The VAT Dilemma: Why It Matters for South Africa’s Future

Vat is set to increase by 0.5% on the 1st of May 2025, making it 15.5%

As South Africa stands on the brink of a potential VAT increase, public anxiety is mounting—and rightly so. Value-Added Tax (VAT) is more than just a figure on your till slip; it’s a crucial lever governments use to manage national finances. Yet, adjusting this lever—even slightly—can have profound effects on the lives of ordinary South Africans, especially the poor and the middle class.

Let’s unpack why VAT increases happen, what happens if they don’t, and how both outcomes have ripple effects—some necessary, some painful.

Why Do Countries Increase VAT?

1. Revenue Generation for Public Services
   Governments, especially in developing economies like South Africa, rely heavily on VAT to fund essential services—education, healthcare, social grants, infrastructure, and policing. When a country faces budget shortfalls due to poor economic growth, corruption, or external shocks (like pandemics or global inflation), VAT becomes an appealing option. It’s broad-based, relatively easy to collect, and hard to avoid.

2. Reducing Budget Deficits
   A growing national debt limits a country’s ability to borrow affordably. Increasing VAT is often seen as a responsible step to reduce fiscal deficits and reassure lenders and investors that the country is managing its finances prudently.

3. Compensating for Narrow Tax Bases
   In many countries, income tax is paid by a small portion of the population. In South Africa, fewer than 8 million people shoulder most of the personal income tax burden—out of a population of over 60 million. VAT allows the state to widen the net.

What Happens If VAT Is Not Increased?

While increasing VAT is painful, not increasing it can be just as damaging in the long term:

• Collapse of Public Services: Hospitals, schools, and municipal infrastructure could suffer from chronic underfunding. Load shedding, water cuts, and deteriorating roads become part of daily life.

• Rising Debt and Borrowing Costs: If the government keeps borrowing to fund basic services without increasing revenue, credit ratings drop. This raises the cost of borrowing and crowds out spending on the poor and vulnerable.

• Inflationary Pressures Elsewhere: To avoid VAT increases, governments might resort to borrowing more or printing money, which fuels inflation—ultimately hitting the poor hardest through food and fuel price hikes.

But What About the Negative Effects of Increasing VAT?

Make no mistake: raising VAT hurts. It especially pinches the poor and middle class.

1. Regressive Nature of VAT
   VAT is a consumption tax. That means everyone pays it, regardless of income. But poorer households spend a larger share of their income on essentials. Even with zero-rated items like bread, maize meal, and vegetables, many necessary items—like soap, electricity, school shoes, and transport—still attract VAT. A 1% VAT hike can make the difference between having enough for the month and going into debt.

2. Shrinking Middle-Class Disposable Income
   For the middle class, VAT increases chip away at already-thin margins. This class is the backbone of consumer spending. As their disposable income shrinks, so does demand for goods and services, slowing economic growth and job creation.

3. Impact on Small Businesses
   VAT increases can dampen consumer demand, leading to lower sales. For small businesses already fighting high fuel prices, red tape, and crime, a VAT hike might be the final nail in the coffin.

4. Erosion of Trust in Government
   When citizens see corruption and mismanagement, VAT increases feel like punishment. People may resist compliance or reduce consumption, further undermining government revenue.

So What's the Middle Ground?

If a VAT increase is unavoidable, protective buffers are essential:

• Expand the list of zero-rated essential goods.

• Provide larger or more frequent social grants to offset the burden.

• Improve transparency: show citizens exactly how VAT revenue will be used.

• Clamp down on corruption and wasteful expenditure, so citizens feel they are getting value for their money.

Conclusion: A Balancing Act with Human Costs

VAT increases are a double-edged sword. While they can stabilize public finances and support critical services, they also risk deepening inequality if not carefully managed. The poorest and most vulnerable in South Africa are already teetering under the weight of unemployment, inflation, and service delivery failures. A VAT increase may tip some over the edge—unless paired with bold, fair, and transparent policy action.

South Africa’s economic future hangs in the balance—and the decisions made now will shape not only the national balance sheet, but the daily lives of millions.