GNU protects South Africans from the worst of VAT, but 0.5% increase has serious implications for businesses

By Stefan Kritzinger 

South Africa’s political system entered further unprecedented territory on 19th February this year when, for the very first time in our 31-year-old democracy, the budget speech was postponed. 

This was a result of fundamental disagreement among parties within the GNU government over a proposed two per cent VAT increase by the minister of finance.

Realising the political damage such an increase would cause, the tabling of the budget was postponed, affording GNU parties to re-negotiate and come to an agreement. 

The government has found itself in a financially tough space. It needs to fund the extension of the Covid-19 social relief distress (SRD) grant, provide a 5.5 per cent increase in public sector wages, and cover the country’s debt servicing costs. This, amidst a backdrop of the country’s debt-to-GDP ratio reaching a high of 75.1 percent in September 2024, with a corresponding  shortfall in tax collection. 

A few weeks later, on 12th March, the minister of finance tabled the budget with a revised VAT increase of 0.5 per cent for the 2025/26 year, and a further 0.5 per cent increase in the 2026/27 year.

The increase is nonetheless still contentious within the GNU.

The DA, the second largest party to the coalition, remains against any tax increases and has asked for multiple economic growth concessions from the ANC for their support of the budget. 

If this was still an ANC-majority government, South Africans would have been subjected to the two percent increase, but the existence of the GNU now acts as a necessary bulwark against bad government policy. That being said, the proposed 0.5 percent increase (which is so far set to come into effect on 1st May, depending on whether Parliament agrees to the proposed fiscal framework), has implications for businesses, whether big or small. 

VAT remains one of the easiest ways for the government to raise revenue simply because it applies to almost every transaction, making it a stable source of income for the state. It further spreads the tax burden across all consumers and is somewhat less politically destructive than raising other taxes such as income and corporate. It also safeguards against more widespread tax evasion, considering that it is collected at multiple points within any supply chain.

Raising VAT is nonetheless risky. While it can help the government plug its fiscal holes, it raises the cost of living and can hamper critical economic growth. 

For businesses, the impact is far from minimal. Businesses that make revenue north of R1 million in a 12-month period must be VAT registered. Failure to do so comes with painful consequences which can include punitive fines from SARS for non-compliance and backdated VAT payments on all past sales where VAT was not charged. 

However, businesses with revenue below R1 million but higher than R50 000 per annum, can still choose to register for VAT voluntarily. There are several benefits to this which include claiming VAT refunds on business expenses, as well as bolstering the credibility of your small, growing business. 

But for businesses with no choice but to be VAT registered, there are some negative implications with the increase.

VAT can be applied to multiple transactions for businesses, which include the purchase of raw materials, business services such as marketing, legal, consulting and accounting, and imported goods – which already come attached with import duties and VAT. 

But absorbing the VAT increase through purchases is only one side of the coin for businesses. Many companies still offer their own goods or services that are VAT rated. The increase in VAT creates a financial conundrum for business owners over whether to pass on that increase to consumers by raising the price of their goods and services or alternatively absorbing the increase without raising the price and operating at a profit loss, with the hopes that this would increase sales over time. 

For many businesses teetering on the edge of financial distress, absorbing such a profit loss is simply not a viable and sustainable option. VAT must be paid over to SARS every two months by businesses, where many already struggle to set aside that amount when trying to cover their daily expenses. Therefore, increasing prices of goods or services is an unfortunate reality to maintain VAT payments and avoid the consequences, which could also include SARS audits and investigations – something that can create reputational damage as well.

Nonetheless, pricing strategies exist for scenarios such as VAT increases. Businesses can adopt a gradual pricing approach with some products or services being increased immediately while others are raised further on in the financial year. Alternatively, all products or services have their prices simultaneously increased gradually throughout the year. The result is nonetheless the same with reduced customer resistance and less price shock. 

Other methods can include offering customers more value with the price increase. These can come in the shape of loyalty programmes, bundle deals, or special discounts.

Whether businesses absorb the increase in VAT or pass it onto the consumer through price increases, there is still an opportunity for businesses to conduct an expenditure review with the objective of cutting redundant and wasteful operational costs. This would also empower businesses to relook at their suppliers and either renegotiate contracts or find new cost-effective ones. 

Tough times require tougher decisions, but with the right strategies in place, businesses have a chance to get through the rough fiscal waves that lie ahead. 

Stefan Kritzinger is the head of compliance and support at Govchain. 

BUSINESS REPORT