Elevated VAT rates set for 2025-27

Source: Reuters. South African President Cyril Ramaphosa answers lawmakers' questions at the parliament in Cape Town, South Africa, 11 March, 2025.

At the same time, the government plans to forgo inflationary adjustments to personal income tax brackets, rebates, and medical tax credits, effectively increasing the tax burden on individuals as wages rise.

For businesses, these policy shifts could impact consumer spending, operational costs, and overall market demand. Understanding the broader implications will be crucial for financial planning and strategic decision-making in the coming years.

"This decision was not made lightly. No Minister of Finance is ever happy to increase taxes. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered. The increase is the most effective way to avoid further spending cuts and to enable us to extend the social wage," SA's Finance Minister, Enoch Godongwana said.

Limited tax options

The government decision was offset against considered alternatives to raising the VAT rate, including increasing corporate and personal income taxes. However, these options were deemed less effective in generating revenue and posed risks to investment, job creation, and economic growth.

"Our top personal income tax rate and our personal income tax collections as a percentage of GDP are far higher than those of most developing countries. Increasing it is therefore not feasible. Taking on additional debt to meet the spending pressures was also not feasible. The amount is simply too large.

"The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades," Godongwana said.

Godongwana noted corporate tax revenues have already declined due to falling profits and economic challenges, while South Africa’s corporate tax rates are higher than those of many peer countries. Raising personal income tax rates, meanwhile, could discourage work and savings, he added.

"We have, however, had to balance this knowledge against the very real, and pressing, service delivery needs that are vital to our developmental goals and which cannot be further postponed."

Easing cost pressures

The minister added that government is very aware of the cost-of-living pressures faced by households, including high food and fuel prices and rising electricity and transportation costs.

He said this was the reason government is taking concrete steps to protect vulnerable households. This will be done through:

• Providing social grant increases that are above inflation.
• Expanding the basket of VAT zero-rated food items to include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry and other animals.
• There will also be no increase in the fuel levy for another year, saving consumers around R4bn.

"Broadening the tax base and improving the administrative efficiency of the South African Revenue Service, allows us over time, to spread the tax burden more evenly and equitably," Godongwana said.

With this in mind, Sars is allocated R3.5bn in the current financial year and an additional R4bn over the medium term.