The fuel levy increase vs VAT hike explained

26 May 2025

While South Africans breathed a sigh of relief at the passing of the 2025 National Budget – and the relegation of the proposed VAT increase – one announcement of note was an increase in the fuel levy. While far less politically contentious than a VAT hike, debate has emerged over whether the fuel levy increase is, in fact, a ‘stealth VAT’. It’s a shift that raises valid questions about regressivity, affordability, and who will bear the brunt of the cost.

When the levee breaks

The National Treasury had aimed to raise R75-billion over three years by increasing VAT by 0.5% and then another 0.5% next year. But following political backlash and a likely legal pushback, the proposal was withdrawn. The fiscal gap, however, remained and needed plugging.

In his revised May 2025 budget speech, Finance Minister Enoch Godongwana announced that the shortfall would instead be offset by expenditure controls and new revenue measures, including a 16c/litre increase on petrol and 15c/litre on diesel, effective 5 June 2025.

This marks the first fuel levy increase since 2021/22, bringing the total to R4.01 per litre – up from R3.85. Treasury projects that the change will raise R23-billion over three years, far less than the R75-billion expected from the shelved VAT plan, but still material given the constrained fiscal outlook.

Read more: ‘We tread water for another year’ — this fiscal offering is a stopgap, not a solution

Who suffers?

“Well, it is pretty much the same,” economist Dawie Roodt told Daily Maverick when comparing the VAT proposal to the fuel levy increase. “The only difference is the quantum – the effect area will be less, simply because the rate of increase is less.”

VAT applies broadly to goods and services (excluding zero-rated essentials), while the fuel levy targets a narrower tax base, but its economic reach is wide – transport, logistics, manufacturing and food pricing are all exposed – which means that costing goes up across the value and supply chains – and even if it is the case that this increase is more distributed than a VAT hike, its impacts are still disproportional.

According to the Pietermaritzburg Economic Justice & Dignity Group, which carries out monthly research on basic household costs, a minimum-wage worker commuting by taxi can spend more than a third of their monthly income on transport. Here, even a marginal fuel price increase imposes disproportionate burdens on low-income earners.

As The Outlier reported in its weekly newsletter issued on Friday, 23 March 2025: “While the 16c increase is just another charge for some of us, it will likely impact poorer communities more. When the fuel price rises, it hits South Africa’s working class the hardest.”

(Source: TheOutlier.co.za)

These costs also pass through to food prices and consumer goods. “Fuel costs increase the price of most other goods and services as they push up transport costs across the board,” the publication said.

A revenue hole that still needs to be filled

Taking into account that the fuel levy will raise an estimated R4-billion in 2025/26, there is still quite a gap. “Certainly not comparable,” Roodt notes. “These two cannot be compared in terms of quantum, but in terms of the effect on the poor, that is pretty much the same.”

To close the gap, the Treasury is counting on SARS to ramp up compliance and enforcement – targeting an additional R20- to R50-billion in revenue annually. These gains remain aspirational, however, and are not yet factored into formal projections, both in terms of revenue or timeline, with much still depending on SARS Commissioner Edward Kieswetter.

An inflation signal? Perhaps not

For now, headline petrol prices are expected to drop in June, thanks to a decline in the basic fuel price. That may temporarily mask the effect of the levy increase, but longer-term pressures persist.

“Hardly any inflationary pressures will be expected from this,” Roodt argues, “because petrol prices are coming down in any event.”

(Source: TheOutlier.co.za)

April CPI data shows inflation edged up from 2.7% in March to 2.8%, with key contributors being food, beverages, housing and services.

Read more: SA consumer inflation ticks up in April but remains below 3.0%

While the direct inflationary impact of the levy may be limited, the pass-through effects to goods and public transport fares are likely to show over a longer horizon.

Is there a better way?

It can be said that a fuel levy increase, much like a VAT increase, is regressive and disproportionately affects the most vulnerable. Roodt is unequivocal: “South Africa’s total tax regime is dramatically progressive already,” he says. “There’s nothing else that can be done to make it more progressive, basically.”

A detailed look at the May 2025 Budget shows that indirect taxes – including VAT, fuel levies and excise duties – account for more than 45% of gross tax revenue, compared with 39.9% from personal income tax. VAT alone contributes more than R480-billion, and domestic goods and services taxes collectively represent a third of all state income.

In other words, while the tax code may be progressive in theory, its impact is mixed in practice – and regressive taxes still carry weight in the government’s pocket – but the fuel levy, unlike income tax, charges the same amount per litre regardless of the earner’s bracket.

This doesn’t negate additional strain on middle and low-income households, but rather illustrates the increasingly narrow options available to the Treasury in an almost zero-growth environment, saddled by debt.

A tax by another name?

Ultimately, the decision to withdraw the VAT hike and instead raise the fuel levy was as much political as it was fiscal. VAT increases require legislation and expose divisions in Parliament. The fuel levy, by contrast, can be adjusted via the Budget process – no legislative amendment required.

Whether this amounts to a “stealth tax” or a strategic compromise depends largely on your own perspective, but as fuel-dependent households, which includes everyone within our borders in one form or another, absorb yet another marginal increase, it is clear that we are all still paying – just not through VAT. DM

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