SARS crackdown looms amid VAT hike debacle

While the National Treasury’s withdrawal of its value-added tax (VAT) hike proposal is a welcome development, this decision will likely place pressure on SARS to make up for the lost revenue.

South Africa’s 2025 Budget has been a rollercoaster ride, with uncertainty surrounding the process from the start. 

The first shock came when Finance Minister Enoch Godongwana had to delay the budget presentation in February, as the Government of National Unity (GNU) could not agree on the proposed plan.

Ramaphosa reportedly called an emergency Cabinet meeting hours before it was set to be presented to convince the other GNU parties to give the green light for this Budget.

However, the parties could not reach a consensus, and for the first time in decades, South Africa’s Budget Speech was postponed to allow more time to address the other parties’ concerns.

DA leader John Steenhuisen later revealed that his party refused to sign off on a Budget that implemented tax increases for South Africans.

He specified that the original Budget planned to propose a two percentage point VAT increase, which the DA said would have been disastrous for the economy.

Therefore, the National Treasury had to go back to the drawing board and finally presented South Africa’s ‘Budget 2.0’ on 12 March 2025.

This version of the Budget also introduced a VAT hike, but rather than a two-percentage-point increase, it proposed a one-percentage-point increase split over two years.

However, this was still not enough for some GNU parties, who continued to oppose the ‘new’ Budget when it had to pass a vote to be adopted in the National Assembly.

This led to severe uncertainty surrounding not only South Africa’s fiscal framework for the next year but also the sustainability of the GNU.

The Budget was eventually passed, and it was all systems go for the VAT rate to increase to 15.5% on 1 May 2025.

However, the DA – a staunch opponent of any VAT increase – decided to take the matter to court. The party argued in the Western Cape High Court that the VAT rate can only be increased after Parliament decides, not through a decision only by the Finance Minister.

A day after the DA made this argument in court, the National Treasury released a statement explaining that Godongwana has withdrawn the proposed VAT increase of 0.5 percentage points.

Now, it appears that the matter could be settled out of court, with the DA and ANC set to meet in an attempt to reach an agreement.

Good news for business – with a catch

The South African Institute of Taxation’s strategic lead for stakeholder engagement and legislation, Keitumetse Sesana, explained that the withdrawal of the proposed VAT increase is good news for business.

“This is to be welcomed in a constrained economic environment,” he said, especially considering many businesses were contemplating absorbing the increase to cushion consumers.

However, Sesana cautioned about the uncertainty that would remain if the DA and ANC did not reach an out-of-court settlement.

Tax Consulting SA managing partner, Jerry Botha, said it is a significant development in the tax world.

“Businesses were left in the dark since the Budget was postponed in February, but lately started preparing for the VAT increase by adjusting their systems to be ready by 1 May,” he said.

According to Sesana, this means that some businesses may have already spent money in preparation for the hike, and that money is now gone. “But at least it is good news for businesses that the increase has now been withdrawn,” he said.

However, this still leaves South Africans in the dark about where the government will now find additional revenue.

In a statement on 24 April 2025, the Finance Ministry said it will shortly introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill), which proposes to maintain the VAT rate at 15%.

“The decision to forgo the increase follows extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees,” the department said.

It added that not increasing the VAT rate will lead to an estimated revenue shortfall of around R75 billion over the medium term.

According to the statement, any additional revenue collected by the South African Revenue Service (SARS) may be considered for this purpose going forward to offset the “unavoidable expenditure adjustments”.

Sesana said this can indicate that SARS will need to collect more revenue to make up the gap left by the lack of a VAT increase. Therefore, he warned that more scrutiny by SARS can be expected in the current financial year.

In the statement, Godongwana said there are many suggestions for filling the revenue gap. However, some of them would create greater negative consequences for growth and employment than a VAT hike.

Others, he said, are worthwhile but would not provide an immediate avenue for further revenue in the short term to replace a VAT increase.

Therefore, it can be assumed that, in the absence of a better plan, SARS will need to increase its compliance measures even further this year to increase collections and fund government expenditure.