What threw the cat among the pigeons on Wednesday was the government proposed a surprise 2% increase in VAT to help pay for its increased spending plans.
This proposal led to the unprecedented postponement of the Budget to March as this measure is being reconsidered.
This increase would have further impoverish many financially struggling consumers. It has drawn the ire of Government of National Unity party members such as the DA.
What was being proposed:
Finance Minister Enoch Godongwana said in a briefing the government realises that the VAT increase, along with some other proposals in the Budget, is politically sensitive, that it will have a big impact on consumers, and he anticipates there will be substantial negotiations on the proposals, once they were tabled in Parliament.
The devastating increase - most economists had predicted that VAT would remain unchanged because of its wide and severe impact on consumer spending and inflation - is part of tax increases announced in the Budget designed to raise R58 billion more in revenue for the government. Godongwana said the additional funds would go towards departments such as health and education, as the government was experiencing funding shortfalls in some "frontline services", with for example, some 19 000 teaching posts were under threat in KwaZulu-Natal, while some departments were struggling to pay their staff.
Support for Lower-Income Households
In an admission of the impact on poorer people, the government has proposed above inflation increases in social grants, additional VAT zero rating from the 21 essential food items, and no changes to the fuel levy. National Treasury said the increase will affect all households, but most VAT will be paid by higher income households, which consume more.
From April 1, 2025, zero rating will be extended to include variety meats from sheep, poultry, goats, swine and bovine animals, specific cuts such as heads, feet, bones and tongues, dairy liquid blend and tinned and bottled vegetables.
Treasury describes zero-rating as a "blunt tool" to assist lower income households, because there is no guarantee there will be a reduction in prices, but it estimates that the government will forego about R2bn from this measure.
VAT Revenue Insights
"Over 75% of VAT revenue is derived from households in the top four expenditure deciles, which roughly corresponds to households that spend R118,000 or more per year," the Budget Review said.
National Treasury said the VAT rate has been unchanged since 2018, and is below that of peer countries, and raising VAT tends to be less harmful to growth than other tax options. It said it had raised VAT after considering all other tax options.
"Tax revenue for 2024/25 is expected to amount to R1.84 trillion, which is R19.3bn less than projected at the time of the 2024 Budget. In light of new and persistent spending pressures, the government has taken the difficult decision to raise the VAT rate by 2 percentage points to 17%. The increase enables additional funding to several key functions and policy priorities..." the Budget Review said.
Other Tax Proposals
Other tax proposals in the Budget include adjustments to personal income tax brackets and rebates to account for inflation.
Excise duties on alcohol and tobacco products were also adjusted above the expected inflation rate. Excise duties were raised 4.83% for cigarette tobacco, and electronic nicotine and non-nicotine delivery systems, while the duty increased by 6.83% for pipe tobacco. The excise duty on wine, ciders and spirits also increased by 6.83%.
Keeping the fuel levy unchanged was expected to result in tax relief to consumers of some R4bn.
Long-Term Tax Policy Reforms
Over the past year, two longer-term tax policy reforms also came into effect: the global minimum tax and the two-pot retirement reform.
The global minimum tax requires large domestic and foreign multinationals operating in South Africa, as well as South African multinationals in other jurisdictions, to pay more corporate tax to SA Revenue Services from 2026/27, if their effective tax rate is below 15%.
For pension reforms, the National Treasury plans to continue engaging in Nedlac on the two-pot pension system, to investigate whether workers losing their jobs can be allowed to access funds from the retirement pot. The government collected an additional R11.1bn from the two-pot retirement reform in 2024/25, which exceeded its initial estimate of R5bn, and the reform alleviated some near-term revenue pressure, even though that was not the focus of the reform.
Personal Income Tax Considerations
National Treasury said it was not an option to raise personal income taxes, because taxpayers make adjustments to reduce their tax liabilities, and so the increase tends to be inefficient. Higher personal tax on income also reduces the incentive to work and save.
"South Africa's personal income collection measured as a contribution to GDP, and the top tax rate, are far higher than those of most developing countries," National Treasury admits in the Budget review.
Also, to reduce pressure on lower income earners, the bottom two personal income tax brackets and all rebates will be adjusted to fully compensate for the effect of inflation, while the remaining brackets will be partially adjusted for inflation. These proposals are expected to raise an additional R3bn for the government. Medical tax credits remain the same.
Adjustments to Smartphone Duties
There is also a small adjustment to the existing 9% flat rate ad valorem duty on smartphones, to make the less expensive smartphones more affordable - the duty will from April 1 only apply to smartphones that are priced more than R2 500.
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