By Lehlohonolo Lehana.
Finance Minister Enoch Godongwana has made a new tax proposal to increase value-added tax (VAT) by 0.5 percentage points over two years.
This will take the VAT rate to 16% in 2026.
This year’s proposed VAT increase will take effect on May 1 and next year’s on April 1.
The value-added tax rate has not been increased since 2018.
It’s the concession he’s making after attempting to table a two percentage point increase in February, when the tabling of the national budget was postponed after Government of National Unity (GNU) partners rejected the proposal at an eleventh-hour Cabinet meeting.
Godongwana tabled a proposal to increase South Africa’s Vat rate by 0.5 percentage points in 2025/26 and by a further 0.5 percentage points in 2026/27. The move is likely to spark a showdown in parliament between the ANC and DA – the two main parties in the GNU.
Cabinet had not approved the latest budget ahead of Godongwana’s speech on Wednesday.
The DA and other parties have been vehemently against any Vat hike, with the DA also against other major tax increases, such as a wealth tax.
A heated dispute over Vat hikes in the GNU cabinet means that a decision on the new proposal will need to be debated and voted for in parliament, with the ANC hoping to secure support from other parties.
The lower Vat increase plan is not good news for South Africans, as the reworked budget now proposes no adjustment for inflation in personal income tax brackets for 2025/26 to address ‘bracket creep’. Personal income tax brackets have not been adjusted since 2023.
But Godongwana tried to stress that relief measures were in the budget, reiterating that “to provide relief to lower-income households, the government proposes additional Vat zero-rating of essential food items and no changes to the fuel levy.”
The Treasury’s 2025 Budget supporting documents note that the latest tax policy proposals are anticipated to raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27. In the ‘untabled’ 19 February draft budget, Godongwana hoped to raise an additional R58 billion from the tax proposals, which would have been largely funded by the controversial 2-percentage point Vat hike plan.
However, he stuck with government’s plan to allocate R23.4 billion for the 2025 public-service wage agreement. This, he stressed, will “provide greater certainty for budget planning for the next three years”.
Despite Godongwana’s comments, the fact is that most of the additional funds from the new budget proposal for a multi-year Vat increase of 0.5 percentage points will be used to increase the public sector wage bill.
The amended budget plan is anticipated to see SA’s consolidated budget deficit narrowing from 5% of GDP in 2024/25 to 3.5% of GDP in 2027/28.
National Treasury is considering tapping the Sarb contingency reserve account to the tune of another R5 billion.
Government has decided not to can the Social Relief of Distress (SRD) grant, which was first implemented in 2020 as an emergency measure to support the poor during the Covid pandemic. The SRD grant will continue until 31 March 2026, at a cost of just over R35 billion.
There was no major announcement about funding National Health Insurance (NHI) or mention of a wealth tax. However, the middle class is likely to be impacted more by the Vat hike and tax bracket creep.
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Video Courtesy of Parliament.