How the VAT increase will affect South African households and businesses"

The 2025 Budget Speech delivered by Finance Minister Enoch Godongwana highlighted significant fiscal measures aimed at addressing South Africa’s economic challenges. The budget highlighted the government’s commitment to macroeconomic stability, revenue generation, and technological advancements.

Key takeaways from the budget, particularly focusing on tax, VAT, and the role of technology in shaping the future of financial compliance and efficiency.

VAT Increase – A Necessary Trade-Off?

One of the most debated measures in the budget is the proposed increase in value-added tax (VAT). The government announced a gradual VAT rate increase: a 0.5% rise in 2025/26, followed by another 0.5% in 2026/27, bringing the final rate to 16%. This move is expected to generate additional revenue of R28 billion in the upcoming fiscal year and R14.5 billion in the subsequent year.

From a business perspective, this increase will have implications for both consumers and businesses. While VAT remains one of the more efficient forms of taxation, its regressive nature means lower-income households will bear a proportionally higher burden. The government’s effort to mitigate this impact by expanding VAT zero-rated food items (including canned vegetables, dairy liquid blends, and certain organ meats) is a welcome measure. However, businesses must prepare for the operational adjustments required to accommodate the new tax rate.

The Tax Landscape – Stability or Pressure?

In a bid to boost revenue without discouraging investment and job creation, the government opted not to adjust personal income tax brackets for inflation. This decision effectively increases the tax burden on individuals, as salaries grow but tax thresholds remain unchanged. Similarly, corporate tax rates remain untouched, recognising the already high tax-to-GDP ratio among South African businesses.

Sars has been allocated R3.5 billion in the current financial year and an additional R4 billion over the medium term to enhance tax collection and enforcement. This signals a continued focus on compliance, which businesses must prioritise to avoid penalties. With 156,000 unregistered taxpayers identified by SARS despite their substantial economic activity, the government’s intent to expand the tax net is clear.

Technology as an Enabler of Compliance and Efficiency

A key takeaway from the budget is the increasing role of technology in improving tax compliance and revenue collection. Sars has been making strides in digital transformation, leveraging data analytics and automation to identify non-compliance and streamline tax administration. This signals an opportunity for businesses to digitally future-proof their business by investing in digital financial management solutions to ensure compliance with evolving regulations.

Cloud-based accounting and VAT management tools can simplify tax calculations, automate reporting, and reduce errors. With real-time data access and AI-driven insights, businesses can enhance their financial planning and compliance, ensuring they remain aligned with Sars’ digital initiatives.

Effectiveness Under the Government of National Unity (GNU)

The implementation of these fiscal measures occurs under the newly established Government of National Unity (GNU), a coalition-driven governance model that brings together diverse political stakeholders. While the GNU presents an opportunity for more inclusive decision-making, its effectiveness in executing economic policies remains to be tested.

The VAT hike and tax adjustments reflect the government’s attempt to balance fiscal sustainability with social priorities, but challenges may arise in policy consistency, bureaucratic efficiency, and stakeholder alignment within the GNU framework. Businesses must remain agile, as shifting political dynamics could influence regulatory enforcement and economic strategies. However, if the GNU successfully fosters collaboration and policy stability, these tax changes could provide a more predictable economic environment for businesses to operate and grow.

Preparing for the Future

As South Africa navigates its fiscal challenges, businesses must remain proactive in their approach to tax planning and compliance. The VAT increase, coupled with enhanced enforcement by Sars, emphasises the need for accurate financial reporting and robust accounting systems. Embracing technology-driven solutions will be key to staying ahead in an evolving regulatory environment.

* Esterhuizen is the director of global product compliance at Sage Africa & Middle East and registered tax practitioner.

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