VAT to rise to 16% in South Africa

Finance Minister Enoch Godongwana has announced that the value-added tax (VAT) will be increased to 16% by 2026/27.

The announcement came during the delayed 2025 Budget, which Godongwana presented on Wednesday, 12 March 2025.

VAT will be hiked by 0.5 percentage points in 2025 and by another 0.5 percentage points in 2026, reaching 16% in the 2026/27 financial year.

Godongwana said that the decision to hike tax came after careful consideration and much debate around VAT and its impact on the country.

However, he said the bigger debate should be on how South Africa will grow the economy to address its financial challenges.

The VAT hike is expected to raise R13.5 billion in 2025, much less than the R60 billion it sought to raise through its initial proposal of a two-percentage-point increase.

Along with the no inflationary adjustments to personal income tax brackets, rebates and medical tax credits, the government will raise an additional R28 billion in 2025/26 and R14.5 billion in 2026/27.

This is again down significantly from the expected R58 billion projected in the shelved February 2025 Budget.

“Madam Speaker, this decision was not made lightly. No Minister of Finance is ever happy to
increase taxes,” said Godongwana.

“We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power.”

“We have, however, had to balance this knowledge against the very real, and pressing, service delivery needs that are vital to our developmental goals and which cannot be further postponed.”

The initial budget, scheduled in February, saw an unprecedented postponement after members of the GNU said that they would not support a proposed two percentage point hike in VAT.

The Minister wanted a hike to raise revenue, noting that keeping the R370 per month Social Relief of Distress (SRD) grant going was necessary.

Prior to Godongwana’s speech, DA Leader John Steenhuisen said that he did not support the Budget in its current state.

With the ANC lacking a majority in parliament, it will need the support of other political parties to pass the highly contested bill. The IFP and other GNU members are also calling for new tax increases.

Why VAT

The Minister said that the National Treasury examined alternatives to increasing the VAT rate and looked at other potential increases, such as increases to corporate and personal income taxes.

Godongwana added that raising corporate or personal income tax rates would generate less revenue and potentially hurt investment, job creation and economic growth.

“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs,” said the Minister.

“Furthermore, South Africa’s corporate income tax collections are already higher than most of our peer countries.”

“On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save.”

He added that South Africa’s top personal income tax rate and the nation’s personal income tax collections as a percentage of GDP are far higher than those of most developing countries.

He said that increasing either of these taxes is, therefore, 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.”

He added that VAT is a tax that affects everyone, and thus its marginal increase to VAT its distribunational effect and impact were considered.

He added that the increase is the most effective way to avoid further spending cuts and to enable us to extend the social wage.

With the expected pain of a VAT increase on poor households, Godongwana also announced an extension of the zero-rated food items. These items are exempt from 16%.

This includes canned vegetables, dairy liquid blends, and organ meats from sheep, poultry and other animals.