Government's late VAT hike reversal hits business

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The government’s handling of the 2025 budget has led to unnecessary costs for businesses, who prepared for a VAT hike that was ultimately scrapped.

Businesses Struggle Amid Government Indecision

Finance Minister Enoch Godongwana formally withdrew the proposed 0.5 percentage point VAT increase on Thursday, 24 April, but business leaders say the decision came too late to prevent the damage.

According to BusinessTech, many companies had already spent millions preparing for a hike that, in their view, should never have progressed as far as it did.

Introduced as part of the 2025 fiscal framework, the VAT hike caused confusion from the outset.

On 1 April, instead of amending the budget, Parliament’s Standing Committee on Finance passed the framework along with a non-binding recommendation to change it.

Parliament narrowly adopted the framework, including the VAT hike, after smaller parties supported it.

The DA, EFF, and Freedom Front Plus opposed the move. Highlighting fractures within the GNU just months after the 2024 elections.

Keitumetse Sesana, Strategic Lead at the South African Institute of Taxation, said, “This reversal is a win for businesses, but it comes too late for many. Millions have already been spent preparing for the increase, and that money is now lost.”

Legal Pressure Mounts on Treasury

The government’s U-turn came shortly after the DA and EFF launched a legal challenge, questioning the finance committee’s process according to Daily Maverick.

Judges reportedly expressed concern that MPs had approved the fiscal framework without fully understanding its contents.

DA federal chair Helen Zille said the legal action forced Treasury to back down, though other parties are expected to claim credit for the reversal.

Withdrawal Leaves Budget Shortfall and Cuts Support for Poor

SA News reported that treasury said the withdrawal of the VAT increase will leave a revenue shortfall of R75 billion over the medium term.

To address this gap, the Finance Minister withdrew the Appropriation and Division of Revenue Bills and plans to table revised versions in the coming weeks.

The government had planned to use the VAT increase to replenish funding for essential services.

It also proposed measures to shield low-income households from the effects of the higher tax rate.

The scrapping of the VAT increase has led the government to cancel support measures and consider broader spending cuts.

SARS Under Pressure to Recover Lost Revenue

The department now expects the South African Revenue Service (SARS) to increase collections to close the gap.

Jerry Botha, managing partner at Tax Consulting SA, warned this may place extra pressure on already overburdened taxpayers.

While SARS recently exceeded collection targets, there is no certainty that trend will continue.

Minister Looks to Spending Cuts

Godongwana has ruled out immediate revenue alternatives that could further slow economic growth. Instead, Treasury will ask Parliament to adjust spending plans to protect fiscal sustainability.

“Some suggestions for raising revenue carry bigger risks for growth and employment,” he said. “We need solutions that do not worsen the economic outlook.”