Home AFRICA NEWS South Africa finance minister says dropping VAT hike would have severe consequences

South Africa finance minister says dropping VAT hike would have severe consequences

by Radarr Africa

South Africa’s Finance Minister, Enoch Godongwana, has warned that the country’s financial situation may get worse if plans to increase the value-added tax (VAT) rate from May are not allowed to go ahead. This warning was made known in court documents as the government continues to face internal disagreements over the controversial VAT hike.

The issue has created tension within the coalition government, especially between the two biggest political parties, the African National Congress (ANC) and the Democratic Alliance (DA). The ANC and DA have not been able to agree on whether to raise VAT by 0.5 percentage points on May 1, 2025, and then again by another 0.5 percentage points next year. VAT in South Africa is currently at 15%.

The Democratic Alliance, known for its pro-business stance, took the matter to court, challenging the legality of the proposed VAT increase. In response, Godongwana filed papers with the court on Wednesday, warning that removing or delaying the increase would seriously affect the country’s ability to fund its budget.

“If the rate increase is halted now, that revenue will be lost, and the state will be left without the funds needed to meet already-budgeted spending commitments,” he stated.

He went further to say that if the government cannot raise the needed funds through VAT, it will have no choice but to either cut down on its expenses or borrow more money to meet its financial obligations. He described this situation as one that could have “severe and far-reaching” effects on the economy.

At the moment, lawmakers in South Africa’s parliament still have the power to either approve, amend, or cancel the VAT increase plan when they hold budget votes in the coming weeks. However, pressure continues to mount from smaller political parties who are against the idea of increasing VAT. Instead, these parties are proposing that the government should look into making deeper expenditure cuts to balance the budget.

Over the past weekend, several local media outlets reported that the ANC may be preparing to step back from its insistence on the VAT increase after it became clear that many of the other political parties they were negotiating with were not in support of the hike.

In an interview with the South African Broadcasting Corporation (SABC) on Wednesday, Godongwana also admitted that continuing to argue over a 0.5 percentage point VAT increase may not be the best move for the country. He noted that while raising VAT could help generate extra revenue, it is important to consider the overall impact on citizens and the economy.

According to the National Treasury, the proposed VAT increase is expected to bring in an additional 13.5 billion rand for the 2025/2026 financial year. This money, according to government officials, is needed to fund critical sectors like health, education, infrastructure, and social grants.

Despite the possible financial benefits, many South Africans have expressed concerns that a VAT increase could lead to higher prices of goods and services, especially for low-income earners who already struggle with the rising cost of living. Civil society groups have also joined the call for government to explore alternative revenue options that would not place more burden on ordinary citizens.

For now, the situation remains tense as discussions continue among lawmakers, political parties, and key stakeholders. Whether or not the VAT increase will be approved by parliament remains to be seen. But one thing is certain: the final decision will have a big impact on the country’s economy and on the pockets of millions of South Africans.

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