BUDGET 2025 | Godongwana opts for modest VAT hike and other tax tweaks

Finance minister Enoch Godongwana has stuck to a VAT hike proposal but opted to do this by a 0.5 percentage point increase in each of the next two years, with no inflation-related adjustments to personal income tax or the fuel levy.

The budget the minister was supposed to table in February outlined a two-percentage point increase to VAT, taking it from 15% to 17%. Pushback at cabinet level, however, forced parliament to postpone the tabling of the budget to Wednesday.

These tax policy proposals, the Budget Review said, are designed to raise R28bn in additional revenue in 2025/2026 and R14.5bn in 2026/2027. While this did not cover the R60bn shortfall the original VAT proposal sought to close, it balanced service delivery and development goals.

Tabling the budget in a joint sitting of parliament, Godongwana said several persistent spending pressures were placed on health, education, transport and security, which the government has decided to fund “after careful consideration”.

“To raise the revenue needed, the government proposes to increase the VAT rate by half a percentage point in 2025/2026 and another half a percentage point the next year. This will bring the VAT rate to 16% in 2026/2027.

“Government also proposes no inflationary adjustments to personal income tax brackets, rebates and medical tax credits. These measures will raise R28bn in additional revenue in 2025/2026 and R14.5bn in 2026/2027.”

He told the joint sitting this decision was not made lightly and no finance minister is happy to increase taxes.

Briefing reporters in a lock-up briefing before the tabling of the budget, Godongwana said the cabinet meeting where the budget was discussed was “a tough time”.

“After a long time in discussions and people must have told you and someone commented in cabinet we have been debating the budget every week. This is a natural consequence of No inflationary adjustments are made to personal income tax brackets, rebates and medical tax credits, which will allow government to raise R28bn in additional revenue in 2025/2026 and R14.5bn in 2026/2027 government.”

The Budget Review document said gross tax revenue for 2024/2025 is now expected to be R1.85-trillion, which is R16.7bn below the 2024 budget projection. Adding to the pressure on revenue collections potential, consumers are still grappling with high living costs and key sectors continue to underperform.

“Over the next three years, tax revenue is expected to increase from R2.01-trillion in 2025/2026 to R2.31-trillion in 2027/2028, with an average tax-to-GDP ratio of 25.3% over the same period. The review proposes raising R28bn in additional revenue in 2025/2026 and R14.5bn in 2026/2027.”

The Budget Review said the 2025 budget lays the foundation for faster growth and stable public finances in an economic outlook were SA’s GDP growth over the medium-term is expected to average 1.8% while tax-to-GDP increases from 24.5% in 2023/2024 to 24.7% in 2024/2025.

The largest contribution over the medium-term is from the increases in the VAT rate, while personal income tax is increased in 2025/2026 by not adjusting the tax brackets, rebates and medical tax credits for inflation.

The budget’s tax proposals will fund key spending areas including health, education and early childhood development. Vulnerable households will be cushioned by real increases in social grants, fuel levy relief and an expansion of the list of zero-rated VAT foods.

“To mitigate the effects of higher inflation arising from fuel price increases, the general fuel levy has remained unchanged since 2022. Government proposes to keep the general fuel levy unchanged for 2025/2026, resulting in tax relief of about R4bn. The Road Accident Fund levy and the customs and excise levy will also remain unchanged.”

The Budget Review said the renewed 2025 budget is anchored by macroeconomic stability, structural reforms, state capability and growth enhancing infrastructure investment. However, the review acknowledged key tax categories had underperformed and revenue collection fell short.

“Though corporate tax receipts benefited from better than expected profitability, slower import growth led to under performance in import VAT collections. Fuel levy receipts contracted amid falling demand and large diesel refund payments. Import VAT collections fell by more than 20% between 2022/2023 and 2023/2024 as nominal imports slowed sharply.”

Despite domestic VAT performing better than expected, the contraction in import VAT led to significant downward revisions to net VAT collections compared with 2024 budget estimates. Corporate tax collections are expected to outperform 2024 budget estimates.

Zero-rated goods list grows

To cushion the VAT hike, the review said the VAT system, which zero-rates 21 essential food items, will be extended in an effort to make them more affordable for lower-income households to mitigate the effect of the VAT rate increases.

“From May 1 zero-rating will be extended to include edible offal of sheep, poultry, goats, swine and bovine animals; specific cuts such as heads, feet, bones and tongues, dairy liquid blend and tinned or canned vegetables,” the review said.

Cushion the blow

Zero-rating was a blunt tool to assist lower-income households because there is no guarantee there will be a reduction in prices, but if not well-targeted, could results in a large portion of the revenue forgone, benefiting higher-income households.

“Nonetheless, the 2022/2023 income and expenditure survey shows high consumption of the proposed additional items in the lowest four expenditure deciles. It is estimated that these measures will cost government about R2bn in forgone revenue.”

Pricier to sip and smoke

The Budget Review points to above-inflation increases on alcohol and tobacco excise duties as government doubles down on improving tax administration as well as broadening the tax base for sustainable collections.

The review proposed adjustments to the alcohol excise taxation policy framework, including the introduction of a three-tier progressive excise duty rate structure for wine and beer. Godongwana marginally reduced the increase in excise duty on alcohol from the 6.8% proposed in the February Budget Review.

“Considering that the details of the new alcohol excise taxation framework will be finalised only after the 2025 budget, government proposes to increase excise duties on alcoholic beverages by 6.75% for 2025/2026.”

The review said a 4.75% increase to the excise tax burden for cigarettes, tobacco, electronic nicotine systems and vaping products. It proposed a 6.75% increase to the excise tax for cigars and pipe tobacco. As a percentage of the retail price of the biggest brands for each category, the excise tax is now 40%.

From April 2, the carbon fuel levy will increase by 3c/l to 14c/l for petrol and 17c/l for diesel, as required under the Carbon Tax Act.

TimesLIVE