BUSINESS NEWS - Value-added-tax (VAT) will increase by 0.5%, with the government needing to cover a R60 billion budget shortfall. Finance Minister Enoch Godongwana said another 0.5% increase will then be introduced next year. This will bring the VAT rate to 16% in 2026.
Godongwana announced this on Wednesday while delivering his revised budget speech in Cape Town.
The increase comes after Godongwana proposed a 2% VAT increase, which resulted in disagreements between parties in the government of national unity (GNU) and the postponement of the initial tabling of the budget.
Increase in VAT and other taxes
The minister said careful consideration was taken before increasing the VAT. “No Minister of Finance is ever happy to increase taxes.”
Government proposes no inflationary adjustments to personal income tax brackets, rebates and medical tax credits.
“These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.”
Why increase in VAT
He said other alternatives were considered before opting to increase VAT.
“We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.”
Godogwana added that increasing corporate or personal income tax rates would generate less revenue, potentially harming investment, job creation and economic growth.
They have noticed that corporate tax collections have declined over the last few years, which they see as an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.
Increasing the personal income tax rate would reduce taxpayers’ incentives to work and save.
“VAT is a tax that affects everyone. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered.”
Expanding the food basket
Godongwana said the government is aware of the cost-of-living pressures faced by households, including rising electricity, transportation, food, and fuel prices.
Therefore, to cushion households, the basket of VAT-zero-rated food items will be expanded to include canned vegetables, dairy liquid blends, and organ meats from sheep, poultry, and other animals.
Organ meats, also known as ‘offal’, are the consumable organs of animals. Organ meats include livers, hearts, brains, and intestines, to name a few.
The South African Poultry Association (Sapa) had submitted to National Treasury to have frozen bone-in chicken included in the list of food items that are exempt from VAT.
Frozen bone-in chicken includes chicken thighs, drumsticks, whole chickens, and chicken leg pieces.
Millions owed to Sars
Godongwana said the South African Revenue Services (Sars) is allocated R3.5 billion in the current financial year and an additional R4 billion over the medium term.
“By the end of February this year, Sars reported a significant increase in undisputed debt. This means billions of Rands are owed to the State.”
Sars has detected 156 000 taxpayers who are not registered or have not filed despite their substantial economic activity.
“I call on all South Africans to comply with the law and support SARS in its endeavour to collect the revenues that enable government to fund and provide critical services.”
Article: Caxton publication, The Citizen
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