Finance Minister Enoch Godongwana has instructed the National Treasury not to increase the value-added tax (VAT) from the beginning of May.
The Finance Ministry confirmed this in a media statement released on Thursday morning, reflecting fierce pressure from other political parties.
Initially Godongwana had wanted the VAT to be raised by two percentage points; however, due to a fierce backlash, he backed down, later proposing a 1% increase with a 0.5% split increase in two financial years, 2025/26 and 2026/27.
The move to call off the VAT increase came as a shock because Godongwana said in court documents filed recently that the DA, which forms part of the government of national unity, and the EFF cannot interdict the VAT hike decision.
“The decision to introduce the VAT rate increase has been made. My decision to introduce the VAT rate change cannot be interdicted at this stage,” said Godongwana in the court documents.
He was opposing a court challenge by the two parties to interdict the VAT increase. However, the media statement on Thursday marked a sharp U-turn.
“The minister of finance will shortly introduce the Rates and Monetary Amounts and the
Amendment of Revenue Laws Bill [Rates Bill], which proposes to maintain the VAT rate at 15% from 1 May 2025, instead of the proposed increase to VAT announced in the Budget in March,” reads the statement.
“The decision to forgo the increase follows extensive consultations with political parties and careful consideration of the recommendations of the parliamentary committees.
Revenue shortfall projected
Godongwana’s office pointed out that failure to raise the VAT will result in a revenue shortfall over the next three years.
Reads the Treasury statement: “By not increasing VAT, estimated revenue will fall short by around R75-billion over the medium term.
“As a result, the minister of finance has written to the Speaker of the National Assembly to
indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill, in
order to propose expenditure adjustments to cover this shortfall in revenue.
“Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability.”
Measures to protect low-income earners withdrawn
The statement continues: “The decision not to increase VAT means that the measures to cushion lower-income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.
“To offset the unavoidable expenditure adjustments, any additional revenue collected by SARS [SA Revenue Service] may be considered for this purpose going forward.
“The minister of finance expects to introduce a revised version of the Appropriation Bill and
Division of Revenue Bill within the next few weeks.
“The initial proposal for an increase to the VAT rate was motivated by the urgent need to
restore and replenish the funding of critical frontline services that had suffered reductions
necessitated by the country’s constrained fiscal position.
“There are many suggestions; however some of them would create greater negative
consequences for growth and employment and some of them, while worthwhile, would not
provide an immediate avenue for further revenue in the short term to replace a VAT increase.
“The National Treasury will, however, consider these and other proposals as potential
amendments in upcoming budgets as mechanisms to increase the resources available.”
