Quick Explainer: What VAT Means for You

If Parliament passes the 2025/6 budget, the VAT rate will go from 15% to 15.5% on 1 May this year. This means that the price of all but a few goods and services will go up, and buyers will pay 15.5c on every rand in tax instead of 15c. Then, from 1 April 2026, VAT is set to go up again, to 16%.

What is VAT?

VAT is an indirect tax levied on the sale of goods and services. Consumers don’t pay the tax directly to SARS, like income tax, but pay it indirectly when paying for goods and services. The seller charges VAT and then passes it on to SARS. The seller (the VAT “vendor” gets refunded for the VAT previously paid on supplies purchased, and so this is a tax on the “value added” in the production or retail chain.

Many countries have VAT systems. Rates vary widely, with VAT at 7% in Thailand, 14% in Egypt, 15% in Ethiopia, 18% in Uganda, 19% in Algeria, 20% in the United Kingdom and as high as 27% in Hungary.

In South Africa this year, VAT is expected to bring in nearly R500-billion out of total tax revenue of R2,006-billion. Of this, the increase in the VAT rate is expected to bring in R13.5-billion in the 2025/6 year and R29.8-billion in 2026/7.

Who will be affected by the increase?

Everyone will be affected by the higher VAT rate. But poor people will be harder hit than rich people. This is because everyone pays the same VAT rate on their consumption expenditure, regardless of income (unlike income tax), so it is a bigger burden on small incomes than an income tax. High income households typically spend a lower percentage of their income than poor households, so the VAT increase has a smaller effect.

Cushioning the effect

Announcing the increase in his budget speech last week, finance minister Enoch Godongwana said three things would be done to cushion the effect of the VAT increase on the poor:

• social grants would be increased;
• the fuel levy (charged on petrol and diesel) would stay the same (rises in the fuel levy affect taxi users as well as those who own cars); and
• the list of goods on which VAT is not paid (zero-rated goods) would be lengthened.

Zero-rated goods

At the moment, 21 food items are “zero-rated” for VAT, which means no VAT is paid on them. Brown bread, maize meal, mealie rice, samp, dried maize, dried beans, lentils, tinned sardines, milk powder, and dairy powder blends have been zero-rated since 1991, when VAT was first introduced.

Nine more items – rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheat flour, eggs – were added to the zero-rated list in 1993, when the VAT rate was increased from 10% to 14%.

Then, in April 2018, when the VAT rate went up from 14% to 15%, an independent panel of experts was appointed to consider zero-rating on more items. They recommended the list be lengthened to include white bread, white flour, cake flour, sanitary pads, school uniforms and nappies.

The government accepted some of these recommendations but not all, and white bread, wheat flour, cake wheat flour and sanitary pads have been zero-rated from 1 April 2019.

If the budget is passed, more items will be added to the list of zero-rated foods: canned vegetables, dairy liquid blends, and organ meats, such as liver and kidneys from sheep, poultry and other animals.

If these foods had not been zero-rated, SARS would have collected an additional R2-billion this year and R2.1-billion next year.

Why is this happening?

Godongwana said in his speech that the government had to increase VAT in order to finance necessary spending on health, education, transport and security.

Critics of the VAT increase have said he could have financed this in other ways, for instance by taxing the rich more heavily, by borrowing more, or by “taking a holiday” from the government’s contribution to the Government Employees Pension Fund, which has a surplus.

Godongwana said before increasing VAT the government had considered other options, such as increasing company tax or personal income tax, or taking on more government debt, but had come to the conclusion that this was not a good idea.

He did not comment in his budget speech on the other proposals.

SARS has also said it is capable of collecting much more tax if its capacity is increased. The budget does give an extra R4-billion to SARS over the next three years to do this.

This is part of an occasional series explaining issues in economics. GroundUp is grateful to Andrew Donaldson of the Southern Africa Labour and Development Research Unit for advice on the series.

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