South Africa plans to raise VAT to 16% within two years to support vital services, with incremental increases starting on 1 May 2025. Finance Minister Godongwana highlighted the necessity of this approach while also outlining protective measures for vulnerable households against rising costs. The government reviewed other taxation options and determined that VAT adjustments were the most equitable solution.
In a significant budget announcement, South Africa’s government will increase the value-added tax (VAT) by 0.5 percentage points each year for the next two years, culminating in a tax rate of 16% by the 2026/27 financial year. This decision aims to reinforce funding for essential services such as health, education, transport, and security. Finance Minister Enoch Godongwana emphasized the importance of fulfilling the government’s service delivery mandate.
The first increment in VAT is slated to commence on 1 May 2025, followed by another increase on 1 April 2026. Godongwana elaborated that these tax adjustments are not easily made, as they balance the necessity of boosting service delivery against the need for investment and household spending power. An extensive review of alternatives, including raising corporate and personal income taxes, revealed that they would generate less revenue and potentially hinder economic growth.
Godongwana noted the decline in corporate tax collections and acknowledged that raising personal income tax rates could diminish incentives for work and savings. He concluded that the idea of increasing national debt to meet spending needs was impractical due to rising borrowing costs and the risks of further downgrades in credit ratings.
To alleviate the burden on households affected by VAT increases, the government is implementing protective measures for vulnerable citizens. These measures include social grant increases surpassing inflation, and the expansion of VAT zero-rated food items to help lower-income households cope with rising living costs.
From 1 May 2025, the expanded zero-rated items will incorporate specific edible offal and canned vegetables, while additional financial measures will include no inflation adjustments to medical tax credits and maintaining the fuel levy for another year to ease consumer pressure. The National Treasury Budget Review forecasts that personal income tax proposals starting from 1 March 2025 will generate R19.5 billion, without adjustments to medical tax credits, which remain unchanged.
The South African government is set to increase VAT to 16% over the next two years as part of a broader strategy to fund critical services. While this decision entails fiscal responsibility, it also aims to address pressing service delivery needs. The government is cautiously mitigating the VAT impact on low-income households through expanded zero-rated food items and social grants, while balancing the need for revenues against potential economic implications. Overall, these changes reflect a complex but necessary approach to budgetary challenges faced by the nation.
Original Source: newcastillian.com
