South Africans will soon face an elevated financial obligation to bolster essential services in health, education, transport, and security, as the government has resolved to increase the value-added tax (VAT) by 0.5 percentage points in each of the next two years, bringing the rate to 16% in the 2026/27 financial year.
This was articulated by Finance Minister Enoch Godongwana, during his Budget Speech before Parliament on Wednesday, 12 March 2025.
During his speech, the Minister declared, “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.”
The initial 0.5 percentage point rise in the VAT rate is set to take effect on 1 May 2025, with a subsequent 0.5 percentage point increase scheduled for 1 April 2026.
While delivering the annual Budget Speech, Godongwana elaborated on the process behind this decision, stating, “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.”
Moreover, he explained that the government conducted an exhaustive review of alternatives to raising VAT, including the possibility of increasing corporate and personal income taxes.
However, these options were found wanting, as they would generate less revenue while potentially stifling investment, job creation, and overall economic growth.
The Minister provided further insight, stating, “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.”
Furthermore, Godongwana also addressed the impracticality of taking on additional debt to meet these spending pressures.
“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.”
To lessen the strain on households, the government has outlined measures to safeguard vulnerable citizens. “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 affirmed.
These steps include providing social grant increases that exceed inflation, expanding the basket of VAT zero-rated food items to incorporate canned vegetables, dairy liquid blends, and organ meats from sheep, poultry, and other animals, as well as maintaining the fuel levy unchanged for another year, which will save consumers around R4 billion.
The VAT system currently zero-rates 21 essential food items to improve affordability for lower-income households, and the government has proposed extending this list to mitigate the impact of the VAT increases.
Godongwana detailed this expansion, stating, “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.”
Additionally, the 2025 National Treasury Budget Review clarified, “The personal income tax proposals are effective from 1 March 2025 and expected to raise revenue of R19.5 billion. No changes to medical tax credits are proposed – these will remain at R364 per month for the first two beneficiaries and at R246 per month for the remaining beneficiaries.” Personal income tax brackets and rebates will not be adjusted for inflation in 2025/26, reflecting a deliberate approach to revenue enhancement.
With South Africans now preparing for VAT, along with other increases, the broader consequences for economic conditions and daily living prompt concern. What are your thoughts on these fiscal adjustments?
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