Treasury stopping VAT increase in South Africa

The Minister of Finance, Enoch Godongwana, will soon implement measures to reverse the highly contested and reviled VAT hike in South Africa.

National Treasury announced on Thursday (24 April) that the minister will “shortly” introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill), which proposes to maintain the Value-Added Tax (VAT) rate at 15 per cent from 1 May 2025.

This is in place of the proposed 0.5 percentage point increase to VAT announced in the Budget in March and passed in the fiscal framework earlier in April.

“The decision to forgo the increase follows extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees,” it said.

“By not increasing VAT, estimated revenue will fall short by around R75 billion over the medium term.

“As a result, the Minister of Finance has written to the Speaker of the National Assembly to indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill, in order to propose expenditure adjustments to cover this shortfall in revenue.”

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.

The decision not to increase VAT means that the measures to cushion lower income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.

To offset the unavoidable expenditure adjustments, any additional revenue collected by SARS may be considered for this purpose going forward.

The Minister of Finance expects to introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks.

Treasury said the initial proposal for an increase to the VAT rate was motivated by the urgent need to restore and replenish the funding of critical frontline services that had suffered reductions necessitated by the country’s constrained fiscal position.

However, the hike was widely rejected by political parties and South Africans at large.

It is not yet clear what this means for the budget process, nor how Parliament will find the additional revenue needed.

Treasury said there have been many suggestions, “however some of them would create greater negative consequences for growth and employment and some of them, while worthwhile, would not provide an immediate avenue for further revenue in the short term to replace a VAT increase”.

Despite this, it said it would consider these and other proposals as potential amendments in upcoming budgets as mechanisms to increase the resources available.