In his 2025 Budget Speech, Finance Minister Enoch Godongwana announced a proposed incremental increase in South Africa’s value-added tax (VAT) rate. The VAT rate will rise by 0.5 percentage points in 2025/26 and another 0.5 percentage points in 2026/27, bringing the total VAT rate to 16% by 2027. The move aims to address persistent spending pressures while providing relief to lower-income households through additional VAT zero-rating of essential food items.
Key Details of the VAT Increase
- 2025/26: VAT increases from 15% to 15.5%.
- 2026/27: VAT increases from 15.5% to 16%.
To mitigate the impact on low-income households, the government has proposed:
- Expanding the list of zero-rated essential food items.
- Providing above-inflation increases in social grants.
- Maintaining the current fuel levy, with no changes planned.
Why the VAT Increase?
The VAT hike is part of broader measures to raise additional tax revenue and address South Africa’s fiscal challenges. According to Dr. Duncan Pietersen, Director-General of the National Treasury, the additional funds will be allocated to critical areas, including:
- Extending early childhood development coverage.
- Hiring more teachers, doctors, and other frontline personnel.
- Rebuilding the commuter rail system.
Godongwana acknowledged that the decision to increase taxes was not taken lightly. “I am not delighted to increase taxes, but this is necessary to fund essential services and support economic recovery,” he said.
Revenue Projections
The proposed VAT increase, along with other tax measures, is expected to generate significant additional revenue:
- 2025/26: R28 billion.
- 2026/27: R14.5 billion.
These funds will primarily come from:
- Not adjusting personal income tax brackets for inflation (bracket creep).
- The incremental VAT increases.
Impact on Inflation and Households
While the VAT increase is expected to contribute to a slight rise in inflation, the overall impact is projected to be moderate:
- Headline Inflation: Averaged 4.4% in 2024 and is projected to rise to 4.3% in 2025 and 4.6% in 2026.
- Core Inflation: Expected to increase from 4.3% in 2024 to 4.6% in 2026 due to the VAT hike.
Lower global crude oil prices are expected to offset some of the inflationary pressures, keeping fuel price inflation muted.
Relief Measures for Low-Income Households
To cushion the blow for vulnerable households, the government has introduced several relief measures:
- Expanded Zero-Rating: More essential food items will be added to the VAT zero-rated list, reducing the tax burden on basic necessities.
- Social Grants: Above-inflation increases in social grants will help protect the purchasing power of beneficiaries.
- Fuel Levy Freeze: No changes to the fuel levy will provide some stability for transport costs.
What’s Next?
The proposed VAT increase will now go through parliamentary approval. If passed, it will take effect in the 2025/26 fiscal year, with the second increase following in 2026/27. The government’s ability to balance revenue generation with social support will be critical in ensuring the measure’s success.
The incremental VAT increase is a bold move by the South African government to address fiscal pressures while prioritizing essential services and economic recovery. While the hike may pose challenges for households, the accompanying relief measures aim to protect the most vulnerable. As the budget moves through the approval process, all eyes will be on its implementation and impact on South Africa’s economy and society.
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