Proposal to increase VAT over two years

Finance Minister Enoch Godongwana has confirmed that South Africans will see a Value Added Tax (VAT) increase as the government moves to raise revenue. The first 0.5 percentage point increase in the VAT rate will take effect on 1 May 2025 and the second 0.5 percentage point increase will take effect on 1 April 2026. This will take VAT to 16% by 2026/27 financial year. 

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Godongwana tabled the budget in Parliament on Wednesday after the initial speech was postponed in February, due to the contentious VAT increase causing fractions within the Government of National Unity. 

“These have to do with the government properly fulfilling its service delivery mandate. After careful consideration, the government has decided to fund these. Deferring the funding of these sectors further would compromise the government’s ability to meet its constitutional obligations to the people,” Minister of Finance Enoch Godongwana said on Wednesday.

“This decision was not made lightly. No Minister of Finance is ever happy to increase taxes. We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power. We have, however, had to balance this knowledge against the very real and pressing service delivery needs that are vital to our developmental goals and which cannot be further postponed,” said the minister.

He explained that government thoroughly examined alternatives to raising the VAT rate.

“We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes. Increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth.

“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs. Furthermore, South Africa’s corporate income tax collections are already higher than most of our peer countries.

“On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save. Our top personal income tax rate and our personal income tax collections as a percentage of GDP are far higher than those of most developing countries. Increasing it is therefore not feasible,” he said.

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Godongwana said taking on additional debt to meet the spending pressures was also not feasible.

“The amount is simply too large. The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades.

“VAT is a tax that affects everyone. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered. The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage,” he said.

Godongwana said that while government has decided to increase the VAT, it will implement measures to protect vulnerable households.

“The government is very aware of the cost-of-living pressures faced by households, including high food and fuel prices and rising electricity and transportation costs. This is why we are taking concrete steps to protect vulnerable households,” the Minister said.

This will be done through providing social grant increases that are above inflation; expanding the basket of VAT zero-rated food items to include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry and other animals as well as by not increasing the fuel levy for another year, saving consumers around R4 billion. The VAT system currently zero rates 21 essential food items in an effort to make them more affordable for lower-income households.  Government has proposed to extend the list of zero-rated basic foods to mitigate the effect of the VAT rate increases.

“From 1 May 2025, zero rating will be extended to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues; dairy liquid blend; and tinned or canned vegetables

“Other tax proposals include no inflation adjustments to medical tax credits, above-inflation increases on alcohol and tobacco excise duties, and diesel refund relief for primary sectors,” the Minister said.

 

Done By: Mitchum George