Dr Muneer Hassan CA(SA) | Senior Lecturer | Taxation | Deputy HOD | Accountancy | University of Johannesburg | Chartered Tax Advisor (CTA) | Deputy Chair | National Tax Committee | South African Institute of Chartered Accountants (SAICA) | mail me |
Parliament tabled the 2025 budgets on 19 February 2025, but they were not approved. The budgets proposed a 2% increase in the Value Added Tax (VAT) rate.
The proposal suggested raising the VAT rate from 15% to 17%.
The table below illustrates South Africa’s VAT rate changes since 1991.
Table: Historical Overview of VAT Rates
| VAT Rates | |
| 30 September 1991 | 10% |
| 7 April 1993 | 14% |
| 1 April 2018 | 15% |
About the proposed the VAT increase
Government proposed the VAT increase to finance new and existing expenditures. Treasury warned that the growing budget deficit and high debt servicing costs would worsen without additional tax revenue.
Debt servicing costs for the 2025/6 fiscal year are estimated at R424.2 billion. This amount exceeds the R325 billion budgeted for corporate income tax collections. Currently, debt servicing costs account for 22 cents of every Rand collected. Borrowing more money is not viable, as it increases debt servicing costs.
Three main revenue instruments contribute to tax collections. These include:
- Personal income tax
- VAT
- Corporate income tax
The maximum marginal tax rate for individuals is 45%. This rate applies to 235,000 taxpayers, who make up 3% of the 7.8 million registered taxpayers. These high-income taxpayers contribute 33% of total personal income tax revenue. Any increase in their tax rates requires careful assessment due to potential emigration effects.
National Treasury relies heavily on tax collections from these individuals. Implementing wealth taxes is also complex, as it requires stronger anti-avoidance laws. Corporate tax rate increases are not an option. The international trend favors lower corporate tax rates to maintain competitiveness.
A broad-based VAT system
South Africa’s 15% VAT rate is below the OECD average of 19% but close to the African average of 15.8%. VAT is inherently regressive, as all consumers pay the same rate regardless of income. However, zero-rated goods help shield lower-income households from VAT-related costs.
Since the 1980s, the OECD has supported a broad-based, single-rate VAT system. Recent studies, like the Mirrlees Review, reinforce this viewpoint. A broad-based VAT system with a single rate can increase revenue and reduce compliance and administrative costs.
Research strongly supports the idea that VAT should not serve as a tool for altering social behaviour or promoting equity. The effectiveness of zero rating remains questionable. The Davis Tax Committee (DTC) argued that zero rating is an ineffective tool for addressing inequality. The DTC believes eliminating zero ratings is difficult without a proper compensation mechanism. No ideal alternative has been identified yet.
When VAT rates rise, governments often introduce protections for low-income households. South Africa did so in 2018 by expanding the zero-rated list. Similarly, in 2010, New Zealand raised its GST rate from 12.5% to 15% and offset the impact with tax reductions.
South Africa’s VAT Act is largely based on New Zealand’s GST system. However, increasing the VAT rate would push South Africa’s rate above New Zealand’s. The proposal to increase VAT to 17% included expanding the zero-rated food list and adjusting social grants above inflation.
Zero rating remains an imprecise tool for assisting low-income households. Vendors may keep VAT savings as profit instead of lowering prices. Some businesses may even raise prices, blaming the VAT increase, as seen with the 2018 VAT hike.
Is increasing the VAT rate justified?
Many question whether increasing the VAT rate is justified. South Africa faces an expenditure problem, and raising taxes may not be the best solution. A more effective approach could involve improving transparency and accountability in public spending. Advanced 4IR technologies can help enhance financial reporting.
For 2025/6, the budget allocated R35 billion to the COVID-19 social relief grant. Higher taxes should translate into jobs, not just social assistance.
Enhancing tax compliance can help reduce the tax gap. The SARS Commissioner emphasized this approach before the budget announcement. Empirical evidence from my PhD study, “A Framework for a Simpler VAT Act“, confirms the legal complexity of VAT laws.
Simplifying the VAT Act will not necessarily increase collections. However, simplification improves compliance and remains the right course of action. The Government of National Unity signaled a shift from past practices. Many opposed the proposed VAT increase, prompting a reconsideration.
National Treasury must rethink the budget process. A transparent, consultative approach with stakeholder engagement can improve governance and decision-making. The nation now awaits the revised March budget, which will determine the VAT rate’s future.
