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A long-standing debate finally settled?
South Africa’s fiscal landscape is undergoing significant changes, with the government’s decision to incrementally increase the VAT rate over the next two years. As announced in Finance Minister Enoch Godongwana’s 2025 Budget Speech, the VAT rate will rise from the current 15% to 15.5% on 1st May 2025, followed by an additional increase to 16% on 1st April 2026.
The proposal to increase VAT has been a longstanding point of contention. The last increase in 2018, from 14% to 15%, sparked fierce public and political opposition, with critics arguing that it placed an undue burden on lower-income consumers. Since then, the ruling party has faced ongoing resistance to further hikes, with opposition groups advocating for alternative tax measures, such as wealth taxes, to boost government revenue. The latest decision to gradually increase VAT reflects a compromise amid these ongoing debates, as the government seeks to balance fiscal stability with economic fairness.
Rationale behind the incremental VAT increase
The government has outlined several key reasons for this phased VAT hike:
Revenue generation
The incremental VAT increase is projected to generate an additional R28 billion in the 2025/26 fiscal year and R14.5 billion in 2026/27. These funds are essential to address persistent spending pressures in critical health, education, transport, and security sectors.
Health sector funding
An additional R28.9 billion has been earmarked for health services, notably to support the country’s extensive HIV-positive population. This increase aims to pay the salaries of medical personnel and newly qualified doctors.
Defence budget
R5 billion is allocated to bolster military forces amid escalating regional conflicts, reaffirming South Africa’s commitment to peacekeeping in the region as fighting intensifies in eastern Congo.
Mitigation measures for lower-income households
Recognising the regressive nature of VAT and its potential impact on lower-income households, the government has proposed several mitigating measures:
Expansion of zero-rated items
To assist poor households, the basket of items that are zero-rated for VAT will be expanded to include specific edible offal, specific meat cuts, unflavoured dairy liquid blends, and specific canned vegetables.
Social grant increases
Social grants will receive above-inflation increases to provide additional support to vulnerable populations and help offset the impact of the VAT hike.
Political and public response
The proposed VAT increase has elicited varied reactions:
Political opposition
Major political entities, including the Democratic Alliance (DA), have expressed opposition to the VAT hike, arguing that it could hinder economic growth and disproportionately affect lower-income citizens.
Public sentiment
The announcement has sparked public debate, with concerns about the rising cost of living and the potential burden on consumers.
Implications for businesses
Businesses must prepare for the upcoming VAT changes to ensure compliance and mitigate potential challenges:
System updates
Accounting and point-of-sale systems need to be updated to reflect the new VAT rates effective from 1 May 2025 and 1 April 2026.
Contractual agreements
Existing contracts spanning the VAT increase dates may require renegotiation or clarification to address the changes in tax obligations.
Conclusion
South Africa’s decision to incrementally increase the VAT rate reflects a strategic effort to balance fiscal responsibility with economic equity. While the additional revenue aims to bolster essential public services, the government has also introduced measures to mitigate the impact on lower-income households. Businesses and consumers alike must stay informed and adapt to these changes to navigate the evolving economic landscape effectively.
