South Africa’s proposed tax increases and their economic ramifications

THE South African government has proposed an increase in several taxes such as the Value Added Tax (VAT) and excise duties, as part of a fiscal strategy to generate additional revenue and address public health concerns.

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In the 2025/26 budget, the government proposed to increase VAT by 0.5% points in each of the next two years, bringing VAT to 16% by 2026/27.

In addition, excise taxes on alcoholic beverages are set to increase by 6.8% in the current fiscal year.

The South African government’s proposed tax hikes in VAT over the next two years and increase in excise duties on alcoholic beverages have ignited debates on their broader economic ramifications.

These measures are aimed at boosting revenue and addressing public health concerns, especially improving households consumption, economic growth, and key industries such as agriculture and food manufacturing.

While taxation is a crucial instrument of fiscal sustainability, its unintended consequences must be carefully managed to mitigate economic distortions and lower come households and vulnerable industries.

The VAT hike: revenue gains versus household strain

VAT is the second-largest contributor to South Africa’s tax revenue. However, as a consumption tax, it disproportionately affects low-income households, who allocate a larger share of their income to taxable goods.

The government projects that the VAT hike will generate an additional R13.2 billion annually. However, historical trends indicate that such increases can exacerbate poverty and inequality.