South Africa to increase VAT to 16% by 2026 for revenue boost

South Africa's Finance Minister, Enoch Godongwana, has announced a phased increase in the value-added tax (VAT) during his 2025 Budget Speech on March 12, 2025. The VAT rate, currently at 15%, will rise by 0.5 percentage points in the 2025/26 financial year, effective May 1, 2025, and an additional 0.5 percentage points in 2026/27, bringing it to 16% by April 1, 2026. ​

This decision follows extensive deliberations within the coalition government. Initially, a 2-percentage-point increase was proposed to address a R60 billion ($3.2 trillion) fiscal deficit, partly due to the cessation of U.S. funding for HIV/AIDS programs under President Donald Trump. However, this proposal faced significant opposition from coalition partners, particularly the Democratic Alliance (DA) and senior African National Congress (ANC) members, leading to a compromise for a gradual increment. ​

Minister Godongwana emphasised that the VAT hike is essential to meet pressing spending needs in critical sectors such as health, education, transport, and security. He acknowledged the potential impact on household spending and economic growth but underscored the necessity of this measure to fulfil the government's constitutional obligations to its citizens.

Revenue projections and fiscal Impact

The incremental VAT increase is projected to generate an additional R13.5 billion ($736 billion) in tax revenue for the 2025/26 fiscal year. This approach aims to balance the need for increased revenue without placing an undue burden on consumers during a challenging economic period. ​

Alongside the VAT adjustments, the budget outlines that personal income tax brackets and rebates will not be adjusted for inflation in the 2025/26 fiscal year, a measure expected to raise R18 billion ($981 billion) in additional revenue. This lack of adjustment, known as "bracket creep," means that taxpayers receiving inflation-linked salary increases may be pushed into higher tax brackets, effectively increasing their tax burden. ​

Mitigation measures for low-income households

To mitigate the impact of the VAT increase on low-income households, the government plans to expand the list of zero-rated VAT items. Currently, 21 items are zero-rated; from May 1, 2025, this basket will include tinned or canned vegetables, dairy liquid blends, and various meat products such as sheep, poultry, goat, and swine. This expansion aims to alleviate the financial strain on vulnerable populations by exempting essential goods from the VAT hike. ​

The proposed VAT increase has been met with resistance from key political figures. DA leader John Steenhuisen reiterated his party's opposition to any tax increases, advocating instead for alternative measures such as selling port concessions and implementing cost-cutting strategies. The DA's stance highlights the complexities within the coalition government, as differing ideologies and policy preferences come to the forefront during critical fiscal decisions. ​

The postponement of the budget from its original February date to March 12, 2025, due to internal disagreements, underscores the challenges faced by the coalition government in reaching a consensus on fiscal policies. The delay marked the first time in 31 years that South Africa's budget presentation was postponed, reflecting the gravity of the situation and the need for thorough deliberation among coalition partners.

Economic context and future outlook

South Africa's economy has been grappling with minimal growth in recent years, with the Treasury adjusting its growth forecast for 2025 to 1.9%, following an average growth rate of less than 1% over the past four years. The economy grew by only 0.6% in 2024, primarily due to a third-quarter contraction driven by weaker-than-expected performances in the transport and agriculture sectors, the latter affected by disease and drought. ​

The government aims to stabilise gross loan debt at 76.2% of GDP in 2025/26, facilitated by a primary budget surplus. The consolidated budget deficit is projected to narrow from 5% in the current year to 3.5% in 2027/28. However, debt service costs remain substantial, amounting to R389.6 billion in the current year, exceeding expenditures on health, police, and basic education. ​

In addition to the VAT increase, excise duties on alcohol and tobacco products are set to rise by 6.75% and 4.75%, respectively, surpassing expected inflation rates. Conversely, fuel levies will remain unchanged to avoid placing further financial strain on consumers. ​

The phased VAT increase reflects the government's efforts to balance fiscal responsibility with economic growth and social welfare considerations. While the decision aims to address critical funding needs, it also highlights the intricate dynamics within South Africa's coalition government and the broader challenges of implementing tax policy changes in a complex economic environment.