The VAT debacle as it unfolded

The proposed VAT hike sparked political fallout, court battles, and public confusion. SHARMINI NAIDOO unpacks the drama behind South Africa’s tax policy U-turn.

In 1936, US President Franklin D. Roosevelt was quoted as saying that taxes “are the dues that we pay for the privileges of membership in an organised society”. The purpose of taxation was, and still is, for governments around the world to collect revenue to provide public goods and services to their citizens.

There are a number of forms of taxes. The most common taxes are personal income tax, corporate income tax, and value-added tax (VAT).

Our system is based on New Zealand’s VAT system. It was introduced in South Africa in 1991 at a rate of 10%, replacing the general sales tax system, which had been levied at 12%.

Since VAT was considered to be more broad-based than the old general sales tax, it was deemed to be neutral in terms of tax revenue collection. Although the South African VAT system was found to be mildly regressive – where a larger percentage of income is taken from the poor in comparison to the rich – it provided a good source of government revenue in comparison with other tax types, as individuals in the informal sector also contributed to the revenue stream.

South Africa is known for its very progressive tax regime, where the rich pay taxes at a higher rate than the poor. Therefore, the decision to increase VAT has always posed a moral dilemma to the state; increasing corporate tax and personal income tax was always the more favoured option.

Despite VAT being a more equitable system that does not discriminate against colour, creed, gender, or nationality – since everyone who consumes a product or service that is not zero-rated pays the tax – its impact is most felt by the everyday consumer, who cannot offset their liability and has to absorb the cost. One can clearly see why any decision to increase VAT would not be taken lightly.

However, to increase tax revenue collection to meet its ever-burgeoning social and economic commitments, the South African government increased the VAT rate from 14 to 15% on 1 April 2018. It remained at that level until this year’s Budget Vote Speech proposal.

In an attempt to generate R72 billion in extra revenue over the next two years, the Minister of Finance proposed an increase to the standard VAT rate from 15 to 15.5% effective 1 May 2025, and a further increase to 16% on 1 April 2026. This was not due to the Minister’s opposition to austerity, but rather as a way to boost government revenue in light of new and persistent spending pressures.

Here is how the VAT debacle unfolded – and how the cookie crumbled…

The VAT hike was met with resistance and ultimately abandoned after significant pushback from partners in the Government of National Unity (GNU). It was challenged legally on the basis of constitutionality, with questions regarding parliamentary procedure and fiscal authority (i.e. the unilateral decision of the Minister of Finance to increase VAT without approval from Parliament).

On 22 April 2025, the High Court heard an urgent application by the Democratic Alliance (DA) and the Economic Freedom Fighters (EFF) to set aside the resolutions by the National Assembly and the National Council of Provinces to accept the report of the Standing Committee on Finance and the Select Committee on Finance in respect of the 2025 Fiscal Framework.

The High Court also heard the DA’s application for the suspension of the operation of the minister’s decision to increase the VAT rate, and to make an order declaring section 7(4) of the VAT Act constitutionally invalid (the moment the minister announced the VAT rate increases, they came into effect from the respective dates by virtue of section 7(4) of the Value-Added Tax Act 89 of 1991).

After a “bad day in court”, the Ministry of Finance issued a statement in the early hours of 24 April that the VAT rate would be maintained at 15% from 1 May 2025, instead of increasing as proposed in the March Budget Speech.

With the suspension of the VAT rate increase, the zero-rating of additional items was also withdrawn and will no longer take effect. The Minister of Finance wrote to the Speaker of the House indicating that he would be withdrawing the Appropriation Bill and the Division of Revenue Bill. He is expected to introduce revised versions of both bills in the coming weeks.

The official reason for foregoing the VAT hike was due to “extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees…”

According to Cliffe Dekker Hofmeyr’s Tax Alert from 29 April 2025, the DA filed a supplementary affidavit on 25 May to stop the VAT increase from being implemented. This was due firstly to legal uncertainty surrounding the withdrawal of the VAT rate increase, as the VAT Act does not provide for the withdrawal of the minister’s announcement (and, in fact, allows it to apply for 12 months), and secondly the concern that the Rates Bill would not be adopted by Parliament before 1 May 2025 (which would have resulted in the increase coming into effect). However, the parties reached a settlement and the terms of this were made an order of the court.

SARS has also issued a statement clarifying that, as a result of the court order:

• There is no basis for VAT vendors to implement an increase in the VAT rate.
• All vendors are urged to readjust their systems back to 15%.
• Vendors who have already implemented the rate change and the zero-rating of food items are encouraged to reverse those changes before 1 May 2025.
• Should a vendor be unable to revert to the 15% rate due to complex system changes, such supplies and purchases may be reported and accounted for at the rate of 15.5% until such time as the necessary system adjustments are made, but only until 15 May 2025.
• All consumers are urged to ensure they are charged the correct VAT rate of 15%. In the unlikely event that they are charged 15.5%, consumers should bring this to the attention of the vendor and ensure that it is resolved at the point of sale or otherwise by mutual agreement.

According to National Treasury, the withdrawal of the VAT increase will create a medium-term revenue shortfall of approximately R75 billion (a mere 0.4% of the overall budget), necessitating decreased government expenditure with likely impacts on service delivery.

The nation now waits to see if the Treasury will indeed bite the bullet, trim the fat, and cut out all the luxuries, frivolities and unnecessaries (wasteful and fruitless expenditure), like any normal business would. We hope that the GNU coalition works together to make decisions and find solutions for the highest good of all – so that there is enough to go around to meet the needs of us all.