Treasury to Scrap 0.5% VAT Hike, Seeks Alternative Budget Fix Amid R75bn Gap

The VAT hike, which was announced during the Budget Speech in March 2025, aimed to bolster public revenues to support essential services.

 In a significant policy reversal, the South African National Treasury has announced its intention to withdraw the planned 0.5% increase in Value-Added Tax (VAT) originally scheduled for implementation on 1 May 2025. The withdrawal will be formally proposed when Finance Minister Enoch Godongwana introduces the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill—commonly referred to as the Rates Bill—to Parliament.

The VAT hike, which was announced during the Budget Speech in March 2025, aimed to bolster public revenues to support essential services. However, mounting political opposition and concerns raised during parliamentary deliberations have led the Treasury to reconsider.

Reasons Behind the Reversal

According to the Treasury, the decision was made after “extensive consultations with political parties and careful consideration of the recommendations of the parliamentary committees.” These consultations reflected widespread concern over the potential impact of the VAT hike on lower- and middle-income households, already burdened by rising costs of living.

The proposed increase would have taken the VAT rate from 15% to 15.5%, marking the first such hike since 2018. It was expected to contribute significantly toward funding critical frontline services such as healthcare, education, and policing, which have all faced austerity-related budget reductions in recent years.

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Fiscal Implications: A R75 Billion Hole

The cancellation of the VAT increase now creates an estimated R75 billion revenue shortfall over the medium-term expenditure framework. In response, Minister Godongwana has taken the unusual step of writing to the Speaker of the National Assembly to withdraw both the Appropriation Bill and the Division of Revenue Bill.

The aim is to reintroduce revised versions of both bills that will account for the revenue loss and realign government spending to maintain fiscal sustainability. “Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability,” Treasury noted in its statement.

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Cushioning Measures Withdrawn, Alternatives Under Review

With the VAT increase off the table, the government will also be scrapping plans to introduce support mechanisms designed to cushion the impact of the hike on low-income households. These measures included food basket subsidies and targeted rebates.

To partially offset the shortfall, the Treasury has hinted at the possibility of leveraging any unexpected increases in tax revenue collected by the South African Revenue Service (SARS). “Any additional revenue collected by SARS may be considered for this purpose going forward,” the Ministry said.

Meanwhile, several alternative revenue measures are under active review. These range from luxury goods taxes and property levies to efficiency-driven reforms in public procurement. However, Treasury cautioned that many of the suggested measures either pose risks to economic growth and employment or are not feasible for immediate implementation.

Revised Bills and Budget Proposals Expected Soon

Finance Minister Godongwana is expected to table a revised Appropriation Bill and Division of Revenue Bill in the coming weeks. These revised bills will provide detailed outlines of how the government plans to readjust its fiscal stance in light of the removed VAT increase.

Treasury emphasized that while the short-term decision avoids a regressive tax measure, long-term structural reforms and difficult choices remain inevitable. “The National Treasury will, however, consider these and other proposals as potential amendments in upcoming budgets as mechanisms to increase the resources available,” the Ministry concluded.

As the fiscal debate intensifies, all eyes will be on Parliament’s response and the revised fiscal package expected to emerge in the coming month.