Is a VAT rate increase to 17% justifiable?

SAICA member, Dr Muneer Hassan CA(SA); Chartered Tax Advisor (CTA); Deputy Chair of the SAICA National Tax Committee; Deputy HOD Accountancy and Senior Lecturer Taxation at UJ delves into this much debated question.

Johannesburg, 03 March 2025 - The 2025 budgets tabled in parliament on 19 February 2025, which were not approved, proposed a 2% base point increase in the VAT rate – with the proposal that the VAT rate increase from 15% to 17%.

The following table illustrates the evolution of VAT rates in South Africa since its inception in 1991.

Table: Historical Overview of VAT Rates

In order to finance the implementation of new and current expenditures, an increase in the VAT rate was tabled. Treasury argued that the growing budget deficit and high debt servicing costs will be further exacerbated if the increase in expenditure is not financed through additional tax revenue – a situation that is unsustainable.

To provide context, debt servicing costs are estimated to be R424,2 billion for the 2025/6 fiscal year. This amount exceeds the budgeted total tax collections from corporate income tax, which is R325 billion. At present, debt-servicing costs account for 22 cents of each Rand of revenue collected. Thus, borrowing more money is not an option (as this would invariably increase debt servicing costs). In order of their contributions to tax collections, there are three revenue instruments that can be considered: personal income taxes, VAT, and corporate income taxes.

Individuals are subject to a maximum marginal tax rate of 45%. The maximum marginal rate of tax is applicable to 235 000 taxpayers, which accounts for 3% of the total registered individual taxpayer base of 7,8 million. These taxpayers contribute 33% of the total personal income tax revenue. It will be necessary to conduct a thorough assessment of any additional increases to the maximum marginal rates, as this has the potential of affecting emigration. Additionally, National Treasury is dependent on tax collections from these taxpayers. The implementation of wealth taxes is also not a straightforward, quick win, as it necessitates the reinforcement of anti-avoidance legislation to ensure that all structures are identified and caught by this anti-avoidance legislation. There is no room for an increase in corporate tax rates, as the international trend is to decrease corporate tax rates – this in an attempt to ensure international competitiveness.

South Africa’s pre-proposal VAT rate of 15% is currently below the Organisation for Economic Co-operation and Development (OECD) average of 19%. With the African average being 15.8%. As such, South Africa is close to the African average but behind as relates to the OECD average.

VAT is, however, regressive in nature (i.e. VAT is levied on the consumption of goods and services at the same rate, therefore higher- and lower-income groups pay the same rate of VAT). However, lower-income groups can be shielded against VAT related costs by allowing zero rating on certain goods and services. Since the 1980s, the OECD has advocated in favour of a broad-based, single-rate VAT system. More recent studies, such as the Mirrlees Review, support the OECD’s viewpoint, arguing that a broad base with a single standard rate would allow for large revenue increases while reducing tax administration expenses for the revenue collection agency as well as compliance costs for enterprises. The opinion that VAT is not an appropriate weapon for altering social behaviour or furthering equitable concerns has considerable support in research. This raises questions about the efficacy of zero rating, which is intended to influence social behaviour and promote equality.

The Davis Tax Committee (DTC) concluded that zero rating is an overly blunt tool for addressing equality concerns, yet the DTC believes that eliminating current zero ratings would be difficult at this time because no ideal compensation alternative has yet been discovered. However, it appears that when the VAT rate is increased, this is generally accompanied by some protection for poor and low-income households, as was the case in South Africa in 2018. With National Treasury announcing the expansion of the zero-rated list, or reductions in personal tax rates and increases in social welfare benefits, as in New Zealand when the Goods and service tax (GST) rate was raised from 12.5 to 15% on 1 October 2010. It is interesting to note that whilst the South African VAT Act is largely based on the New Zealand GST, which is in essence VAT, the proposal to increase the VAT rate in South Africa would result in the South African VAT rate exceeding the New Zealand GST rate.

It is therefore unsurprising that the budget proposal to raise the VAT rate to 17% was accompanied by an expansion to the list of zero-rated essential foods and the provision of above-inflation adjustments for social grants – this all in order to alleviate the impact of the VAT rate increase on the most vulnerable. Zero rating as mentioned is a blunt tool for assisting lower-income households, as there is no guarantee that prices will decrease; rather, VAT vendors may consume the VAT as profit. Vendors may even raise prices by attributing the increase in products and services to the VAT rate increase, as we have seen from experience with the 2018 VAT rate increase.

The question on many lips is whether the VAT rate increase is justifiable. Given that South Africa currently has an expenditure problem, many argue that the solution should not be the raising of taxes. What could be more efficient is improving transparency and accountability, particularly in the area of public expenditure, by utilising advanced technologies like 4IR to enhance the reporting process to eradicate fruitful and wasteful expenditure. The budget proposals allocated R35 billion to the COVID-19 social relief of distress grant for the 2025/6 year, if taxes are raised, it must translate into more employment opportunities rather than social assistance.

The alternative is to enhance compliance, which will reduce the tax gap, as the SARS Commissioner indicated in the lead-up to the budget. Empirical evidence from my PhD study, “A framework for a simpler VAT Act”, has validated the legal complexity of the VAT Act. I believe that there is additional potential for simplifying the VAT Act, even though legal simplicity does not necessarily equate to increased collections. However, simplification does make it easier to comply, and it is still the right thing to do!

The Government of National Unity has demonstrated that it is no longer business as usual, with the proposed increase to the VAT rate opposed by many. National Treasury must therefore reassess and rethink the budgeting process by instituting a consultative and transparent approach that incorporates enhanced governance as well as stakeholder engagement and input. We wait patiently to see what the revised March budget will contain as relates to the VAT rate.

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