To VAT or not to VAT That is the Question?
As the Government of National Unity (GNU) currently is grappling with its new coalition structures and budget decision making processes this week, we will soon know if the proposed VAT increases proposed in the budget are to take effect or not.
Tomorrow will see the national budget being voted on in Parliament and it is unlikely that VAT will not be increased at all, as options for raising additional taxes are few, while government has not sought to cut spending in any significant way.
In the 2025 Budget Speech, Finance Minister Enoch Godongwana unveiled a proposed a staggered increase to the VAT rate. This move, is designed to address economic challenges and fund key government initiatives.
It will however also create additional pressure to small businesses, and in particular, those who are already struggling with cash flow.
It is worth understanding who pays VAT, and how VAT contributes to total tax revenue, and how small businesses can go about manage this change as effectively as possible.
The Proposed VAT Increase
Value Added Tax (VAT) is a consumption tax levied on the purchase of most goods and services in South Africa. It forms a key element in the overall revenue collection stream in the country, and any changes to its rate have significant implications, particularly for small businesses.
The government has proposed increasing the current 15% VAT rate to 15.5% on May 1, 2025, and then further to 16% on April 1, 2026.
The increase has been projected to generate an additional R28 billion in the upcoming fiscal year and an additional R14.5 billion tax revenue in the following year. The revenue is intended to fund key initiatives across healthcare, increases in social grants, and building and maintaining national infrastructure. To understand the significance of this increase, it’s important to examine the role of VAT in the national tax revenue.
The role of VAT in South Africa’s tax revenue
VAT contributes significantly to South Africa’s total tax revenue, accounting for 25.7%, second only to Personal Income Tax. However, while there were 959,000 registered VAT vendors in the 2023/24 tax year, only 488,118 were active. Interestingly, 53% of these active vendors had a turnover of R1 million or less, accounting for only 5.6% of domestic VAT payments.
This gap indicates clearly the prevalence of micro and small businesses within the VAT collection system and the challenges they face in compliance. The bulk of VAT revenue is extracted from larger businesses and the data highlights the government’s need to widen the revenue collection net, and the difficulties involved in collecting that revenue.
While it is easy for government to increase VAT, the implications for the economy, consumers and small businesses is large. Small businesses need to update their systems and ensure that they are VAT compliant which adds additional pressure onto their business.
It would be far better if overall tax compliance would grow and bring currently uncollected taxes into the collection eco-system rather than having to increase any tax rates at all.
Impact on Small Businesses
Colin Timmis, Country Manager for Xero South Africa, comments that “The proposed VAT increase will directly impact small businesses through increased input costs, pricing pressures, cash flow challenges, and administrative burdens”. “If you’re a small business owner, you’ll need to decide whether to absorb these costs or pass them on to your consumers”.
To mitigate the impact on lower-income households, the government plans to expand the basket of VAT zero-rated items. However, small businesses still need to adapt to this change.
