Economic experts argue that South Africans are already heavily taxed, contributing through income tax, fuel levies, sin taxes, and municipal rates.
Many argue that the government's proposed VAT hike will affect the poor and middle class, who are already under significant financial strain.
South Africa’s tax system is primarily structured around personal income tax, corporate income tax, and VAT, which together contribute the largest portion of revenue to the National Treasury.
Other taxes include customs duties, fuel levies, capital gains tax, and excise duties (commonly known as "sin taxes" on products such as alcohol and tobacco).
Among these, VAT stands out as a broad-based consumption tax, currently set at 15%, and is applied to most goods and services purchased by consumers.
In a bold but controversial move to stabilise South Africa’s precarious fiscal situation, the National Treasury has proposed a VAT increase by 0.5% in 2025/2026, and a further 0.5% in 2026/2027 - raising the VAT rate from 15% to 16%.
The move comes as the government grapples with a widening budget deficit, mounting debt servicing costs, and pressure to sustain essential services like social grants, public sector wages, and infrastructure development.
Finance Minister Enoch Godongwana tabled the national budget last month, saying that the VAT hike is a necessary measure to generate additional revenue and prevent the country’s fiscal situation from spiraling into unsustainability.
Treasury officials argue that with limited alternatives - such as raising already high personal income and company tax rates - VAT hike is the only option to resolve the issue.
But for ordinary South Africans, the increase in consumption tax feels like another blow to already strained finances.
Speaking with IOL News, Dr. Johann Frederich Kirsten, senior lecturer at the University of Johannesburg’s School of Economics, said the attempt to soften the blow by phasing the increase over two years offers little comfort.
“At the end of the day, a 1% increase (staggered or not) still hits households hard,” Kirsten said. “Consumers are already stretched by high living costs, limited job availability, and rising debt levels.”
He said that even a small VAT hike disproportionately affects the poor and middle class, especially those in the so-called “missing middle” - too rich to qualify for government aid, but too poor to cope with rising costs.
“Most of the goods they buy aren’t zero-rated, so they’ll feel the full impact of a VAT increase.”
Many economists argue that raising VAT during a period when consumer spending is needed to drive economic growth is risky.
“South Africa’s economy desperately needs a boost in consumer activity,” Kirsten said.
“This measure risks doing the opposite.”
For people like Dineo Mosinki, a 42-year-old unemployed mother of five from Zandspruit Informal Settlement in Johannesburg, the VAT increase could mean choosing between necessities.
“It’s going to be difficult,” she said.
“The SASSA grants I receive for my children are already not enough. Now food and other basic needs are going to cost even more.”
Mosinski believes that instead of raising taxes on consumption, the government should focus on job creation.
“There are many people with qualifications, but no jobs. If the government helped us with job creation, we wouldn’t need to rely so heavily on grants or feel crushed by taxes.”
However, the Treasury argues that without the VAT hike, vital state functions would be jeopardised.
“VAT is one of the biggest revenue generators,” said Kirsten.
“Even a small increase brings in significant additional funds.”
Professor Jannie Rossouw of Wits Business School agreed that South Africa’s fiscal challenges are real and pressing, citing high debt levels as a major concern.
“VAT is a broad-based tax. The only alternatives are less spending, higher company tax, or higher personal income tax,” he said.
“But both those tax rates are already high.”
Rossouw criticised the ANC-led government for being unwilling to reduce expenditure.
“The VAT increase will lead to higher inflation through higher prices. My preference is for a reduction in government expenditure. One example is a smaller Cabinet and fewer deputy ministers.”
He added that the country must prioritise economic growth, adding that “higher growth will expand the tax base, which will ultimately bring in more revenue without the need for painful tax hikes.”
IOL News