VAT RATE INCREASE

On 12 March 2025, the Finance Minister Enoch Godongwana announced in the 2025 Budget Speech that the standard  Value-Added Tax (VAT) rate would rise from 15% to 15.5%, with effect from 1 May 2025, with a further increase to 16% planned for 1 April 2026. The increase in the VAT rate forms part of a fiscal strategy to address a budget shortfall and boost revenue.

However, this increase threatens to weaken the spending capacity of South Africans, hitting low-income households hardest and worsening their everyday financial struggles, and will negatively affect household budgets across all income groups.

VAT Increase Legislation

The key piece of legislation governing VAT in South Africa is the Value-Added Tax Act 89 of 1991 (VAT Act), which provides the legal framework for how VAT is applied, administered, and adjusted. Specifically, section 7(4) of the VAT Act permits the increase in the VAT rate and allows the Minister of Finance to announce a change to the VAT rate during the national Budget Speech, and that change takes effect on the date specified by the Minister for a period of 12 months thereafter, provided Parliament passes legislation to effectuate the announcement within 12 months.

The Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which was published in draft form on 12 March 2025 and later introduced to the National Assembly, formalises the VAT increase and other tax adjustments.

Process for Approval of VAT Rate Increase

The process for bringing forth a VAT increase can briefly be summarised as follows:

1. The Minister of Finance announces the VAT rate increase during the annual Budget Speech. This is done through section 7(4) of the VAT Act, which allows the Minister to set a new rate and effective date.
2. The Minister publishes the rate change in the Government Gazette, making it legally binding from the specified date without needing immediate parliamentary approval.
3. Parliament votes on the broader fiscal framework, signalling support for the budget, including the VAT hike.
4. A bill, such as the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, is then introduced to Parliament to formally amend the VAT Act with the new VAT rate. This bill must pass within 12 months to confirm the change.

Current Position

The standard VAT rate is currently set to increase from 15% to 15.5% effective 1 May 2025, with a further rise to 16% planned for 1 April 2026. Several potential scenarios could develop going forward:

• If the VAT increase to 15.5% proceeds as announced on 1 May 2025, the South African Revenue Services (SARS) will begin collecting at the new rate, requiring businesses to update their systems and pricing structures accordingly.
• Should Parliament reject the Rates and Monetary Amounts and Amendment of Revenue Laws Bill before 1 May 2025, the VAT rate increase could be prevented. However, this outcome appears unlikely given both the tight timeline and strong ANC parliamentary support.
• If the VAT rate increase takes effect but Parliament subsequently rejects the bill before 1 May 2026, or if a legal challenge succeeds, the rate might theoretically revert to 15%. However, such a reversal would present significant administrative challenges for both SARS and businesses.

Effect on Buying Power

The increase in VAT rate will raise the cost of goods and services, lowering the purchasing power of South Africans. Lower-income households will be impacted the hardest, as a larger share of their income is spent on basic necessities, which becomes more expensive with the VAT hike. With less money available after buying essentials, many families will have to cut back on non-essential spending. This reduction in household consumption will weaken overall demand, harming businesses and potentially leading to job losses and slower economic growth. Over time the VAT increase may worsen inequality by pushing already vulnerable households deeper into financial strain. Unless the government introduces measures to lower the impact, the VAT rate increase risks leaving many South Africans poorer and the economy weaker.