South Africa Drops the Proposed VAT Increase After Political Conflict

South Africa plans to modify spending to make up for the revenue deficit after political opposition forced the country to abandon its intended VAT hike.

On Thursday, South Africa’s finance minister said that it will not proceed with the projected May 1 hike in value-added tax (VAT). The decision comes after internal conflicts within the ruling coalition government and strong opposition from major groups.

Initial plans for the National Treasury’s revenue strategies for the 2025 national budget included for raising VAT by 1% over a two-year period. On May 1, there would have been a 0.5 percentage point increase in this, and another 0.5 points are anticipated the following year. The Democratic Alliance (DA) and the African National Congress (ANC), the two biggest coalition partners, were at odds about the raise, though, and the idea caused them to disagree.

For the time being, VAT will stay at 15%, the finance ministry announced in a statement. In the upcoming weeks, Finance Minister Enoch Godongwana will instead present an updated Appropriations Bill and Division of Revenue Bill after consulting with legislative committees and political parties.

In the medium term, South Africa’s estimated revenue is expected to fall short by roughly 75 billion rand ($4.02 billion) in the absence of the VAT rise, the ministry said. As a result, Parliament will be urged to modify spending in a way that guarantees the nation’s financial stability.

Court challenges had also been made to the proposed VAT hike, with Finance Minister Godongwana claiming that the state’s finances would suffer if the VAT was not raised. According to the government, some smaller political parties offered substitutes, like more significant spending cuts, but they wouldn’t immediately bring in enough money to offset the VAT hike.

Short-term political tensions may be reduced by the decision to forgo the VAT hike, but the government of South Africa has a serious financial issue as it attempts to balance its budget in the face of mounting economic challenges.