VAT to hit 16% by ‘26, as Godongwana defends hike

The tax will increase by half a percentage point in the 2025/26 financial year, followed by another increase the following year.

This will take VAT to 16% by 2026/27.  

Godongwana tabled the budget in Parliament in Cape Town on Wednesday afternoon after the initial speech was postponed last month.

The VAT hike has been a major sticking point within the Government of National Unity.  

Just before Godongwana’s address, DA Leader John Steenhuisen made it clear that his party will not support the budget in its current form.

 He said they would continue to push for economic growth and job creation instead.  

 "The DA made it clear to the ANC in the GNU that we would not support any increase in taxes unless those increases were temporary, and the ANC agreed to a series of major reforms that would grow the economy, create jobs, reduce waste and bring down taxes within three years.

"The ANC refused to agree to these measures and instead insisted on two likely permanent VAT increases, which cumulatively will increase VAT by 1% over the next 2 years. As a consequence, the people of South Africa will be poorer, and the future of the government is at risk.

“The underlying problem is that the ANC has still not accepted the outcome of the general election and cannot bring itself to share power," said Steenhuisen.

Godongwana defended the decision, saying the government explored alternative tax options, such as raising corporate and personal income tax, but found them unsuitable.  

"These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.

"Madam Speaker, this decision was not made lightly. No Minister of Finance is ever happy to increase taxes.

"We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power.

“We have, however, had to balance this knowledge against the very real, and pressing, service delivery needs that are vital to our developmental goals and which cannot be further postponed," explained Godongwana.

He warned that increasing corporate tax could harm investment and economic growth, while higher personal income tax would discourage work and savings.  

 "We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.

"Increasing corporate or personal income tax rates would generate less revenue while potentially harming investment, job creation and economic growth.

"Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.

"Furthermore, South Africa’s corporate income tax collections are already higher than most of our peer countries.

“On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save," warned Godongwana.

The minister added that taking on more debt to fund service delivery was not an option, given South Africa’s already high borrowing costs and credit rating risks.

"Our top personal income tax rate and our personal income tax collections as a percentage of GDP are far higher than those of most developing countries. Increasing it is, therefore, not feasible.

"Taking on additional debt to meet the spending pressures was also not feasible. The amount is simply too large.

"The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades.

"Madam Speaker, VAT is a tax that affects everyone. By opting for a marginal increase in VAT, its distributional effect and impact were cautiously considered.

“The increase is also the most effective way to avoid further spending cuts and to enable us to extend the social wage," he added.

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