Despite opposition from many quarters, including most opposition parties within the government of National Unity (GNU), the Minister of Finance, Enoch Godongwana has announced a value-added tax (VAT) increase of 0.5 percentage point.
Godongwana announced the increase a short while ago while delivering the 2025-2026 budget in Cape Town today, March 12.
He said there are several persistent spending pressures in health, education, transport and security.
According to the South African finance minister, these have to do with the government properly fulfilling its service delivery mandate.
He said after “careful consideration”, President Cyril Ramaphosa’s government decided to fund these by increasing VAT.
“Deferring the funding of these sectors further would compromise the government’s ability to meet its constitutional obligations to the people.
“To raise the revenue needed, the government proposes to increase the VAT rate by half-a-
percentage point in 2025/26, and by another half-a-percentage point in the following year. This will bring the VAT rate to 16 per cent in 2026/27. [The] government also proposes no inflationary adjustments to personal income tax brackets, rebates and medical tax credits,” Godongwana said while justifying the increase, drawing jeers from the opposition benches.
“These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27. Madam Speaker, this decision was not made lightly. No Minister of Finance is ever happy to increase taxes. We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power. 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,” he added.
Godongwana said before opting for VAT increase, the government thoroughly examined alternatives to raising the VAT rate. They weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.
“Increasing corporate or personal income tax rates would generate less revenue, while
potentially harming investment, job creation and economic growth. Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.
“Furthermore, South Africa’s corporate income tax collections are already higher than most of
our peer countries. On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save,” he said.
The finance minister added that the country’s 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.
He also said taking on additional debt to meet the spending pressures was also not feasible as the amount is simply too large.
“Madam Speaker, VAT is a tax that affects everyone. By opting for a marginal increase to VAT,
its distributional effect and impact were cautiously considered. The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage,” Godongwana said.
