VAT increase in South Africa on the cards

The Finance Minister is likely to hike taxes during his Budget Speech on 19 February as a way to raise additional revenue for the government and bolster its finances. 

In particular, there has been much debate about a potential increase to VAT in South Africa as it is a relatively easy tax to administer and is collected from a broad source as opposed to highly concentrated personal or corporate income taxes. 

Krutham managing director Peter Attard Montalto said such discussion indicates that tax revenues in the current financial year have underperformed and the National Treasury has been unable to keep a tight lid on spending. 

Old Mutual’s research indicates that Finance Minister Enoch Godongwana could be faced with revenue that underperforms estimates by R22.3 billion.

Tax collections from individuals continued their upward trend, increasing by 13.2% for the fiscal year to December 2024 compared to December 2023. 

However, corporate income tax and VAT have been relatively flat, with corporate income tax reflecting a reduction of 0.4% while VAT collections presented an increase of just 1.2%.

“It is quite bizarre, I think, that with the Budget Speech happening this week, a major policy change is still up for debate among Cabinet members,” Montalto told the SABC. 

The Sunday Times reported earlier this week that the National Treasury had proposed tax hikes to Cabinet, which was met with opposition from members of the Government of National Unity. 

The DA has made a public statement saying that it would oppose any tax hikes and will not vote for a Budget in Parliament that contains increases. 

“Neither party actually wants a VAT hike, but we might end up getting one,” Montalto said. 

“I think if we do end up getting an increase to VAT, it shows that the National Treasury has been unable to contain spending in some areas.” 

However, Montalto explained that tax increases are not a certainty, with the Treasury still having some space to absorb increased spending before needing to raise revenue. 

“I have to say that we are a little more optimistic than the PwC commentary that has come out. We think that excluding the two-pot revenue underperforming, revenue should be strong.” 

The National Treasury also has significant budget reserves of around R20 billion pencilled in for the coming financial year to absorb unforeseen expenditure rises. 

Montalto explained that this gives it some wiggle room to avoid tax hikes. 

Old Mutual’s head of tax, Nazrien Kader, does not think a VAT increase is likely, as the government is looking to other sources to boost revenue. 

Kader explained that the Budget Speech is becoming increasingly difficult for the minister as there is less space for spending to be cut each year and revenue to be raised in a stagnant economy.

With revenue expected to undershoot forecasts by R22.3 billion, the Finance Minister will have to raise additional funds from other sources or cut spending further, which would be politically unpopular.

Thus, while the National Treasury is unlikely to introduce any new taxes, existing taxes are likely to be tinkered with.

The usual lower-than-inflationary adjustments to the individual tax brackets can be more or less guaranteed. Major changes may come with regard to a wealth tax in South Africa. 

In an address to members of Parliament last year, the National Treasury confirmed that it is exploring the feasibility of a wealth tax. 

The debate endures with advocacy groups pushing for early implementation and economists cautioning that such a tax on wealth could risk driving taxpayers away through emigration and tax planning strategies. 

Kader said Old Mutual expects the National Treasury to tinker with existing ‘wealth taxes’ in the current regime. 

These include donations tax (currently 25%), estate duty (dual rate of 20% on the first R30m and 25% thereafter) and the capital gains tax inclusion rate for individuals (currently 40%).

Kader also expects the Finance Minister to impose a Black Economic Empowerment (BEE) levy to fund the new R100 billion Transformation Fund touted by President Cyril Ramaphosa.

“In setting up the fund, we urge the government to give due consideration by way of credits for existing expenditure on Enterprise and Supplier Development programmes implemented by business,” Kader said. 

“If business is simply required to redirect the funds to a BEE levy, this could contribute towards the collapse of black economic empowered business and small enterprises.”