Today, 21 May 2025, we have had the 2025 Budget presented by the Minister of Finance (”Minister”), Mr. Enoch Godongwana, for the second time. As you will recall the original 2025 Budget which is traditionally held in February of each year, was not tabled formally due to a decision of Cabinet and the ruling issued by the National Assembly Speaker, Thoko Didiza on 19 February 2025 for the postponement to 12 March 2025. The unprecedented postponement was due to the Minister’s initial proposed VAT increase of 2% which led to a lack of consensus in Cabinet.

The second time parliament gathered to hear the budget was on 12 March 2025 and as the budget still contained a VAT increase of 0.5%, this budget was subjected to a court challenge. By consent the budget was withdrawn. We now have the third version of the 2025 budget tabled formally, with the entire parliamentary process on the budget having to resume afresh.

The only new tax proposal announced in this budget is the fuel levy increase

The fuel levy will increase by 16 cents per litre for petrol and 15 cents per litre for diesel with effect from 4 June 2025. This is the first fuel levy increase in three years.

Additional funding for SARS

SARS has been allocated an additional R7,5 billion over the next three years to increase their effectiveness in collecting more revenue. Part of this allocated to collecting outstanding debt due to the fiscus. SARS has indicated that this could raise between R20 billion and R50 billion per year. Another part of the allocation is to improve the modernisation and the targeting of illicit trade in tobacco and other areas. SARS believes that this will generate at least R35 billion and the revenue gap will not require further taxes.

Proposed expenditure reductions

This budget will reduce additional expending over the medium term by R68 billion by reducing provisional allocations not yet assigned to votes. The Minister states “that this is not an austerity budget”, and in fact states that this is a “redistributive budget”. The Minister notes that Government is “not deaf to the public’s concern about wasteful and inefficient expenditure.”

National Treasury has undertaken an expenditure review from 2013 with the aim of identifying duplications, waste and inefficiencies and have identified potential savings of R37 billion through improved oversight and operations.

Tax analysis of all 3 Budgets for 2025

VAT

The abovementioned proposed VAT increase remains the biggest talking point around the 2025 Budget. This was apparent during the overall participation by opposing political parties and other stakeholders by way of submissions and presentations at the public hearings (as part of the parliamentary process) which were held at the end of March that have clearly made an impact.

This is evidenced by the Minister’s proposed VAT increase dropping from the initial 2% increase, that was intended to be effective on 1 April 2025 in the leaked version (of the original budget), down to a 0.5% increase effective 1 May 2025 and an additional 0.5% increase on 1 April 2026 in the second version to no VAT increase in this third version of the budget.

The original budget estimated that R60 billion would be raised by the 2% VAT increase and the second budget revised this down to only R13.5 billion due to the reduction of the increase to 0.5%.

The original extension of the zero-rated foodstuffs basket of items to include specific edible offal, specific meat cuts, unflavoured dairy liquid blends and specific canned vegetables to assist poor households proposed in both the original leaked budget and the second budget have been removed in the third budget. The extension to zero-rating was estimated to provide R2 billion relief to customers.

Personal Income Tax

• Tax Tables (“Bracket Creep”)
  The original leaked budget proposed a partial adjustment to the tax brackets and the primary and secondary rebates to provide some relief for bracket creep. By only making a partial adjustment for the impact of inflation of the tables, the original budget estimated that R1.5 billion would be raised. In the second budget the tax brackets remained unchanged along with the primary, secondary and tertiary rebates also not being adjusted. By not adjusting the tax brackets or the rebates the second budget estimated that R18 billion would be raised, resulting in an increase in tax revenue collections from the first to second budget of R16.5 billion. The third budget also retains the brackets and the primary and secondary rebates in line with the second budget and as such there is no relief for personal income tax. However, the estimated additional tax revenue collection has been reduced to R15,5 billion. As a result, many individuals will move into higher tax brackets resulting in higher taxes being paid due to these tax brackets not been adjusted in both the 2024 and 2025 budgets.
• Medical Scheme Fees Tax Credit
  In all three versions of the budget, the Medical Scheme Tax credits remain unchanged. As medical premiums increase year on year, the potential rebate remains unchanged for individuals resulting in lesser relief from personal Income Tax. By simply not increasing the medical aid credit for inflation, the budget estimates that an additional R1.5 billion would be raised.

Capital Gains Tax: In all three versions of the budget, no changes are proposed in respect of Capital Gains Tax.

Estate Duty and Donations Tax: Estate Duty and Donations Tax: In all three budgets Estate Duty and Donations Tax rates remain unchanged.

Transfer Duty: All three versions of the budget remain unchanged with regards to the amendment to the monetary thresholds for Transfer Duty which will be adjusted by 10 per cent to compensate for inflation. The Transfer Duty tax rates will remain unchanged. These changes came into effect on 1 April 2025.

It is interesting to note that even though this Transfer Duty increase will impact the property sector, with its policy intention to constitute a form of “Wealth Tax”, this increase will also have a great impact on the lower middle class as it will make it more difficult to purchase property. The Budget documents do not provide any estimate of tax revenue generation from this increase in either the first or second budget.

Corporate Income Tax Rate: In all three versions of the budget, the corporate Income Tax rate remains the same at 27%.

Employment Tax Incentive: Government proposes to maintain the current value of the employment tax incentive. However, effective from 1 April 2025, the formula to calculate the incentive and the eligible income bands are adjusted, in part due to adjustments of minimum wages since the last increase in the value of the incentive in 2022.

Urban Development Zone Incentive: The incentive is extended by five years to 31 March 2030 to address urban decay within inner cities.

Carbon Tax: Increased from R190 per tonne to R236 per tonne of the carbon dioxide equivalent.

Excise Duties: In all three versions of the budget, Excise Duties on alcoholic beverages will increase by 6.75%, which is above inflation. In addition, there will be an increase of 6.75% in excise duties on cigars and pipe tobacco and 4.75% on cigarettes and other tobacco products.

By raising the excise duties at an above inflationary increase, the first and second budgets estimated that R1 billion would be raised.

Fuel Levies: In the first two versions of the budget, no change to the general fuel levy and road accident levy. However, from 2 April 2025 the Carbon Fuel Levy will increase by 3 cents on both petrol and diesel.

The first and second budgets estimated that R4 billion relief would be provided to motorists by not raising the general fuel levy.

The new tax proposal in the third budget is to increase the fuel levy by 16 cents per litre for petrol and 15 cents per litre for diesel with effect from 4 June 2025. This is the first fuel levy increase in three years however the additional estimated revenue collection has not been quantified in the Budget review.

Economic outlook and budget framework for 2025/2026

In 2024, the economy grew by only 0.6%. Over the medium term, GDP growth is projected to average 1.6%, a significant reduction from the 1.8% two months ago when the second budget was tabled.

Government debt will stabilise at 77.4% of GDP in 2025/26 which is up from 76.2% in the second budget.

Debt-service costs are estimated to be R1,2 billion per day. It is more than the amount we spend on health, the police and basic education.

The budget proposes R1 trillion investment in road, rail, energy and water infrastructure.

 

A summary of the three budgets additional revenue estimates as a result of the adjustments are presented in the table below:

OVERVIEW OF NATIONAL BUDGET REVISIONS	1st Budget	2nd Budget	3rd Budget
R Million	2025/26	2025/26	2025/26
2025 Budget proposals	R58,000.00	R28,000.00	R18,000.00
Direct taxes	R3,000.00	R19,500.00	R16,700.00
Personal Income Tax
Partial adjustment to tax brackets and rebates	R1,500.00	-	-
No adjustment to tax brackets or rebates	-	R18,000.00	R15,500.00
No adjustment to medical tax credits	R1,500.00	R1,500.00	R1,200.00
Indirect taxes	R55,000.00	R8,500.00	R1,300.00
Value-added tax (VAT)
Increase in VAT rate - 2%	R60,000.00	-	-
Increase in VAT rate - 0.5%		R13,500.00	-
Increase in VAT rate - NIL		-
Additional zero-rating	-R2,000.00	-R2,000.00	-
Fuel levy
No adjustment to general fuel levy	-R4,000.00	-R4,000.00	(no estimate)
Diesel refund relief for primary sectors	-	-
Specific excise duties
Above-inflation increase in excise duties on alcohol and tobacco	R1,000.00	R1,000.00	R1,300.00
Net impact of tax proposals	R58,000.00	R28,000.00	R18,000.00

 

Important Tax Proposals to note

It is important to note that Chapter 4 and Annexure C to the Budget Review documents contain the additional tax policy matters that would be addressed in this upcoming budget cycle. The process of the budget cycle involves public participation and consultation. A proposal in the budget review means that National Treasury will be considering the issues and may develop a draft legislative amendment for comment.

As PKF South Africa, we have been actively participating in the public consultation process which follows the presentation of the Budget for many years to provide input into the tax proposals presented in the Budget and why we are in agreement/disagreement with such proposals along with other various stakeholders.

The original leaked budget and the second budget of 2025 both set out in detail the increases to the proposed VAT rate. As the first/original budget was not tabled, only the second budget was subject to this public consultation process. As we have seen in the reversal of VAT rate increase, there is a real benefit for public participation and sound arguments influence potential legislative changes.

Here are some of the key proposals we wish to highlight and where applicable, some of our initial comments.

INDIVIDUALS, EMPLOYMENT AND SAVINGS

The main proposed changes are:

• The extension of the ring-fencing of assessed losses
  In terms of the current ring-fencing rules, only taxpayers who are the maximum marginal tax rate are subject to potential ring-fencing of losses from specific trades. The proposal is for National Treasury to review the threshold at which the ring-fencing rules will apply. This will potentially impact those taxpayers who are not at the top marginal rate who hold a second property which they rent, and which is incurring a loss.
• Treatment of retirement funds
  • Cross-border: The current treatment of cross-border retirement funds may have resulted in double non-taxation, particularly where South Africa is granted the taxing right by treaty. It is proposed that changes be made to the rules that currently exempt lump sums, pensions and annuities received by South African residents from foreign retirement funds for previous employment outside South Africa, with amendments in the current legislative cycle.
  • Clarifying payment of death benefits: With the introduction of the two-pot system, retirement funds have different components which are taxed differently. The intention has always been to treat the funds differently upon the death of the member as opposed to any other withdrawal. The savings component wording on the death of a member needs to be reviewed to bring it in line with this policy.

BUSINESS

The main areas proposed to be reviewed are:

• Limitation of assessed losses
  In terms of the current rule the balance of assessed loss is limited to 80% of the taxable income for companies with an assessed loss greater than R1 million. The question as to the order of deductions has an impact on the calculation of the taxable income and this order of deductions will be reviewed. This will be clarified to ensure certainty in determining the amount of the limitation.
• Corporate Reorganisation Rules
  
  • Assets-for-share transactions for listed shares currently do not properly align with the policy intent. Accordingly, the roll over relief in this regard will be clarified.
  • o Assets-for-share or Amalgamation transactions involving the use of a Collective Investment Scheme or a Unit trust for those who still use the old language) current provisions have some unintended consequences which will be reviewed.
• Limitation of interest deduction
  
  • The various interest limitation provisions will be reviewed to clarify the application and its alignment with the policy intent.

INTERNATIONAL

The majority of the proposed amendments are technical in nature but considered necessary by Treasury to clarify the policy intent and to ensure that any anomalies or loopholes are closed to limit any tax leakage. The more important proposals are summarised as follows:

• Controlled Foreign Companies (“CFC”)
  • The current rules will be reviewed as it has come to Treasury’s attention that there are instances where a CFC ceases tax residency without triggering the CGT exit charge contained in the deeming rules.
  • The comparable tax exemption (i.e. net income taxed in foreign country at a rate of at least 67.5% of SA tax rate) does not take into account any foreign refund that such CFC may have received where that foreign country’s tax system allows for a refund on the dividend paid to the shareholder. This exemption will be reviewed.
• Taxation of trusts and non-resident beneficiaries
  • Recent amendments restrict the “flow -through” principle to apply only to resident beneficiaries in respect of distributions of trust income and capital gains.
  • The interaction between section 7 (deeming provisions) and section 25B (flow-through) in respect of income and assets vested to non-resident beneficiaries will be reviewed.

VALUE-ADDED TAX

The main areas to be reviewed are:

• Debit and credit notes administration
  • Currently there is a special provision where a business was sold as a going concern, but these rules need to be extended to where a business was transferred under the reorganizational rules of section 42 or section 45.
• Temporary letting of residential accommodation
  • An additional review of this provision is required to ensure ease of administration.
• Supply of airtime vouchers
  • The supply of airtime vouchers to be used in a foreign country will be reviewed. One can only hope that this will reduce the costs in this regard for the consumer.

CARBON TAX

There are certain areas being reviewed which include:

• aligning schedule 1 of the Carbon Tax Action (2019) emission factors;
• a revision of the fugitive emissions formula for the coal to liquid fuel and charcoal production activities (under certain circumstances);
• potential extension of the sequestration deduction to be extended to third party timber sequestration; and
• additional carbon offset standards to qualify for the allowance.

TAX ADMINISTRATION

The main areas that will be reviewed are as follows:

Public Benefit Organisations (PBO’s)

• Where a PBO undertakes section 18A and non-section 18A activities, it is required to obtain an “audit certificate” confirming that all donations received by or accrued in the year for which receipts were issued were solely used to undertake activities covered by section 18A.
• Due to the uncertainty surrounding the term “audit certificate” and its potential linkages to the Auditing Profession Act 2005 clarity will be provided.

Understatement Penalties (USP) – Bona fide inadvertent error

• Where there is a shortfall of tax (understatement), SARS may impose a USP ranging from 10% to 200% based on the taxpayer behaviour and type of case.
• Consideration will be given to explicitly linking the term “bona fide inadvertent error” to the definition of “substantial understatement.
• We note that one of the main areas of dispute is the determination of what constitutes the behaviour of a taxpayer having taken “reasonable care” and what is a” bona fide inadvertent error”.
• Due to the rigidity of this penalty regime, it is important that one is able to distinguish the “error” from one where additional “care” should have been taken and one where sufficient “reasonable care” was taken despite the error having occurred.
• The Courts have looked at this interpretation in detail and some of the recent decisions have gone against SARS.
• We wish to highlight that SARS actually controls the amendment process of the Tax Administration Act 2011 (“TAA”) which contains the dispute and penalty provisions hence thus proposed amendment seeks to narrow the definition of a bona fide inadvertent error as a result of the abovementioned judgements.
• We therefore recommend that in order for one to prove that “reasonable care” was taken (as also confirmed in these Court cases) before entering into any significant transactions one should obtain a valid tax opinion from a registered tax practitioner in accordance with section 223 of the TAA.

Voluntary VAT registrations – Expansion of site inspections

• VAT fraud and abuse throughout the VAT cycle, from registration to claiming inputs is once again under scrutiny. Inspections at the business site/s for voluntary registrations to be expanded to verify the validity of these business activities as detailed on registration application.

CUSTOMS AND EXCISE

• The main areas that will be reviewed are as follows:

Administration process for diesel refunds.

• The diesel refund process has been the subjected to many changes over the years, which may have limited its use by taxpayers due to the complexity of its administrational requirements. A new simplified diesel refund administration system is being considered.

Voluntary Disclosure Programme (“VDP”)

• There is currently a voluntary disclosure programme for the other taxes administered by the Commissioner but not for Customs and Excise. Consideration is being given to extending the VDP to Customs and Excise.

Search and seizure powers

• Customs officers have significant search and seizure powers, and so consideration is being given to the use of body cameras to promote trust and transparency.