By 
South Africa’s Finance Minister, Enoch Godongwana, has announced a phased increase in the country’s value-added tax (VAT), outlining the measure during his 2025 Budget Speech on March 12, 2025. The current VAT rate of 15% will rise by 0.5 percentage points in the 2025/26 financial year, effective May 1, 2025, followed by an additional 0.5 percentage points in 2026/27, bringing the rate to 16% by April 1, 2026.
This policy decision comes after extensive deliberations within the coalition government. An initial proposal sought a 2-percentage-point increase to address a R60 billion ($3.2 trillion) fiscal shortfall, exacerbated by the termination of U.S. funding for HIV/AIDS programs under former President Donald Trump. However, opposition from coalition partners—including the Democratic Alliance (DA) and senior African National Congress (ANC) members—led to a compromise for a gradual increase.
Revenue Projections and Fiscal Impact
Minister Godongwana emphasized that the VAT hike is essential for funding critical sectors such as healthcare, education, transport, and security. While acknowledging concerns over its impact on household spending and economic growth, he stressed the necessity of the measure to meet the government’s constitutional obligations.
The incremental VAT adjustments are expected to generate an additional R13.5 billion ($736 billion) in tax revenue during the 2025/26 fiscal year. To balance revenue generation with economic stability, the government has opted for a gradual increase, mitigating the immediate burden on consumers.
Additionally, the budget specifies that personal income tax brackets and rebates will not be adjusted for inflation in 2025/26. This measure, known as “bracket creep,” is projected to raise R18 billion ($981 billion) in additional revenue, as taxpayers with inflation-linked salary increases may be pushed into higher tax brackets, effectively increasing their tax obligations.
Mitigating the Impact on Low-Income Households
To cushion the effects of the VAT increase on vulnerable populations, the government plans to expand the list of zero-rated VAT items. Currently, 21 items are exempt from VAT, and from May 1, 2025, the exemption will extend to tinned or canned vegetables, dairy liquid blends, and a range of meat products, including sheep, poultry, goat, and swine. This expansion aims to alleviate financial pressure on low-income households by ensuring essential goods remain affordable.
Despite these mitigation efforts, the VAT increase has been met with political resistance. DA leader John Steenhuisen reaffirmed his party’s opposition to tax hikes, advocating for alternative revenue-generation strategies such as selling port concessions and implementing cost-cutting measures. The DA’s stance underscores ongoing ideological differences within the coalition government, highlighting the complexities of fiscal policymaking.
The delay of the 2025 budget from February to March 12—the first postponement in 31 years—further illustrates the internal challenges faced by the coalition government in reaching a consensus on economic policies.
Economic Context and Future Outlook
South Africa’s economy has struggled with slow growth in recent years. The Treasury has adjusted its 2025 growth forecast to 1.9%, following an average growth rate of less than 1% over the past four years. In 2024, GDP grew by only 0.6%, with the economy contracting in the third quarter due to weak performances in the transport and agriculture sectors, the latter affected by disease outbreaks and drought.
The government aims to stabilize gross loan debt at 76.2% of GDP in 2025/26, supported by a primary budget surplus. The consolidated budget deficit is expected to decline from 5% in the current year to 3.5% by 2027/28. However, debt service costs remain a significant challenge, reaching R389.6 billion in the current fiscal year—exceeding government expenditures on health, policing, and basic education.
Beyond VAT adjustments, the budget introduces additional revenue measures, including a 6.75% increase in excise duties on alcohol and a 4.75% increase on tobacco products—both surpassing projected inflation rates. However, to ease financial strain on consumers, fuel levies will remain unchanged.
The phased VAT increase reflects the government’s effort to balance fiscal responsibility with economic growth and social welfare. While designed to address pressing funding needs, the move also underscores the complexities of managing South Africa’s coalition government and navigating tax policy reforms in a challenging economic climate.
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