VAT u-turn creates chaos

The decision to withdraw the planned 0.5 percentage point VAT increase effective from 1 May 2025 will come at a significant cost to retailers and South Africans. 

As part of the withdrawal, the National Treasury has also reversed its plan to expand the list of zero-rated food items to ease pressure on consumers. 

All of this has significantly impacted retailers, who had spent significant sums of money to ensure compliance, all of which will have to be reversed. 

This is feedback from Consumer Goods Council of South Africa (CGCSA) CEO Zinhle Tyikwe, who said the organisation has welcomed the reversal of the VAT hike with caution. 

Tyikwe said the reversal would go a long way toward easing the financial burden on particularly poor households, but has come at a cost for retailers. 

On Thursday, 24 April 2025, the National Treasury announced that Godongwana will introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill.

They will propose maintaining the Value-Added Tax (VAT) rate at 15 per cent from 1 May 2025, instead of the proposed increase to VAT announced in the March Budget.

Tyikwe explained that retailers had been working hard to make best efforts to apply the VAT increase by ensuring systems compliance, shelf price labelling of each item and notification of consumers. 

This compliance readiness came at huge costs, which costs will now be further exaggerated by retailers having to implement the National Treasury’s reversal of the VAT increase.

“The back and forth over the VAT issue came at a cost to retailers who have had to incur financial expenses while adjusting their systems,” Tyikwe said. 

“We’re yet to quantify the cost by retailers, but some have told us that it has been a significant expense both in terms of financial cost and hours spent to ensure they were compliant.” 

The cost is set to soar further as retailers will have to reverse the changes they have made to their systems to return to the original VAT rate of 15%. 

Zero-rated VAT items

Food retailers will be particularly hard hit as they will have to undo the changes made to ensure they comply with the expansion of the list of zero-rated food items. 

Linked to the reversal of the VAT increase was the withdrawal of the Minister of Finance’s decision to expand the basket of VAT zero-rated food items to ease the burden of food costs on the poor. 

In his budget statement, the Minister proposed expanding the basket of VAT zero-rated food items to include canned beans and peas, dairy liquid blends and certain organ meats from sheep, pigs, goats and poultry.

However, in the VAT increase reversal statement of 24 April 2025, the National Treasury reversed this, stating that there is no longer a need to cushion South Africans against the VAT hike. 

“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,” the statement read.   

“This is particularly concerning for the CGCSA and our members because many South Africans are hard hit by the cost of living, and the zero-rating of the additional products would have gone a long way to cushion consumers,” Tyikwe said. 

“Our members continue to find ways of ensuring that basic food items are sold at competitive prices, aware of the impact of food costs on their consumers. Expanding the basket of VAT zero-rated food items would have been beneficial to consumers.” 

Tyikwe also pointed out that CGCSA had been concerned about expanding the VAT zero-rated food items without the relevant legislation to enact the zero-rating. 

While zero-rating provisions were expected to be promulgated with retrospective effect in terms of the Draft Bill, this would create uncertainty regarding the VAT rate that must be applied to the additional zero-rated foodstuffs in the interim period.

“This was going to cause a legal and tax dilemma for retailers, and specificall,y whether they should zero-rate the additional zero-rated products from 1 May 2025,” Tyikwe said. 

“If they had zero-rated before the promulgation of the Draft Bill, retailers could have been breaking the law, and if they did not, they were likely going to be liable for taxes or penalties following the retrospective adoption of the Draft Bill.”

To eliminate uncertainty, the CGCSA had proactively lodged a VAT ruling application with SARS, requesting confirmation that retailer members may commence the zero-rating of additional zero-rated foodstuffs, effective from 1 May 2025. 

CGCSA also sought clarity from SARS and the National Treasury on the additional items proposed to be zero-rated for VAT purposes effective 1 May 2025.

Tyikwe said that it is important to highlight that the government’s decisions have a significant impact from a practicality and implementation perspective. 

“Our members have gone to great lengths to prepare for the VAT increase, including incurring unbudgeted, exorbitant costs, which they have absorbed and not passed on to consumers.”

This article was first published by Daily Investor and is reproduced with permission.