South Africa to Increase VAT to 16%: Key Implications and Measures

South Africa will increase its VAT by 0.5 percentage points over the next two years, reaching 16% by the 2026/27 fiscal year. This decision aims to fund essential services and has been articulated by Finance Minister Enoch Godongwana. Measures to protect vulnerable households will accompany this increase, addressing cost-of-living pressures while expanding the list of VAT zero-rated items.

The South African government has announced an increase in the value-added tax (VAT) by 0.5 percentage points in each of the next two years, culminating in a rate of 16% by the 2026/27 fiscal year. This decision, communicated by Finance Minister Enoch Godongwana during his Budget Speech on March 12, 2025, aims to enhance funding for essential services such as health, education, transport, and security.

The initial VAT hike will occur on May 1, 2025, followed by a second increment on April 1, 2026. Minister Godongwana emphasized the necessity of this increase to fulfill the government’s mandate for service delivery, asserting that deferring funding would hinder the government’s constitutional obligations to its citizens.

In his address, the Minister acknowledged the reluctance to raise taxes, stating, “No Minister of Finance is ever happy to increase taxes. We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation… However, we have had to balance this knowledge against the very real and pressing service delivery needs that are vital to our developmental goals.”

The government evaluated various alternatives to raising VAT, contemplating increases in corporate and personal income taxes; however, it concluded that such approaches would actually generate less revenue while potentially curbing investment and economic growth. Godongwana noted, “Corporate tax collections have declined… an indication of falling profits… Our top personal income tax rate… is far higher than most developing countries. Increasing it is therefore not feasible.”

Furthermore, the Minister addressed the impracticality of incurring additional debt due to elevated costs associated with borrowing. He mentioned, “The amount is simply too large… VAT is a tax that affects everyone… By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered.”

To mitigate the impact of VAT increases on vulnerable households, the government plans to ensure safeguarding measures. Godongwana stated, “We are very aware of the cost-of-living pressures…. This is why we are taking concrete steps to protect vulnerable households.” Proposed measures include social grant increases, an expanded list of VAT zero-rated food items, and a maintained fuel levy.

The zero-rated list of essential food items currently includes 21 items, with plans to expand it to accommodate more. Starting May 1, 2025, new zero-rated items will include various cuts of meat and canned vegetables. Additionally, the personal income tax proposals effective from March 1, 2025, are expected to generate R19.5 billion in revenue, while adjustments to medical tax credits are not proposed.

In summary, the South African government’s decision to increase VAT to 16% by 2026 emphasizes the need for sustained funding of essential services. While this increase may place additional financial pressure on households, the government’s approach includes measures aimed at protecting vulnerable citizens. These fiscal adjustments pave the way for enhanced service delivery while also considering the broader economic context and the implications for daily living.

Original Source: newcastillian.com