Budget speech: VAT increases by 0.5%, with another 0.5% hike next year

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, in February, 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.

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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.”

“These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27,” he said.

The finance minister’s budget also had no inflationary adjustments to personal income tax brackets, rebates and medical tax credits.

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.

He said corporate tax collections have declined in the last few years, which is an indication of falling profits and a trading environment worsened by logistical constraints and rising electricity costs.

Also, 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.”

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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.  

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 asked National Treasury to have frozen bone-in chicken included on the list of food items that are exempt from VAT. This 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.”

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