Motorists and Smokers Brace for New Tax Hikes in South Africa’s Budget Next Week

South Africans can breathe a sigh of relief—at least for now—as the government is set to table a new national budget next week without a controversial VAT increase. But this relief may come at a cost elsewhere, with Finance Minister Enoch Godongwana likely to introduce new tax hikes on fuel and so-called “sin” goods like alcohol and tobacco.

After two failed budget attempts in February and March, the revised budget to be delivered on 21 May 2025 is expected to include new fiscal projections covering revenue, GDP growth, and borrowing needs. Treasury is under immense pressure to close a widening deficit without pushing the economy further into distress.

No VAT Hike, But Pressure Elsewhere

The previous budget proposals were widely rejected due to plans for a VAT increase, including a 2 percentage point hike in February and a scaled-back 1 percentage point increase in March. These proposals sparked public and political backlash, ultimately leading to their withdrawal.

But the cost of avoiding a VAT hike is steep. Treasury now faces a substantial shortfall and will have to find new ways to raise revenue while keeping spending in check.

Investec chief economist Annabel Bishop has warned that while raising taxes is not ideal—given the knock-on effects on employment and economic growth—the government may have no choice but to rely on indirect tax increases.

Sin Taxes and Fuel Levies in the Crosshairs

Moderate increases in excise duties on tobacco and alcohol are likely. These taxes were already hiked above inflation in previous budgets, and any further increases will place additional pressure on industries and consumers alike.

Motorists may also be hit with a higher fuel levy. The levy was frozen earlier this year to soften the blow of the now-scrapped VAT hike. With VAT off the table, Treasury may use fuel taxes to recover revenue—raising an estimated R4 billion.

Bracket Creep and ‘Stealth’ Taxes Continue

Apart from direct tax increases, South Africans will continue to feel the effects of so-called “stealth” taxes. These include the failure to adjust income tax brackets for inflation—known as bracket creep—and the lack of increases to medical aid tax credits. Treasury previously estimated these measures alone could bring in R19.5 billion in additional revenue.

SARS to Receive More Support

To boost compliance and collection, SARS (South African Revenue Service) is also expected to receive increased funding. The tax authority has already identified over 150,000 non-compliant taxpayers and is targeting specific demographics to widen the tax net.

SARS reported 6.6% growth in total tax revenue collection in 2024/25, with personal income tax contributing the most—thanks to improved compliance and a growing tax base.

Low GDP Growth Adds to the Challenge

Despite better collection, South Africa’s sluggish economy remains a major concern. National Treasury is expected to revise its GDP growth forecast for 2025 down from 1.9% to around 1.4%, aligning with projections from Investec and Bloomberg. Sustained growth above 3.0% is needed to stabilise the country’s debt trajectory.

Gross debt-to-GDP is projected to remain high—76.4% in 2025/26 and 75.3% by 2028/29—well above the 60% benchmark for emerging markets.

A Conservative Budget Ahead

Minister Godongwana is expected to table a conservative budget that avoids dramatic tax shocks, opting instead for targeted measures and spending cuts. While financial markets and credit rating agencies are unlikely to react negatively, consumers should prepare for modest but noticeable tax adjustments in everyday expenses—especially at the pump and the bottle store.

South Africa may avoid a VAT hike next week, but don’t expect a free ride. If you drink, smoke, or drive, prepare to pay more. With rising debt and weak economic growth, the government is tightening its belt—and yours.

{Source: IOL}

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