In response to mounting financial pressures in key sectors such as health, education, transport, and security, the government has announced a phased increase in Value-Added Tax (VAT). The tax rate will rise by 0.5 percentage points in each of the next two years, reaching 16% in the 2026/27 financial year.
“These adjustments are necessary for the government to fulfil its service delivery obligations. After careful consideration, we have decided that funding these critical sectors can no longer be deferred, as doing so would compromise our constitutional duties,” said Minister of Finance Enoch Godongwana on Wednesday.
The first increase will take effect on 1 May 2025, followed by a second on 1 April 2026.
Difficult but Necessary Measures
The Minister acknowledged the gravity of the decision, stating, “No Minister of Finance takes pleasure in raising taxes. We are acutely aware that a lower tax burden fosters investment, job creation, and household spending power. However, we must balance this against the urgent need for service delivery, which remains integral to our developmental objectives.”
Government explored alternative revenue sources before settling on the VAT increase. Options such as higher corporate or personal income taxes were deemed less effective, given their potential to stifle investment and economic growth.
“Corporate tax collections have been declining due to economic constraints, including logistics challenges and soaring electricity costs. Increasing corporate taxes would generate minimal additional revenue while exacerbating these difficulties,” the Minister explained.
“Similarly, raising personal income tax would deter work and savings, making it an unviable solution given that South Africa’s tax rates are already higher than those of comparable developing nations.”
Borrowing to meet spending demands was also ruled out. “The debt burden would be unsustainable, leading to higher borrowing costs and increasing the risk of further credit downgrades,” he warned.
Impact and Mitigation Efforts
The government acknowledges the widespread impact of VAT increases but argues that they are the most viable means of preventing further spending cuts while sustaining critical social services.
To alleviate the burden on vulnerable households, several mitigating measures will be implemented:
- Above-inflation increases in social grants.
- An expanded list of VAT-zero-rated essential foods, including canned vegetables, dairy liquid blends, and organ meats from sheep, poultry, and other livestock.
- A continued freeze on the fuel levy, saving consumers an estimated R4 billion.
Currently, the VAT system exempts 21 essential food items to ease financial strain on low-income households. From 1 May 2025, additional items such as edible offal, dairy liquid blends, and specific canned vegetables will be added to the zero-rated list.
Additional Tax Proposals
Other tax measures include:
- No inflation adjustments to medical tax credits.
- Above-inflation increases in excise duties on alcohol and tobacco.
- Diesel refund relief for primary sectors.
Personal income tax brackets and rebates will remain unchanged in 2025/26, with the new tax measures expected to generate R19.5 billion in revenue.
“The personal income tax proposals, effective from 1 March 2025, will maintain current medical tax credits at R364 per month for the first two beneficiaries and R246 per month for any additional dependents,” the 2025 National Treasury Budget Review stated.
As South Africans brace for higher living costs, the government insists that these painful but necessary decisions will safeguard long-term financial stability and ensure continued service delivery in an increasingly constrained economic climate.