How a 2% VAT Increase Would Impact South African Households & Living Costs

How a 2% VAT Increase Would Impact South African Households

A proposed 2% increase in VAT—raising the rate from 15% to 17%—has sparked debate in South Africa. While the government anticipates an additional R58 billion in revenue in the 2025/26 fiscal year, many citizens fear the burden this tax hike will place on their daily expenses. The Government of National Unity (GNU) remains divided, with parties like the Democratic Alliance (DA) opposing the move, citing concerns over affordability for lower- and middle-income households.

With the Budget Speech postponed to March 12, the debate continues on whether the VAT hike is a necessary step for economic stability or an undue strain on consumers already battling high living costs.

ALSO READ: Budget Speech 2025 Postponed to 12 March Due to ANC-DA Dispute Over VAT Increase

Understanding the VAT Increase and Its Purpose

Value-added tax (VAT) is a consumption tax applied to goods and services. Currently set at 15%, it has remained unchanged since 2018. The proposed increase to 17% is aimed at addressing South Africa’s fiscal challenges, which include:

• Funding essential services, such as education, healthcare, and social grants
• Strengthening infrastructure, including commuter rail services and municipal utilities
• Providing employment opportunities, especially in public sectors like health and education
• Extending the Social Relief of Distress (SRD) grant, benefiting lower-income groups

National Treasury argues that VAT is a more stable revenue source compared to personal or corporate income tax, as it is broad-based and minimally disruptive to economic growth. However, the tax burden on ordinary South Africans cannot be ignored.

The Impact on Everyday Living Costs

A 2% increase in VAT will have direct and indirect effects on South African households.

1. Price Increases on Essential Goods & Services

• While basic food items like bread, maize meal, and fresh vegetables are VAT-free, many essentials are not, including:
  • Meat (excluding certain cuts newly zero-rated)
  • Cooking oil
  • Electricity and water services
  • Fuel and transportation
• As businesses face higher costs, they may pass these onto consumers through price hikes.

2. Rising Utility Bills & Transport Costs

• Electricity and water tariffs, already under pressure, may increase further due to the VAT hike.
• Fuel levy relief is set to continue, but fuel prices may still rise, affecting transportation costs and indirectly increasing food prices.

3. Higher Inflation Risks

• The VAT increase could drive inflation upward, reducing purchasing power for consumers.
• Low- and middle-income households will feel this most acutely, as a larger portion of their income goes towards basic necessities.

4. Small Businesses & Employment Concerns

• Small businesses may struggle to absorb higher costs without raising prices or cutting jobs.
• Employment growth could slow, especially in sectors reliant on consumer spending.

Government Measures to Offset the VAT Impact

To cushion the blow for lower-income households, the government has proposed:

1. Expanding the List of Zero-Rated Food Items

• From April 1, 2025, new zero-rated items will include:
  • Variety meats from sheep, poultry, goats, swine, and cattle
  • Dairy liquid blend
  • Tinned and bottled vegetables

2. Increasing Social Grants Above Inflation

• The budget allocates R23.3 billion over the next three years to boost social grants.
• This includes higher payments for pensioners, child grants, and disability grants.

3. Continued Fuel Levy Relief

• This measure aims to limit transport cost increases, benefiting commuters and businesses.

Is the VAT Hike the Best Solution?

While Treasury argues that VAT is the least harmful tax increase, critics suggest alternative revenue strategies, such as:

1. Stronger enforcement of corporate taxes to prevent profit shifting.
2. More efficient public spending to reduce waste and corruption.
3. Higher personal income tax for high earners, instead of increasing VAT for all.

Final Thoughts

A 2% VAT increase may provide the government with much-needed revenue, but ordinary South Africans will bear the brunt of higher living costs. With inflation concerns, employment risks, and strained household budgets, the government must ensure that relief measures effectively protect vulnerable communities.

As the Budget Speech approaches, the country awaits a final decision—one that will shape South Africa’s economic future and its citizens’ daily lives.