How a 0.5 percent point VAT increase will squeeze South Africans

A 0.5 percent point VAT increase may seem like a small adjustment, but even the tiniest hike puts pressure on an already unstable SA economy.

What does the 0.5 percent point VAT hike mean for South Africans? Image: canva

How bad could it be? While a 0.5 percent point increase in South Africa’s Value Added Tax (VAT) might seem insignificant on paper, for millions of citizens already struggling with rising costs, it’s yet another financial burden South Africans now have to deal with. The government justifies tax hikes as a way to boost revenue, but the reality is that this increase will hit ordinary consumers, small businesses, and economic growth in ways that simply can’t be ignored. Take a look…

VAT hike: A direct hit to consumers

VAT is a tax on spending, which means that every South African – rich or poor – will feel the pinch whenever they buy goods and services. The wealthier segments of society may absorb the increase without much trouble, but for lower- and middle-income households, it’s a different story.

Many South Africans already battle impossibly high food prices, rising fuel costs, and stagnant wages. Although certain essential food items remain VAT-exempt, many everyday necessities – including electricity, hygiene products, and public transport – will now cost more. A family already struggling to cover monthly expenses will find their budget stretched even thinner.

Less money, less spending, slower growth

South Africa’s economy heavily depends on consumer spending. When people have less disposable income, they cut back on non-essential purchases. This affects industries like retail, tourism, and hospitality, which rely on consumer activity.

For businesses, the VAT increase presents a dilemma: absorb the additional cost and risk lower profits, or pass it on to consumers and risk losing customers. Small businesses, which often have tighter profit margins, are particularly vulnerable. If consumers spend less and businesses earn less, economic growth slows down – a scenario South Africa simply can’t afford.

Government revenue vs. economic reality

The South African government argues that raising VAT helps fund essential services and reduce debt. While this is true to some extent, there’s a fine line between increasing tax revenue and stifling economic activity.

If the VAT hike results in reduced consumer spending and struggling businesses, it could offset the intended revenue gains. Lower business profits mean less corporate tax collected, and lower consumer spending means fewer transactions subject to VAT. In the worst-case scenario, this ‘necessary’ increase could do more harm than good.