Bad news for anyone paying income tax in South Africa

While the reversal of the 0.5 percentage point VAT hike gripped South Africans and news headlines on Thursday (24 April), taxpayers will still feel the pinch of bracket creep in 2025.

Finance Minister Enoch Godongwana made waves on Thursday morning, announcing a U-turn on the proposed VAT hike in a pre-dawn media statement.

The statement was issued shortly after the Democratic Alliance (DA) confirmed it had been approached by the minister’s lawyers about an out-of-court settlement relating to its legal challenge over the VAT.

While legal questions remain about the process for fully withdrawing the tax hike, political parties across the spectrum have agreed it cannot proceed and have celebrated its withdrawal.

Sanisha Packirisamy, Economist at Momentum Investments, said that the rolling back of VAT will bring some relief to consumers, but warned that taxpayers are still on the hook for R18 billion.

This is because the Treasury confirmed that the fiscal drag from not adjusting tax brackets for inflation will remain in place.

The non-adjustment of tax brackets is seen as one of the most egregious “stealth taxes” on the population, and will place an even bigger burden on fewer South Africans.

While the VAT hike sought to raise R13.5 billion from the entire population, bracket creep is expected to raise R18 billion from income taxpayers alone.

In another “sleight of hand” move, medical aid tax credits also remain frozen at previous levels, adding another R1.5 billion to the pot.

By not making these adjustments, individual taxpayers are still on the hook raising R19.5 billion for the government.

Even as political parties congratulated themselves on seemingly avoiding the VAT disaster, promises to eliminate bracket creep appear to have been squarely forgotten.

Unclear path ahead

Echoing the view of legal experts, Packirisamy also noted that the path ahead is not clear or easy, and the VAT mess will have consequences.

Firstly, revised versions of the Appropriation and Division of Revenue Bills will need to be drafted in the coming weeks. What happens in the interim is still unclear.

Thomson Wilks Attorneys’ director, Bartho van Tonder said that there does not appear to be a legal route for the Finance Minister to simply stop the VAT hike through these measures.

He said it would require either a court order setting aside the passing of the fiscal framework, or a new bill undoing his decision. The latter is unlikely to be achieved before 1 May.

Secondly, parliament will have to find additional revenue sources to make up for the estimated R75 billion budget shortfall the VAT loss will create over the medium term.

Packirisamy said this will include a number of adjustements under consideration, such as the removal of additional zero-rated VAT items, curtailing the magnitude of social grant increases or delaying planned recruitment drives.

Thirdly, she warned that South Africa will also have to navigate the political fallout of the move, with the cracks within the Government of National Unity (GNU) deepening.

“While the VAT reversal has been politically framed as a win for the Democratic Alliance, which had challenged the measure in court, it has exposed cracks within the GNU,” the economist said.

This was demonstrated by the ANC-led GNU calling a press briefing with all political parties that supported it in pushing through the fiscal framework in the portfolio committee and in parliament.

Notably, the DA and Freedom Front Plus—GNU members who opposed the framework—were excluded.

This friction has already undermined that positive sentiment generated by the GNU’s formation.

It exacerbates tensions from the uncompromising ANC-led stance on the NHI, and the signing of the BELA and Expropriation Acts, which the DA opposed.

Packirisamy said that the discord has stalled business confidence and caused investors to pause, waiting for more stable government policy direction.

Consumer confidence has also waned, and recent political polls have shown the deep unpopularity of these moves. Support for the ANC, in particular, has dropped significantly.