Govt to Increase VAT to 16% by 2026/27 to Address Urgent Service Delivery Needs

Minister of Finance Enoch Godongwana confirmed on Wednesday that VAT will rise by 0.5 percentage points in each of the next two years, bringing the rate to 16% in the 2026/27 financial year.

In response to increasing and persistent spending demands in key sectors such as health, education, transport, and security, the South African government has announced a phased increase in the value-added tax (VAT) rate. Minister of Finance Enoch Godongwana confirmed on Wednesday that VAT will rise by 0.5 percentage points in each of the next two years, bringing the rate to 16% in the 2026/27 financial year.

"These measures are essential for the government to effectively fulfill its service delivery mandate," said Godongwana while delivering the 2025 Budget Speech in Parliament. "Deferring the funding of these sectors further would compromise the government's ability to meet its constitutional obligations to the people."

Gradual VAT Increase Implementation

The first 0.5 percentage point increase in VAT will take effect on 1 May 2025, followed by another 0.5 percentage point increase on 1 April 2026.

Considerations Behind the Decision

The Finance Minister emphasized that the decision to raise VAT was not made lightly and followed careful consideration of alternative revenue-raising options.

"We weighed the policy trade-offs, including increasing corporate and personal income taxes. However, raising corporate or personal income tax rates would generate less revenue while potentially harming investment, job creation, and economic growth," Godongwana explained.

• Corporate tax collections have declined due to falling profits, exacerbated by logistical constraints and rising electricity costs. Increasing corporate tax could further hinder business growth and competitiveness.
• Personal income tax rates in South Africa are already high compared to other developing nations, and further increases could disincentivize work and savings.
• Additional government borrowing was deemed unfeasible due to high debt costs and potential credit rating downgrades.

Given these challenges, VAT was identified as the most viable solution, with its impact carefully assessed to minimize negative effects on lower-income households.

Measures to Cushion the Impact on Vulnerable Households

Recognizing the financial strain on South African households due to rising costs of living, the government has introduced measures to protect vulnerable citizens from the effects of the VAT hike:

1. Above-inflation increases in social grants to support low-income households.
2. Expansion of VAT zero-rated food items to include:
   • Canned vegetables
   • Dairy liquid blends
   • Organ meats from sheep, poultry, and other animals
3. Freeze on fuel levy increases for another year, saving consumers an estimated R4 billion.

Currently, 21 essential food items are zero-rated under the VAT system to ensure affordability for lower-income households. The newly proposed zero-rated items will be effective from 1 May 2025.

Additional Tax Measures

• No inflation adjustments to medical tax credits, which will remain at R364 per month for the first two beneficiaries and R246 for additional beneficiaries.
• Above-inflation increases in excise duties on alcohol and tobacco products.
• Diesel refund relief for primary sectors to ease cost pressures on industries reliant on fuel.
• No adjustments to personal income tax brackets and rebates for inflation in 2025/26, expected to generate R19.5 billion in revenue.

Godongwana reassured the public that the government remains committed to balancing tax policy with economic growth while ensuring the continued delivery of essential public services. "We recognize the burden that taxes place on citizens and businesses. However, these necessary increases will enable the government to maintain and expand critical public services without resorting to severe spending cuts," he said.

Conclusion

While the VAT increase is expected to provide significant revenue for government operations, the phased approach and mitigating measures aim to protect lower-income households. As the country navigates economic challenges, these decisions reflect a strategic effort to maintain fiscal sustainability while addressing urgent social and infrastructural needs.