The South African government will gradually increase VAT from 15% to 16% by April 2026, generating significant additional revenue to address fiscal deficits. Alongside this, no adjustments will be made to personal income tax brackets for inflation, a decision that may increase tax burdens. The government also plans to expand zero-rated VAT items to mitigate impact on low-income households, amidst concerns from opposition parties regarding economic strain.
The South African government, in a move to address its increasing fiscal deficit, has announced a phased increase of the value-added tax (VAT) from 15% to 16% by April 2026. Finance Minister Enoch Godongwana outlined this decision during the 2025 Budget Speech, detailing that the VAT rate will first rise to 15.5% on 1 May 2025, followed by the final increase to 16% on 1 April 2026. This tax adjustment is projected to generate an additional R13.5 billion ($736 million) for the financial year 2025/26. While the government asserts that these funds are imperative for maintaining public services such as healthcare, education, and security, opposition parties have voiced their concerns regarding the potential impact on consumers.
Debate within the coalition government preceded this decision, with the Democratic Alliance (DA) and several African National Congress (ANC) leaders opposing an initial proposal for a two-percentage-point increase. To mitigate economic ramifications and public dissent, a gradual increase was agreed upon. DA leader John Steenhuisen has expressed his concerns, advocating for alternative revenue strategies, including the sale of port concessions and reduction of unnecessary expenditures. The opposition reflects a broader unease that the VAT increase may further burden consumers already facing rising living costs.
To alleviate the impact on low-income households, the government intends to broaden the list of zero-rated VAT items starting 1 May 2025. This updated list will encompass necessities such as tinned vegetables, dairy liquid blends, and various meats, including poultry, goat, sheep, and swine.
Moreover, the VAT adjustment is not the sole financial policy affecting South Africans. The government has opted not to index personal income tax brackets for inflation in 2025/26, known as “bracket creep.” This could lead inflation-adjusted salary increases to push workers into higher tax brackets, effectively increasing their tax liabilities. This decision is expected to yield an additional R18 billion ($981 million) in revenue.
Excise duties on alcohol and tobacco are set to rise by 6.75% and 4.75%, respectively, exceeding inflation. Conversely, fuel levies will remain unchanged to avoid inflicting further financial distress on consumers.
The 2025 budget, first scheduled for February, was postponed to 12 March. This delay marks the first of its kind in 31 years and underscores the complexities of governance in a coalition, as disagreements over fiscal policy remained unresolved.
Against a backdrop of a weak economic outlook, the Treasury has reduced its growth forecast for 2025 to 1.9%, following only 0.6% growth in 2024 due to contractions in transport and agriculture. The government aims to stabilize gross loan debt at 76.2% of GDP for 2025/26 and reduce the consolidated budget deficit from 5% this year to 3.5% by 2027/28. Nevertheless, high debt servicing costs, projected at R389.6 billion this year, overshadow funding allocations for health, policing, and basic education combined.
The phased VAT increase represents part of a broader initiative to bolster public revenue while continuing to fund essential services. Implementing these changes amid rising fiscal pressures and economic difficulties forms a delicate balance for the government, as it seeks to maintain public acceptance amidst uncertain financial futures.
In summary, the South African government has announced a phased VAT increase, aiming to address fiscal deficits while attempting to fund crucial public services. Although this approach seeks to relieve low-income households and mitigate immediate backlash, the overall economic environment remains challenging. The absence of personal income tax adjustments and increasing excise duties further complicate the financial landscape for citizens, prompting discussions about balancing fiscal strategy with public welfare. The government’s approach amid these hurdles will be closely scrutinized as it navigates the complexities of relationship management within a coalition and ongoing economic pressures.
Original Source: thecondia.com
