income tax rates,
• Partial adjustments to tax brackets,
• Removing retirement deductions,
• Scrapping tax incentives,
• Increasing the corporate income tax rate or
• Introducing a direct wealth tax.

Treasury said that these comments and suggestions were raised previously and also responded to.

Broadly, these tax proposals have been considered too economically damaging to implement.

Corporate income tax is already too high, making South Africa less competitive, and personal income tax increases tend to bring in less revenue (thanks to the Laffer Curve).

With the wealth tax, South Africa already has multiple taxes on wealth. Tax incentives, meanwhile, are already being looked at.

Despite this position, Treasury said that nothing is off the table for the 2026 Budget.

“These proposals will be considered as part of the options to potentially raise R20 billion in the 2026 Budget,” it said.

At a bare minimum, the department said that excise on alcohol and tobacco will continue to rise above inflation.

“It is important that excise duty rates are adjusted for inflation annually, as a minimum, to preserve the real or effective rates of excise duties,” it said.