Budget 2025: Minister Godongwana hikes VAT rate by 0.5 percentage points

Budget 2025: Minister Godongwana hikes VAT rate by 0.5 percentage points in each of the next two years to improve fiscal conditions; gives R6 billion in relief measures to shield the poor from cost-of-living increases

Key highlights
• Value-Added Tax (VAT) rate will increase from 15.0% at present to 15.5% on 1 May 2025 and to 16.0% on 1 April 2026 as part of a package of measures to generate R72 billion in extra revenue during the two years.
• Increased VAT revenue will be used to fund early childhood education, employ more healthcare workers and to help rebuild commuter rail transport.
• To support vulnerable households, National Treasury will expand the list of VAT zero-rated food items to include more meat and vegetable products.
• Increased VAT is part of the government’s efforts to right the fiscal ship. Fiscal sustainability is key to the country’s long-term economic development plans. This includes maintaining a surplus on the primary fiscal balance, projected at 0.9% of GDP in 2025/2026.
• Other requirements for a more sustainable fiscus are faster economic growth and the collection of all taxes due to the state.

Finance Minister Enoch Godongwana delivered his 2025 Budget Speech in Parliament today. This press release looks at 1) the proposed increase in the VAT rate over the next two financial years, 2) associated plans for relief to poor households by adding more VAT zero-rated foods, 3) fiscal sustainability and the primary budget surplus, as well as 4) the size of the gap between taxes due and actual collections (the tax gap). PwC will also publish a more comprehensive report on 18 March 2025, titled ‘Responsible growth for a sustainable future’ that will look at the broader context of South Africa’s tax increase choices, levers to improve economic growth, the need for climate-resilient infrastructure, as well as how to improve public sector decision-making and policy implementation.

The finance minister announced today a cumulative one percentage point increase in the VAT rate over the next two fiscal years. Other revenue increasing measures include no inflationary adjustment to tax brackets (also known as fiscal drag) and rebates, no inflationary adjustment to medical tax credits and an above-inflation increase in excise duties on alcohol and tobacco products. National Treasury expects higher VAT and excise revenue to help the Government narrow its fiscal deficit from 5.0% of GDP in 2024/2025 to a planned 4.6% of GDP in 2025/2026.

The proposed 0.5 percentage point increase in VAT during 2025/2026 and an identical upward adjustment in 2026/2027 are part of a package of measures to generate an additional R28 billion and R44 billion in revenue over the next two financial years, respectively. This is a more moderate upward adjustment than was initially planned as well as a significant change in the mix of tax instruments proposed to generate the increased revenues. In February, the finance minister was seeking a two percentage point increase in VAT from 1 April 2025 in support of an extra R58 billion in planned revenue during 2025/2026.[1] Now, VAT will increase to 15.5% on 1 May 2025 and 16.0% on 1 April 2026.

At the same time, to provide some relief to poor households, the latest budget framework plans to increase social grants by more than the inflation rate and to expand the VAT zero-rating of essential food items. There will also be no change to the fuel levy which is generally adjusted higher on an annual basis.

In Budget 2024, there was some expectation that the finance minister could announce a VAT increase to generate more revenue. Instead, the National Treasury was able to reallocate finances within the existing spending envelope to avoid this increase alongside increases in personal income taxes through fiscal drag. This year, it was initially anticipated that there would be little revenue shortfall, and to the extent there was a small shortfall, it would again be taken care of in the same way.

Kyle Mandy, PwC South Africa Tax Policy Leader, says:

“The proposed increased fiscal expenditure in 2025/2026 and the earlier planned VAT hike to 17% to fund this was unexpected. However, it did set the scene for this month’s announcement of the two 0.5 percentage point adjustments in the next two fiscal years. Increasing VAT is less harmful to the economy compared to many other tax options, so this approach is less distortive to the economy. It is also one of the easier taxes to administer. That said, two VAT increases in the space of a year will likely create a significant burden on business to implement the required changes to their systems. The significantly increased element of fiscal drag for personal income tax in the revenue proposals will, however, be more harmful to economic growth and further increase the high burden on this tax base.”

The extra R28 billion in VAT revenue will be spent on extending early childhood development coverage; employing more teachers, doctors and other critical frontline personnel; and rebuilding the commuter rail system. Last month, when the finance minister expected a larger revenue boost from a bigger VAT hike to 17%, the extra money would have also gone to funding the one-year extension of the social relief of distress (SRD) grant (R35 billion) and paying for a higher-than-expected public service wage increase (R7 billion) under a three-year deal. It now appears that these will be funded by reductions to provisional allocations (R40 billion) and a drawdown in the contingency reserve (R7 billion). In other words, to make up for the smaller-than-desired VAT increase, Budget 2025 is reprioritising previously planned spending and using some reserves.

National Treasury is aware of the negative impact that the upward adjustment in VAT will have on the cost of living. As such, an expansion of the list of VAT zero-rated foods and no adjustment to the general fuel levy are planned for. Nonetheless, according to National Treasury estimates, these two measures will put only R6 billion back in the pockets of South Africans. Some R2 billion of this will come from zero-rating certain food products. At present, there are 21 food items in the zero-rated basket, including basic foods like fruits, vegetables and starches like bread, rice and maize, as well as sanitary towels which are also zero-rated. The zero-rated items will be expanded to include a variety of meat products, including from sheep, poultry, goats, swine and bovines, as well as tinned and bottled vegetables and dairy liquid blends.

Lullu Krugel, PwC South Africa Chief Economist, says:

“Expanding the list of VAT zero-rated products has long been called for by private business and civil society as a way of supporting the financial situation of low-income households. Today’s announcement to expand the basket of goods to include more meat and other products that are widely consumed in the lower expenditure deciles is welcomed with open arms in light of the impending VAT increases. It is now incumbent upon the producers and retail sector to ensure that these adjustments are passed onto the consumer.”

While the VAT increase is not favourable towards consumers, it is part of a drive by National Treasury to get fiscal finances under control. This, in turn, has positive effects for the economy and its people over the long term. Fiscal sustainability is therefore key in the country’s economic growth and development plans. In this regard, authorities are planning for a notable increase in the size of the primary budget surplus (revenue minus non-interest expenditure) as an anchor to reduce deficits and reduce the need to borrow. The primary surplus is projected at R71 billion in 2025/2026, equal to 0.9% of GDP.

The higher VAT rate and adjustments around personal income tax (no inflationary adjustment to tax brackets, rebates and medical tax credits) are expected to bring in an additional R31.5 billion to the fiscus. As such, the growing primary budget surplus—up R34.2 billion from R36.8 billion in 2024/2025—is largely a product of the VAT increase and fiscal drag on personal income tax. As it stands, the budget is planning for the following with regards to fiscal sustainability:

• A peak in debt service costs as a share of revenue in 2024/2025 and as a share of GDP in 2025/2026
• A narrowing of the fiscal deficit over the next three years, from 5.0% of GDP in 2024/2025 to 3.5% of GDP in 2027/2028
• Gross loan debt peaking at 76.1% of GDP in 2025/2026

Reducing all these ratios would result in lower debt payment costs for the state and more money available to spend on priorities like education, healthcare and transport—the same expenditure points that now require additional VAT revenue to finance.

Mbai Rashamuse, PwC Southern Africa Tax and Legal Services Leader, says:

“PwC’s theme for Budget 2025/2026 is ‘Responsible growth for a sustainable future’, reflecting the need to make the right fiscal choices today in the interest of South Africa’s tomorrow. While the increase in the VAT rate over the next two years will negatively impact local consumers, it is part of a strategy aimed at righting the country’s fiscal ship. This will benefit all South Africans and especially the poor who are dependent on the government to find money for public services and social transfers.”

Of course, another key element to making fiscal metrics more sustainable is to have a faster growing economy. Over the long term, tax revenue growth is at a near 1:1 ratio to nominal economic growth. In other words, if the economy grows faster, so too will fiscal income. In support of a better economic environment, the first phase of Operation Vulindlela supported economic growth by reducing load-shedding, improving logistics performance (specifically ports), reducing mobile data costs, attracting needed skills and supporting tourism. The Budget Review 2025 document notes that the second phase of Operation Vulindlela will have a strong focus on local government needs, including municipal accountability and capacity, turning cities into engines of economic activity and improving the ability of local government to deliver services. This too will contribute to fiscal soundness: improved financial management capacity and control makes for a more efficient spending of fiscal resources.

Another essential ingredient in fiscal sustainability is the collection of all taxes due to the state. The South African Revenue Service (SARS) was allocated additional funding of R3.5 billion for the period 2025/2026–2027/2028 in the most recent Medium-Term Budget Policy Statement (MTBPS) and is hard at work to close this tax gap through enhanced audits and verifications, targeted compliance activities and various voluntary disclosure programmes (VDPs), among other measures. PwC South Africa’s Taxing Times Survey 2024 commented that SARS also needs to improve taxpayer trust. Building trust will eventually translate into restored public confidence in SARS, increased overall tax morality and, ultimately, the payment of taxes needed for greater government spending.