Bad news for VAT increase in South Africa

South Africa’s proposed Value-Added Tax (VAT) increase in 2025 will still proceed under current circumstances, even if the 2025 Budget has not passed through parliament.

Finance Minister Enoch Godongwana recently announced that VAT would increase by half a percentage point in May 2025 and by the same amount again in April 2026.

These two increases will take VAT to 16%, less than the 17% proposed by Godongwana in the cancelled February 2025 budget.

Several political parties in the Government of National Unity (GNU) said they would not support the increase in VAT.

Without a majority in parliament, the ANC’s ability to pass the budget is uncertain. Many are concerned that the VAT increase will most affect low-income households.

However, the opposition won’t stop the VAT hike from being implemented.

Speaking at the PSG Thing Big Series, Chris Axelson, Acting Deputy Director-General: Tax and Financial Sector Policy at National Treasury gave an in-depth analysis of the process to approve the dudget.

1. National Treasury will need to wait on the Standing Committee on Finance, which has had its first hearing on a fiscal framework.
2. This framework will then pass onto public hearings.
3. The National Treasury will then respond to the framework.
4. National Treasury will then send a report to the National Assembly, where MPs will have to vote to adopt it.

Axelson said he is hopeful that a resolution between parties will be found within the coming weeks to pass the budget.

If there aren’t enough votes to pass the budget, South Africa will enter uncharted territory. This will see amendments proposed by the committees or see National Treasury head back to the drawing board.

However, as it stands by law, the VAT increase to 15.5% will be effective on 1 May as it was announced by the Minister during his speech. The increase thus does not need parliament’s approval.

Although there is widespread anger at the increase, he said that the potential increase in VAT is the least damaging to economic growth.

“R100 would have been an inflationary increase, however, we allocated an extra R50 for old age grants to compensate for the impact of the increase in VAT,” said Axelson.

“In the revised budget, we have allocated an additional R30 as we recognise that these groups are under pressure.”

Infrastructure is key

Spending needs to increase in South Africa, but Axelson said that finding the funds is another challenge, particularly since the post-Covid commodity boom has now ended.

As mining companies are now struggling, Axelson said that one effective growth strategy is the investment in infrastructure.

“Some of the additional revenue is going to these new projects. We’ve got a budget facility for infrastructure that is now meeting more frequently to review and initiate projects,” he said.

“There’s been a lot of success from Operation Vulindlela on energy transmission, and now that’s extending to other types of government programmes.”

Axelson noted that reliable water and power, along with efficient roads and transport are essential.

“Investing in these areas can potentially lower business costs, improve efficiency and make them more effective.”

Thus, public-private partnerships (PPPs) are seen as essential to fund, build, maintain and operate public infrastructure.

There has been increased realisation in government circles that they need to partner with the private sector to facilitate economic initiatives.

External risks including geopolitical tensions and global economic instability loom, and the Deputy DG warned that South Africa lacks a substantial buffer against such events.

Although what is being experienced regarding the budget may be new to democratic South Africa, Axelson said that is not uncommon in a democracy and should not be seen as a crisis.