New plan for VAT hike

President Cyril Ramaphosa has proposed hiking value-added tax (VAT) by between 0.5 and one percentage point in the country’s 2025/2026 budget to resolve a dispute in the Government of National Unity (GNU).

City Press reported that government sources said the compromise was tabled during a Cabinet meeting last week.

Finance minister Enoch Godongwana’s original budget, which he planned to announce on 19 February 2025, included an increase in the VAT rate by two percentage points — from 15% to 17%.

Godongwana explained this would be necessary to fund public sector wage increases, retain essential frontline workers, invest in a commuter rail system to better serve working-class families, and support above-inflation increases to social grants.

Godongwana said government had thoroughly examined alternatives to raising the VAT rate, including increases to corporate and personal income taxes.

“However, these would generate substantially less revenue while potentially harming economic growth and job creation,” his undelivered budget speech stated.

The Democratic Alliance, the second-biggest party in the government of national unity, threatened to vote against the budget when it was tabled in Parliament.

Citing its sources, Rapport reported that the ANC-led government continued with the VAT plan despite weeks of indications from the DA that they would not support it.

Ramaphosa’s proposal came after finance minister Enoch Godongwana explained the ramifications of not increasing VAT, which he warned would include scrapping the lockdown-era R350 per month Social Relief of Distress (SRD) grant.

The government budgeted R35.2 billion to extend the SRD grant for another year, a promise that formed a key part of the ANC’s 2024 election campaign.

The DA is not opposed to keeping the grant but has proposed it be converted into a Job Seekers’ Allowance for those actively searching for work.

The party maintains that South Africa’s tax base is too small to support further tax hikes without strangling private sector investments and causing further damage to the economy.

Instead of tax increases, it has proposed several measures to cut expenditures that would result in savings equal to the extra R60 billion that the government had estimated would be raised through the VAT increase.

These proposed cuts include:

• A 50% reduction in government advertising budgets
• A 33% reduction in travel and catering expenditure for government officials
• A hiring freeze for all non-essential government employees
• An audit of government employees to identify so-called “ghost” workers

The DA also wants a three-month spending review to identify wasteful and failing programmes to enable the reallocation of funds.

These funds would go to essential public services and the ability to pay for legally-mandated commitments like wage increases.

Don’t increase taxes, increase tax collection

The DA has also supported a South African Revenue Service (Sars) proposal that government provide the taxman with more funding to upgrade its systems and increase tax compliance.

“Increasing tax compliance from 63% to 67% can generate R60 billion per year,” the DA said.

Sars commissioner Edward Kieswetter has repeatedly appealed for additional funding to improve the agency’s tax collection capabilities.

The entity has estimated that tax dodging costs the country around R800 billion annually.

Sars modelling predicted that it could collect R450 billion to R460 billion extra if it received funding to modernise its systems.

Kieswetter has explained that Sars will need continuous funding for the agency’s digitalisation to keep up with tax crime.

“Once you suspend funding, the end result will always be the suspension of innovation and regression against the progress of other administrations,” Kieswetter said.

In his original budget speech, Godongwana said that R3.5 billion would be allocated to the agency to modernise its ICT systems to enhance revenue collection and improve tax compliance “well into the future.”

However, it is unclear how much funding Sars wanted to improve its tax compliance rate sufficiently to ward off further tax increases.