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Finance Minister Enoch Godongwana has increased the Value Added Tax (VAT) rate by 0.5% in the 2025/26 financial year and a further 0.5% in the following year.
It was Godongwana's second attempt to table the maiden budget under the Government of National Unity following a postponement in February.
That speech was canned following an impasse over a proposed two percentage point VAT increase, which was reduced to half-a-percentage point on Wednesday.
“This will bring the VAT rate to 16 percent in 2026/27,” the minister said.
“Government also proposes no inflationary adjustments to personal income tax brackets, rebates, and medical tax credits. These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27.”
Godongwana said it was not an easy decision to make.
“No minister of finance is ever happy to increase taxes. We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power,” he said.
Explaining the decision, Godongwana said they weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.
“Increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation, and economic growth.
“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.
“Furthermore, South Africa’s corporate income tax collections are already higher than most of our peer countries. On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save,” he said.
The announcement of the VAT increase was met with groans from some parties, with the official opposition MK Party rejecting it.
Parliamentary leader, Dr John Hlope, said the MK Party the minister had a number of options to explore but he "chose the wrong one", saying the VAT increase would be "disastrous" and that "black people" would suffer.
He said they believe that corporate taxes should have been increased.
Democratic Alliance leader, John Steenhuisen, said they also rejected the proposal on VAT and therefore could not support the budget in its current form.
"We don’t believe a VAT increase is the way to go, especially if it is not accompanied by bold reforms. There were a number of bold announcements that could have been made,” he said.
However, Steenhuisen said there is still some time to negotiate on the sticking points, but the budget must take into account the views of the parties in the GNU.
BOSA acting spokesperson, Graham Solomons, said the GNU's first budget was "a punch to the gut of already struggling South Africans".
He said in particular, the overstretched tax base will now effectively face a double tax with working families paying more in tax on at least two fronts to foot the bill for the government’s unjustifiable choices.
"Not only will Value-Added Tax (VAT) increase by 0.5 percentage points each year for the next two years, but there will be no inflationary adjustments to personal income tax brackets, rebates, and medical tax credits this year," said Solomons.
ActionSA's parliamentary leader, Athol Trollip, said they need to "scrutinise things properly" before deciding whether or not to support the budget.
He said no mention was made regarding reducing the cabinet, state-owned enterprises, corruption, and "no property security".
Trollip said these are the issues that drive away investment.
Rise Mzansi leader, Songezo Zibi, has welcomed Godongwana's decision not to implement the proposed 2% VAT increase.
However, he cautioned against focusing on single-issue politics, citing the importance of considering where the minister will recover the revenue that was expected from the VAT hike.
“I am glad that the government has provisioned around R30 billion over the next three years to hire unemployed doctors and nurses. And, if you talk about a cost-of-living crisis, you have to invest in infrastructure that will reduce the cost of living for South Africans,” Zibi said.
