Vat hike will hit the poor hardest, says analysts

The government has expanded the basket of zero-rated food items as it increased VAT to 16% by the 2026/27 financial year, but analysts say this hike will drive the prices of essential goods adding strain to households.

A 0.5 percentage point increase will be implemented from May this year and another half a percentage point increase effected in April next year. Despite a climb down from the initial two percentage point increase proposed in February,  finance minister Enoch Godongwana still faces an uphill battle to secure political support for the budget. Disagreements in the government of national unity over the proposed VAT hike led to the budget speech being postponed last month.

Godongwana said the zero-rated items now include canned vegetables, dairy liquid blends and organ meats from sheep, poultry and other animals.

Section27’s budget analyst Matshidiso Lencoasa said VAT is a regressive tax – meaning it takes a bigger proportion of income from the poor than from the wealthy – and the “problem with zero rating is that in the past it is ineffective from holding back the prices of essential goods from going up”. 

Godongwana said there were several persistent spending pressures in health, education, transport and security that concerned the government’s ability to properly fulfil its service delivery mandate.

“After careful consideration, the government has decided to fund these,” he said.

“Deferring the funding of these sectors further would compromise the government’s ability to meet its constitutional obligations to the people. To raise the revenue needed, the government proposes to increase the VAT...”

Lencoasa said: “If government [says] ‘we are zero-rating these goods, and you won’t feel the prices going up’, the producers of goods will still increase the prices because their production prices are still going up.

“The final product might be zero-rated but the ingredients for making it are not always zero-rated, which means that they push the prices up for consumers – that was found in the past. Poultry is imported because we are not able to produce [enough for] our demand, which means that the tariffs make it more expensive. That is a thing that we caution against.”

Chief risk officer for Standard Bank, Thabani Ndwandwe, said the VAT increase seems small but it will hit low and middle-income earners the hardest.

“For consumers, this means everyday goods and services will become more expensive – from electricity and clothing to transport and personal care products. While basic food items remain VAT-exempt and more items [are now] VAT-exempt, the reality is that many essentials will see price hikes, adding further strain to household budgets,” said Ndwandwe.

Head of public policy and regulatory affairs at PSG Wealth, Ronald King, said the VAT increase would harm all households, especially poor and low-income ones.

“When viewed in the context of an environment of high, real interest rates that continue to constrain demand in the economy, an increase in the VAT rate would cause inflation to rise and reduce the buying power of consumers.

“It has been argued that zero rating can be used to ease the burden, but previous efforts to do so have had limited success,” King said. “There is no guarantee that zero rating will sufficiently lower prices for consumers, leaving poor households exposed to higher prices.”

Godongwana said alternatives to raising the VAT rate were thoroughly considered.

“We weighed up the policy trade-offs involved, including increases to corporate and personal income taxes. Increasing corporate or personal income tax rates would generate less revenue, while potentially harming investment, job creation and economic growth,” he said.

“Corporate tax collections have declined over the last few years, an indication of falling profits and a trading environment worsened by the logistics constraints and rising electricity costs ...”

Lencoasa described the budget as a “difficult” one for marginalised people.

“The VAT increase ... could constrain the amount of money that is available in people’s pockets every month. But, on the other hand, that money is intended to go towards strengthening the public healthcare sector so that people don’t spend as much money or experience as many barriers to accessing clinics, or taking their children to school,” he said.

A Wits University lecturer who specialises in administrative law and governance, Shadi Maganoe, said the decision to raise VAT, especially amid the already high cost of living, was deeply concerning.

“While the government’s justification for this increase revolves around funding critical sectors such as health, education, and infrastructure, it risks worsening existing inequalities.”

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