The shocks, surprises and shortfalls in the initial budget on 19 February 2025 made way for a reworked National Budget. This new budget is marked by cuts, compromises and curveballs.
Although Finance Minister Enoch Godongwana’s first budget attempt was unexpectedly stopped three weeks ago, a higher Value Added Tax (VAT) rate is still on the table.
Several partners in the Government of National Unity (GNU) found the proposed 2 percentage points increase in the VAT rate unacceptable. Despite this, the minister continues his search for additional revenue. This time, the minister has softened the blow.
In his 2025 Budget Speech, the minister proposed a VAT increase of 0.5 percentage points for the next two years. The rate would rise to 16% by 2026/27. This is lower than the original proposal, which would have raised the VAT rate to 17% had the 2-percentage points increase been implemented.
Additional revenue
National Treasury explains in the 2025 Budget Review that increasing VAT is essential for raising additional revenue. Importantly, the required revenue cannot be achieved without this increase. However, adjusting the VAT rate also demands reduced spending plans and a different revenue mix.
Budget 1.0 planned to raise an extra R58 billion in 2025/26. The revised budget now proposes tax measures to generate R28 billion in 2025/26. Additionally, it targets R14.5 billion in 2026/27.
Individual taxpayers, already overburdened, will bear the brunt of revenue generation in 2025/26. Treasury will raise R19.5 billion by freezing adjustments to PIT brackets, rebates and medical tax credits for inflation.
Over the medium term, VAT increases will contribute the most to additional revenue. In 2025/26, they are projected to raise R11.5 billion. However, adding more zero-rated food items will reduce this by R2 billion. By 2026/27, VAT increases should generate R27 billion.
Above-inflation hikes in excise duties on alcohol and tobacco will add another R1 billion.
These tax measures will increase funding for education, early childhood development and health, Treasury confirms.
Strengthening SARS
The minister confirmed that SARS will continue its revitalisation efforts. The tax authority will receive R7.5 billion over the medium term. Additionally, R3.5 billion is allocated for the current financial year.
In 2025/26, SARS will prioritise closing the tax gap, which is estimated at R800 billion. It aims to enhance revenue collection by improving taxpayer compliance and trade facilitation. To achieve this, SARS will use artificial intelligence, data science and innovative technologies.
Commissioner Edward Kieswetter stated that SARS will consult the minister on further rebuilding efforts. They will discuss modernisation needs and efficiency improvements. This includes reducing debt and recruiting skilled professionals to close the tax gap.
Tax revenue for 2024/25 is projected to reach R1.85 trillion. However, this falls R16.7 billion short of the 2024 Budget expectations due to weak economic performance. Corporate tax receipts exceeded expectations, but import VAT and fuel levy collections lagged.
Personal income tax collection increased by 12.6% in the first 11 months of 2024/25. This growth resulted from higher-than-expected tax receipts from Retirement Savings Pot withdrawals. The Two Pot Retirement reforms, effective from 1 September 2024, triggered these withdrawals. The total collected, R11 billion, nearly doubled the October 2024 MTBPS forecast.
Justifying the VAT increase
National Treasury states that raising PIT and CIT would harm employment, savings, investment, and growth. Currently, PIT collections equal 9% of GDP. This percentage is significantly higher than in most developing countries.
Similarly, CIT collections exceed 5% of GDP, surpassing the OECD average of 4%. The 2025 Budget Speech highlights that past PIT rate hikes failed to generate expected revenue. Taxpayers altered their behaviour to avoid the tax, reducing its effectiveness.
In contrast, a VAT increase is harder to evade and triggers fewer behavioural changes. As a result, it has a smaller economic impact. Although businesses pay CIT, shareholders, workers and consumers ultimately bear the cost.
Taking on additional debt to cover spending was not a viable option. To offset tax increases, vulnerable households will receive real social grant increases. Additionally, the government will extend fuel levy relief.
The list of VAT zero-rated foods will also expand to include more essential items. Among these are canned vegetables and edible offal.
Other tax policies
Other noteworthy amendments include adjusting the monetary thresholds for transfer duties by 10% to compensate for inflation.
The urban development zone tax incentive will be extended until 2030. Additionally, the Budget Review refers to the current treatment of cross-border retirement funds. This could lead to double non-taxation, especially where South Africa holds the taxing right by treaty.
In conclusion
Godongwana acknowledged the 2025 Budget Speech postponement three weeks ago. He called it regrettable but an inevitable part of multiparty governance. He also described it as a sign of a maturing and resilient democracy.
The minister issued a clear warning about future spending pressures. Over the medium term, the government must fund these pressures responsibly. This funding must come from additional revenue, expenditure cuts or budget reprioritisation.
As in previous years, the budget lacks new sustainable revenue streams for the immediate tax years. Economic growth remains the key to future stability.
 |
 |
|
Darren Britz | Partner | Head | Tax Legal | mail me | |
Richan Schwellnus | Tax Attorney | mail me | |
|
| Tax Consulting | |
|
