The announcement of a staggered increase in value-added tax (VAT) by finance minister Enoch Gondongwana during his Budget speech on Wednesday has sent ripples of concern across South Africa’s business sector and civil society.
With VAT set to rise by 0.5% in both the 2025/2026 and the 2026/2027 financial years, culminating in a total increase to 16%, stakeholders are increasingly vocal about the implications of this fiscal decision for both businesses and the general populace.
To soften the blow of these increases, Gondongwana proposed expanding the basket of VAT zero-rated food items, set to include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry, and other animals.
However, many experts and advocates have argued that this may not be sufficient to alleviate the looming pressures on household finances.
Khulekani Mathe, CEO of Business Unity South Africa, expressed profound concerns, saying that the proposed 1% VAT increase over two years, along with the absence of inflationary adjustments to Personal Income Tax brackets, will further strain household incomes, leading to subdued aggregate demand.
“These tax hikes also impose an additional burden on an already narrow tax base, which shoulders a significant portion of the country’s taxes. Given the slow GDP growth outlook over the medium term, relying on yet uncertain spending reviews while expanding government expenditure is a risky gamble for controlling spending,” Mathe said.
Stability in the economy appears fragile, with authorities relying on uncertain spending reviews while simultaneously expanding government expenditure, posing a risky gamble for effective fiscal management.
Kevin Lings, chief economist at STANLIB, said Godongwana made other compromises in two key brackets since he realised he won’t collect as much money from VAT as he had intiially proposed.
“The first is he removed the benefit that was going to accrue in terms of an adjustment for fiscal drag. Fiscal drag essentially being the negative effect of inflation pushing people into higher tax brackets,” Lings said.
“The second compromise that he’s pushed through is that he’s not putting up the social grant payments quite as much as was initially envisaged. And this applies to most of the social grants. So there won’t be any significant tax changes that would really concern the taxpayers or the investor community. And the resolution of the VAT rate is encouraging.
“I would like to see much more urgency being demonstrated on improving the growth dynamic of this country because once you get that going, then obviously a whole lot of positives flow, particularly you start to improve the employment rate, broad-based increase in private sector investment, and then you would expand the tax base and make the whole fiscal dynamic a lot easier to achieve.”
Meanwhile, the Banking Association of South Africa (BASA) also warned that the proposed VAT rise, alongside the lack of personal income tax relief, will inevitably reduce disposable household income, thereby restricting consumer spending and economic activity.
Human Rights organisation Black Sash also raised alarms regarding the viability of social grants as a buffer against the VAT increase.
Black Sash said recipients were still unable to meet basic nutritional needs, raising questions about the government’s commitment to its social contract with the citizens.
“Grants serve as a vital lifeline for millions of South Africans facing economic hardship. While we note the increases of grants above the inflation rate, it is important to highlight that the Child Support Grant continues to be below the Food Poverty Line of R796 and the value of the SRD Grant has not been increased, with a limited budget allocation which does not speak to the reality of the unemployment crisis in South Africa,” it said.
“The VAT increase signals a troubling backtrack on the government’s social contract with its people, particularly given the already high cost of living. Resorting to a VAT hike is a short-sighted solution that will only exacerbate inequality and hardship for millions of South Africans. We categorically do not support any form of VAT increase, as it places an unfair burden on those who are already struggling to make ends meet.”
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