VAT to get FAT by 2%
ADVOCATE LAVAN GOPAUL
THE rescheduling of the National Budget marks a historic departure from tradition. Initially slated for presentation and parliamentary ratification on February 19, the budget will now be tabled on March 12 - an unprecedented delay underscoring the gravity of the fiscal deliberations at hand and the inability to find consensus between some parties of the Government of Nation Unity (GNU) was not reached on aspects of the budget.
The planned budget speech was embargoed from release. However, Members of Parliament from several parties confirmed that they disagreed with aspects of the budget. Several MPs cited the issue of a potential 2% increase in VAT as one of the main reasons for the postponement. The finance minister’s potential for a 2% increase in the Value-Added Tax (VAT) rate is expected to take effect in 2025.
This would raise the standard VAT rate from 15% to 17%, marking the first VAT hike since 2018. While the government frames the increase as necessary to address fiscal deficits and fund critical services, the decision has ignited debate over its potential to strain households, exacerbate inequality, and influence macroeconomic stability. This column examines the multifaceted implications of the policy, from government revenue to inflation, and its disproportionate impact on people with low incomes.
Government revenue and fiscal health: a lifeline for the Treasury
South Africa’s National Treasury has long grappled with shrinking revenue, rising debt, and demands for expanded social spending.
The 2% VAT hike is projected to generate additional income. For context, the 2018 VAT increase from 14% to 15% raised approximately R22.9 billion annually. A 2% rise today, assuming a similar VAT base, could inject over R60 billion into state coffers; given that in 2024, SARS collected some R477 billion in revenue based on a 15% VAT, it may provide some relief for a budget deficit hovering near 6% of GDP.
The revenue of the 2024 budget was R1.9 trillion, with state expenditure of R2.26 trillion, resulting in a budget deficit of R347 billion.
However, the revenue boost is not guaranteed.
VAT’s effectiveness depends on consumption patterns: collections may fall short if higher prices deter spending. Moreover, South Africa’s narrow income tax base has only 7 million income taxpayers supporting 60 million people. Unfortunately, this leaves VAT as one of the few reliable revenue streams. The increase could stabilise debt levels, avert credit rating downgrades, and fund infrastructure or social grants. Yet, critics argue that the hike risks being a stopgap rather than a sustainable solution without parallel efforts to curb corruption and wasteful expenditure.
Consumer impact: squeezed wallets in a struggling economy
For ordinary South Africans, the VAT hike translates to higher prices for most goods and services. From groceries to electronics, consumers will face immediate cost increases. While essentials like maize meal, rice, and paraffin are zero-rated, many items - including school uniforms, sanitary products, and processed foods - remain taxable. A family spending R5 000 monthly on taxable items would see their costs rise by R100, a significant burden for households already contending with soaring electricity tariffs and fuel prices.
Middle-income earners may cut discretionary spending, such as dining out or luxury purchases. For lower-income groups, the hike could force painful trade-offs between food, transport, and healthcare.
Economists warn that reduced consumer spending could dampen GDP growth, which the South African Reserve Bank (SARB) projects at a sluggish 1.3% for 2025. This is a regressive tax in a country already plagued by inequality.
The poor and lower-income consumers: deepening inequality
VAT is inherently regressive, consuming a larger share of income from poorer households. Over 55% of South Africans live below the upper-bound poverty line (R1 335 per month), and unemployment exceeds 32%. For these groups, even a modest price increase can be catastrophic. A study of the 2018 VAT increase of 1% from 14% to 15% pushed 500 000 people into poverty. A 2% hike could deepen this crisis.
While zero-rated items provide some protection, their scope is limited. For instance, chicken - a protein staple - is taxed, but raw maize meal is not. This disparity means low-income families reliant on cheaper processed foods face higher costs. Civil society groups demand an expanded zero-rated basket, but the Treasury has resisted, citing revenue risks. Instead, the government may raise social grants, such as the SRD grant, to offset the impact. Yet, with grant allocations already stretched, such measures may be insufficient.
Inflation: fuelling the fire of rising prices
The VAT increase will directly feed into consumer prices, adding inflationary pressure. SARB has struggled to anchor inflation within its 3 - 6% target band, with persistent shocks from fuel and food prices. Several economists say a 2% VAT hike could push headline inflation by 0.6 - 0.8% points. This complicates SARB’s monetary policy, which may respond with interest rate hikes to curb inflation - a move that could further stifle economic activity.
Micro enterprises face a dilemma: absorb the tax, erode margins, or pass costs to consumers and risk losing sales. In sectors like retail and hospitality, where profit margins are thin, the fallout could lead to layoffs or closures.
Consumer spending: a drag on economic recovery
Consumer spending accounts for 60% of South Africa’s GDP and is likely to contract as disposable incomes shrink. High inflation and interest rates will compound the VAT’s impact, particularly for middle-class households servicing debt. Sectors reliant on discretionary spending—automotive, tourism, and durable goods - may see sharp declines. Conversely, essential services like healthcare and utilities could prove more resilient.
The downturn in spending risks a vicious cycle: lower demand leads to reduced business investment and job losses, further suppressing economic activity. Already at 60%, youth unemployment could worsen, fuelling social unrest. However, some analysts argue that long-term growth prospects might improve if the VAT revenue is channelled into job creation programs or infrastructure.
“The key is how the government uses this revenue,” notes Investec economist Annabel Bishop. “Transparent, efficient spending could rebuild confidence and stimulate growth.”
Conclusion: balancing fiscal needs and social equity
South Africa’s VAT increase underscores the delicate balance between fiscal sustainability and social justice. While the hike offers a short-term revenue fix, its success hinges on prudent governance and targeted social protection. Expanding zero-rated items, increasing grants, and curbing corruption must accompany the policy to mitigate harm to the vulnerable.
In the long run, sustainable solutions are broadening the tax base, stimulating job creation, and addressing structural inequalities. As South Africa navigates this precarious path, the VAT debate serves as a reminder that economic policy is not just about numbers - it’s about people. The government’s ability to harmonize fiscal discipline with compassion will determine whether this measure catalyses renewal or creates further discontent.
Advocate Lavan Gopaul is the director of Merchant Afrika.
** The views expressed do not necessarily reflect the views of IOL or Independent Media.