The revised approach to VAT increases announced in the delayed Budget speech represents a concession by Treasury while still striving to meet the revenue requirements necessary to offset government spending, sustain public services, and maintain fiscal stability.
From a taxpayer perspective, people may be relieved that the VAT rate hasn’t gone up by a full two percentage points and that its implementation will be phased in. Ultimately, the economics will depend on the added effect of unadjusted personal tax brackets, rebates and medical tax credits on personal income tax.
These tax hikes do also mean that Treasury will be able to generate additional revenue (estimated at ZAR 28 billion this financial year, and ZAR 14.5 billion in 2026/27).
The key thing is that there aren’t really any significant revenue-raising measures available to Treasury to plug the gap that we have between our spending and our revenue. We are running a deficit of about 5% of GDP annually, and if one considers that the tax-to-GDP ratio is about 25 percent, it’s clear that there are no real revenue or tax measures to effectively close that budget gap without growth.
We, therefore, need to do all we can to increase economic growth in this country. Minister Godongwana was correct when he stated that “a bigger, faster growing economy, and the larger fiscal resources that comes with it, would give us more fiscal room to meet more of our developmental goals.”
The phased VAT implementation, 0.5 percentage points in 2025 and another 0.5 in 2026 means businesses should prepare for the administrative changes required to ensure compliance. Businesses should also assess the potential impact on their revenues and profit margins.
While the unprecedented budget postponement created uncertainty, it appears to have achieved its objective of recalibrating the government’s approach to these difficult fiscal choices. The question remains: if this more gradual VAT increase is adopted by Parliament, will it be accompanied by the structural reforms needed to deliver the growth that Minister Godongwana has identified as a solution to our fiscal challenges?
Shaheed Patel, Tax Consultant at CMS South Africa
Soweto Sunrise News
