Price hikes loom following Treasury’s decision to increase VAT

The Treasury has decided to increase the Value Added Tax (VAT) by 1% over two years.

If all goes according to the Finance Department’s plan – from next month, all taxable goods and services will reflect a 0.5% hike, while another 0.5% increase will come into effect next year – taking the country’s VAT rate to 16% during the 2026/2027 financial period.

Finance Minister, Enoch Godongwana, revealed his revised budget in Parliament despite concerns that the hike will hurt the poor the most. The country’s official opposition party, the MK Party, on Monday even threatened to bring the country into a standstill should the VAT go up.

Defending Treasury’s decision, the Finance Minister says an increase in VAT was the best option available to them.

Godongwana says it will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.

According to the Minister, increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth.

Government is also not proposing any inflationary adjustments to personal income tax brackets, rebates and medical tax credits.

“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. 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. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades. Madam Speaker, 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 extend the social wage,” says Minister Godongwana.

He stresses the need for the country’s economy to grow.

“A bigger, faster growing economy, and the larger fiscal resources that comes with it, would
give us more fiscal room to meet more of our developmental goals. But the truth is that our economy has stagnated for over a decade. In that time, GDP growth has averaged less than 2 per cent, far below the level required to meet our expanding list of needs.”

Last year, the economy grew by only 0.6% and over the medium term, GDP growth is
projected to average 1.8%.

“To meet our goals of redistribution, redress and structural transformation, the economy needs to grow much faster and in an inclusive manner. This is the central objective of the current administration,” he says.

The VAT increase follows last month’s Debt Busters’ report, which shows that consumer debt is on the rise in the country, and in particular in relation to unsecured credit providers, where the number of consumers with unsecured debt applying for debt review had increased by 22% on average over the last 8 years, while it had increased 52% for those consumers earning more than R35 000 per month.

It’s raised fears that it could lead to higher debt burden for cash-strapped households, who might be forced to borrowing money to maintain their living standards.

Despite the disappointing news to many, the basket of VAT zero-rated foodstuff will be expanded and the general petrol levy won’t go up.

Social grants will also increase. The old age and disability grants will go up by R130 to R2 315; the child support grant by R30 to R560 per month while the foster care allowance will be hiked by R70.

The COVID19 Social Relief of Distress (SRD), in its current form, will be extended by a year to the end of March next year.

The Treasury has also heeded to calls for more funding for the South African Revenue Service, allocating an additional R7.5 billion over the medium term to modernise the tax collection agency’s operations in a bid to combat tax evasion and improve collection.

It has raised sin tax, as expected.

The Minister says the budget reflects collective efforts to chart a path through difficult times to prosperity.

Proceedings were slightly delayed after the EFF wanted Godongwana to apologise for last month’s postponement of the speech, an unprecedented move he has described as sign of a maturing and resilient democracy.

#BudgetSpeech2025 https://t.co/lhq0M5HZTO

— The Presidency 🇿🇦 (@PresidencyZA) March 12, 2025

It, however, remains to be seen whether the budget will get the greenlight from Parliament as the ANC-led government’s coalition partners, the DA, doesn’t support it.

DA leader, John Steenhuisen, says it doesn’t reflect a growth plan for the economy.

Members of Parliament will vote on the proposed budget next week.