Finance Minister Enoch Godongwana has directed the National Treasury to abandon plans for a rise in the value-added tax (VAT), effective May 1, 2025.
This reversal, detailed in a statement released Thursday, comes amid considerable opposition from other political forces.
Godongwana initially sought a two-percentage-point VAT increase, but faced substantial resistance, subsequently suggesting a more modest 1% rise, spread across two fiscal years – 2025/26 and 2026/27. However, the sudden cancellation of the VAT increase presents a surprising shift, particularly as Godongwana recently asserted in court filings that the Democratic Alliance (DA) and the Economic Freedom Fighters (EFF) wouldn’t be able to block the VAT decision.
“The decision to implement the VAT rate increase has been finalized. My decision to change the VAT rate cannot be prevented at this point,” he stated in those documents, defending against a legal challenge.
Thursday’s announcement marked a dramatic about-face.
“The finance minister will shortly present the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill), which proposes maintaining the Value-Added Tax (VAT) rate at 15% from May 1, 2025, instead of the increase previously announced in March’s Budget.
“This decision follows extensive discussions with political parties and a thorough review of parliamentary committee recommendations.”
Revenue Gap Anticipated
Godongwana’s office cautioned that foregoing the VAT increase will lead to a revenue deficit over the next three years.
“Without the VAT increase, revenue is projected to fall short by approximately R75 billion over the medium term.
“Consequently, the minister of finance has informed the Speaker of the National Assembly that he is retracting the Appropriation Bill and the Division of Revenue Bill, to propose adjustments to spending to address this revenue shortfall,” the Treasury statement explained.
“Parliament will be asked to modify expenditure to ensure that the loss of revenue doesn’t jeopardize South Africa’s financial stability.”
Support for Vulnerable Households Put on Hold
“The decision to forgo the VAT increase means that the measures designed to protect lower-income households from the potential impact of the rate increase must now be withdrawn, and other spending plans re-evaluated.
“To compensate for the necessary expenditure adjustments, any additional revenue collected by the South African Revenue Service (SARS) may be considered for this purpose in the future.
“The minister of finance anticipates introducing a revised version of the Appropriation Bill and Division of Revenue Bill within the coming weeks.
“The initial proposal for a VAT increase was driven by the pressing need to restore and bolster funding for essential frontline services, which had experienced cuts due to the country’s tight fiscal situation.
“Numerous alternatives have been suggested, but some would create more detrimental effects on growth and employment, while others, though valuable, wouldn’t offer an immediate means of generating additional revenue to replace the VAT increase.
“National Treasury will, nevertheless, explore these and other proposals as potential amendments in future budgets to enhance the resources available,” concluded National Treasury.
