The true cost of the May 2025 VAT increase

As the Democratic Alliance (DA) and the Economic Freedom Front (EFF) fight in the Western Cape High Court to block a May 2025 VAT increase, economists shed light on the long-term costs of such measures. The first study by the National Agricultural Marketing Council (NAMC) suggests that the May 2025 VAT increase will have a negative impact on the South African economy.

If the May 2025 VAT increase goes ahead, it could cause long-term damage to the economy. This includes a loss of jobs and a reduction in overall government revenue, rather than an increase in government revenue. Based on NAMC’s modeling, the May 2025 VAT increase would not only result in lower-than-expected revenue, but would also have a negative impact on various industries over time.

Bad news about VAT increase in May 2025

The National Agricultural Marketing Council (NAMC) estimates that real GDP will fall by 0.21 percentage points and will significantly reduce household spending. Secondly, although VAT collections will increase, other forms of tax revenue are likely to fall due to reduced disposable income. This, in turn, will reduce personal income tax (PIT) collections, which NAMC calls a "general equilibrium effect".

Singapore Tax

The finance minister also raised excise taxes on alcohol and tobacco products, known as “sin taxes”. But here, any short-term revenue growth would jeopardize the long-term prospects of the industry. The 6.8% increase in alcohol excise taxes is expected to have a knock-on effect on the wine and brandy industry.

NAMC estimates that the extra R1 billion in revenue will be offset by losses from reduced economic activity and disposable income. “Our modelling suggests that for every R1 billion increase in excise tax, there could be a reduction of around R250 million in other tax revenues as a result of the higher tax rates,” NAMC said.

Therefore, at the industry level, the increase in excise tax could result in a 0.3% drop in beverage sales. The South African beverage industry contributes 3.6% (R226.3 billion) to South Africa's GDP. The industry employs approximately 500,000 people.