VAT hike announced for South Africa

Instead of the 2 percentage point hike to value-added tax (VAT) that the National Treasury initially wanted to implement, it will now increase the VAT rate by 1 percentage point over two years.

This will be done by hiking the VAT rate by 0.5 percentage points in each of the next two years, bringing the VAT rate to 16% in 2026/27.

This was announced in the 2025 Budget, which Finance Minister Enoch Godongwana tabled on Wednesday, 12 March.

The minister explained that tax measures enable additional funding in several key areas, including education, early childhood development, and health. 

“There are several persistent spending pressures in health, education, transport and security,” he said.

“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.”

Therefore, to raise the revenue needed, the government has proposed to increase the VAT rate by half a percentage point in 2025/26 and by another half a percentage point in the following year.

The government has also proposed no inflationary adjustments to personal income tax brackets, rebates and medical tax credits.

By not adjusting the tax brackets for inflation, the National Treasury is giving rise to “bracket creep”, which, in effect, makes taxpayers pay more without needing to raise the tax rate, resulting in greater revenue without hiking rates.

Godongwana said these measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.

A VAT rate hike has been the source of significant controversy surrounding this year’s Budget.

Godongwana was initially set to present the 2025 Budget in February, but the members of the Government of National Unity (GNU) could not reach a consensus.

This resulted in the Budget being delayed to 12 March.

The DA, a member of the GNU, later revealed that it could not sign off on the original Budget because it proposed implementing a 2 percentage point VAT hike.

The party said this would have devastated the economy and have a disproportionately negative effect on poor South Africans.

In his Budget presentation on 12 March, Godongwana said the National Treasury thoroughly examined alternatives to raising the VAT rate. 

“We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes,” he said. 

However, they found that increasing corporate or personal income tax rates would generate less revenue while potentially harming investment, job creation and economic growth. 

In addition, 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. 

The minister also pointed out that South Africa’s corporate income tax collections are already higher than those of most of its peer countries. 

“On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save,’ he explained.

“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 added that 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,” he said. 

Therefore, the National Treasury concluded that hiking VAT was the only way to raise additional tax revenue.

“VAT is a tax that affects everyone. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered,” Godongwana said. 

“The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage.”

Considering the impact of the tax measures on the most vulnerable households, the National Treasury implemented several measures intended to “cushion” the effect of a VAT hike. 

These measures include –

• Real increases in social grants
• An expansion of the list of VAT zero-rated foods to include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry and other animals
• Continued fuel levy relief, as the government has not increased the fuel levy for another year, saving consumers around R4 billion.

“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,” the minister said. 

“This is why we are taking concrete steps to protect vulnerable households.”