VAT will be raised by 0.5% this year and by 0.5% the year thereafter, but a range of measures have been proposed by the government to alleviate the impact of these increases on lower-income households.
The National Treasury had earlier this year proposed a 2% increase from the current 15% VAT rate, but the proposal was shot down by the political parties in the Government of National Unity due to the potentially severe impact on lower-income groups.
Consequently, the February Budget was postponed until Wednesday so that other ways could be found to increase government revenues.
In addition, the government has decided not to adjust the personal income tax brackets and rebates for inflation in 2025/26, which will see employees paying more tax. Finance Minister Enoch Godongwana said in a briefing that because the VAT increase was lower than expected, an earlier plan to provide higher than inflation increases in social grants was reduced, although social grants will still increase by above inflation.
Recognising that “a VAT increase affects everyone,” the National Treasury said the government is mitigating the adverse effects for lower-income households through increases to social grants, not increasing the general fuel levy, and expanding the list of foods zero-rated for VAT.
The National Treasury said in the Budget review that the tax policy measures proposed in the 2025 Budget are designed to raise R28 billion in additional revenue in 2025/26 and R14.5bn in 2026/27.
It noted that raising VAT was considered after evaluating all other tax options. Raising personal income tax was likely to be inefficient as taxpayers make adjustments to reduce their tax rates, and South Africa’s personal income tax collection, measured as a contribution of GDP, and the top tax rate are far higher than those of most developing countries.
It said a tax rate increase has become unavoidable to ensure adequate funding for government policy priorities while ensuring fiscal sustainability. South Africa’s VAT rate is relatively low compared with peer countries, with most VAT paid by higher-income households, as they consume more, the National Treasury said.
During 2024, two major tax policies were implemented: the Global Minimum Tax, which requires multinationals to pay additional tax from 2026/27 if their tax rate is below 15%, and the Two Pot Pension Fund reform, which raised R11.5bn and helped alleviate some near-term revenue pressures in government, even though this was not the aim of the reforms.
Other tax proposals include no inflation adjustments to medical tax credits, above-inflation increases on alcohol and tobacco excise duties, and diesel refund relief for primary sectors.
From May 1, 2025, VAT zero-rating will be extended to include edible offal of sheep, poultry, goats, swine, and bovine animals, specific cuts such as heads, feet, bones, and tongues, dairy liquid blend, and tinned and bottled vegetables.
The Treasury describes zero-rating as a “blunt tool” to assist lower-income households because there is no guarantee there will be a reduction in prices, but it estimates that the government will forego about R2bn from this measure.
“Over 75% of VAT revenue is derived from households in the top four expenditure deciles, which roughly corresponds to households that spend R118 000 or more per year,” the Budget Review said.
Excise duties were raised by 4.75% for cigarette tobacco and electronic nicotine and non-nicotine delivery systems, while the duty increased by 6.75% for pipe tobacco. The excise duty on wine, ciders, and spirits also increased by 6.75%.
The carbon tax, a component of South Africa’s climate change mitigation efforts, was increased from R190 to R236 per ton of carbon dioxide equivalent from January 1, 2025. From April 2, 2025, the carbon fuel levy would increase by 3c/litre to 14c/litre for petrol and 17c/litre for diesel, as required under the Carbon Tax Act.
The carbon tax cost recovery quantum for the liquid fuels sector increased from 0.69c/litre to 0.99c/litre from January 1, 2025, to align with the increase of the headline carbon tax rate.
The National Treasury said the sugar industry has been given more time to restructure in response to regional competition, as an inflationary increase in the health promotion levy that was due to take effect from April 1, 2025, has been cancelled.
The government has also proposed that the ad valorem excise duties on smartphones only be applied to smartphones with a price paid greater than R2 500 at the time of export to South Africa, as a measure to make lower-priced smartphones more affordable. Currently, ad valorem excise duties on smartphones are charged at a flat rate of 9%.
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