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Most relieving for the business community is that the budget speech has been delivered, though it was not what it was expected, the Minister of Finance Mr Enoch Gondongwana proposed a half a percentage point increase in VAT.
Political parties were unhappy with the announcement of the proposed increase in VAT rate, as they were howling as the Minister made his proposed increment. Gondongwana cited that government is under spending pressure emanating from the different sectors including education, health, transport and security.
He said funding for these sectors can no longer be deferred as it would compromise the government’s ability to meet its constitutional obligations to the people. The Minister explained that the sectors have to do with government properly fulfilling its service delivery mandate.
“To raise the revenue needed, the government proposes to increase the VAT rate by half- a percentage point in 2025/26, and by another half-a-percentage point in the following year. This will bring the VAT rate to 16 per cent in 2026/27.
Government also proposes no inflationary adjustments to personal income tax brackets, rebates and medical tax credits. These measures will raise R28 billion in additional revenue in 2025/26 and R14.5 billion in 2026/27. This decision was not made lightly. No Minister of Finance is ever happy to increase taxes,” said Enoch Godongwana.
“We are aware of the fact that a lower overall burden of tax can help to increase investment and job creation and also unlock household spending power. We have, however, had to balance this knowledge against the very real, and pressing, service delivery needs that are vital to our developmental goals and which cannot be further postponed,” said the Minister.
All eyes and ears were glued to the budget speech to hear whether the Minister will raise the VAT by 2% or not, though the proposed increase is far less, most political parties and Business Unity South Africa (BUSA) were hoping for a zero increase and instead find other ways to fund government spending and generate revenue.
Minister Godongwana says he and his team thoroughly examined alternatives to raising the VAT rate. He said they weighed up the policy trade-offs involved, including increases to corporate and personal income taxes.
“Increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth. Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs.
Furthermore, South Africa’s corporate income tax collections are already higher than most of our peer countries. On the other hand, an increase to the personal income tax rate would reduce taxpayers’ incentives to work and save,” he said.
“Our top personal income tax rate and our personal income tax collections as a percentage of GDP are far higher than those of most developing countries. Increasing it is therefore not feasible. Taking on additional debt to meet the spending pressures was also not feasible. The amount is simply too large. The cost of borrowing would be unaffordable. Our sub-investment credit rating would also make this level of borrowing costlier and put us at risk of even further downgrades.
VAT is a tax that affects everyone. By opting for a marginal increase to VAT, its distributional effect and impact were cautiously considered. The increase is also the most effective way to avoid further spending cuts and to enable us extend the social wage,” continued Minister Godongwana.
