South Africa’s plan to hike VAT to 17%

National Treasury’s plan to increase the Value-Added Tax in South Africa has been thwarted.

In an unprecedented move that shocked markets on Wednesday, cabinet cancelled the scheduled 2025 budget speech and postponed it to 12 March.

The main driving force behind the cancellation is a big fight within the Government of National Unity (GNU) over proposed tax changes within the budget.

Specifically, a proposal to hike VAT by two percentage points drew wide criticism.

According to a document from the South African Revenue Service’s (SARS) website over the proposed tax changes, the treasury outlined its plan to increase VAT from 15% to 17%.

This would have taken effect from 1 April 2025.

In response, the zero-rating of certain goods would have been extended to include edible offal, unflavoured dairy liquid blends and specific canned and bottled vegetables to assist poor households.

Zero-rated VAT products are exempt from VAT and currently include a host of other foods, products under the general fuel levy and more.

The Democratic Alliance said it would have refused to approve the budget with the increase in VAT.

DA chief whip George Michalakis said at the sitting that the government is no longer a majority-run entity that will rubber-stamp bad policies.

Following the cancellation, the DA leadership took credit for “defeating” the move. However, at a post-cancellation briefing, minister in the presidency Khumbudzo Ntshavheni said that the decision to cancel the sitting was a cabinet decision across party lines.

The move to cancel the sitting shocked markets, and the VAT proposal was widely unexpected by tax experts in South Africa.

Many stated ahead of the budget speech that a VAT increase would be highly unlikely, given that these hikes often hit the poorest the most in the country, even if it is seen as a way to increase the state’s coffers.

The increase in VAT comes amid reports that the government plans to squeeze more of taxpayers to fund a projected R300 billion shortfall.

Despite this, speaking at a media roundtable, tax experts at Deloitte predicted that the National Treasury would keep VAT at 15%.

Ania Strydom from PaySpace also did not see an increase in VAT occurring. She noted that it took considerable pressure to increase VAT to 15% in 2018.

Even with South Africa’s coffers strained, Strydom said that current fiscal pressures were unlikely to motivate another VAT increase.

Not everything was a surprise

Unlike the increase in VAT, most experts did expect the number of zero-rated goods to be increased.

Zero-rated goods are exempt from VAT and include 19 basic food items, such as brown bread, maize meal, samp, and mealie rice.

Calls to increase the list of zero-rated goods are seen as a way to allow greater relief to already financially strained lower- and middle-class consumers.

President Cyril Ramaphosa and other ANC members previously called for an increase in the number of zero-rated increases.

However, Deputy Finance Minister David Masondo, who works with the National Treasury, previously said that a serious change in the zero-rated list was unlikely.

Masondo said that existing items on the list were well-targeting, adding that increasing the list of zero-rated goods would lead to VAT revenue loss for the state.

However, this was before the state planned to hike VAT to make up for this.