South Africa's finance ministry halts VAT hike

Finance Minister Enoch Godongwana will soon take steps to reverse South Africa's controversial and condemned value-added tax increase.

The Ministry of Finance announced on Thursday (April 24) that the Minister will "soon" introduce the Rates and Amounts of Taxes and the Taxation Act Amendment Bill (the Rates Bill), which proposes to maintain the Value Added Tax (VAT) rate at 15% from May 1, 2025.

The move replaces a proposed 0.5 percentage point increase in VAT announced in the March budget and adopted in the fiscal framework in early April.

"The decision to forgo a pay increase has been made following extensive consultation with all parties and careful consideration of the advice of the parliamentary committee," the statement read.

“Without the VAT increase, revenues are projected to fall by around R75 billion in the medium term.

“As a result, the Finance Minister has written to the Speaker of the National Assembly stating that he will withdraw the appropriations bill and the revenue allocation bill to propose adjustments to expenditure to make up for the revenue shortfall.”

Parliament will be asked to adjust spending to ensure that revenue losses do not undermine South Africa's fiscal sustainability.

The decision not to increase VAT means that measures to cushion low-income households from the potential negative impact of higher tax rates now need to be rolled back and other spending decisions reviewed.

To offset the inevitable expenditure adjustments, any additional revenue collected by SARS may be considered for this purpose.

The finance minister is expected to present revised versions of the appropriations bill and the revenue apportionment bill in the coming weeks.

The Ministry of Finance said the initial proposal to increase the VAT rate was motivated by the urgent need to restore and replenish funding for critical frontline services that had suffered cuts due to the country's tight fiscal situation.

However, the price increase was widely opposed by South African political parties and the general public.

It is unclear what this will mean for the budget process or how Parliament will find the additional revenue it needs.

The Treasury said a number of proposals had been made, "but some would have more negative impacts on growth and employment than others, while having merit, would not provide an immediate way to raise revenue in the short term to replace the VAT increase".

Nonetheless, it said it would consider these and other proposals as potential amendments in future budgets as a mechanism to increase available resources.