Value-Added Tax (VAT) was in the spotlight after Mininster of Finance Enoch Godongwana announced a hike in VAT over the next two years in a bid to raise R72b.

Minister Godongwana announced that the current 15% VAT will be raised to 15.5% from May 1 and to 16% from April 1, 2026.

In an explainer after the Budget Speecth, PWC wrote that the extra revenue raised by the increased VAT will primarily be used to fund early childhood education, to employ more healthcare workers and rebuild commuter rail transport.

VAT explained

VAT is a consumption of tax charged on goods and services at each stage of production and distribution. It is a crucial source of revenue for the South African government, amounting to approximately 25% of total tax revenue.

The South African Revenue Service (SARS) collects VAT on behalf of the government.

When a consumer purchases an item, the seller adds VAT to the price and then pays it to SARS.

The collected VAT is deposited into the National Revenue Fund, which is the government’s main revenue account.

The role of VAT in economic policy

According to economist Jenny Mokhaukhau, VAT is a key component of a country’s fiscal policy, as it generates significant revenue to fund essential public goods and services.

Also read: How a VAT increase will impact your grocery bill

“By levying VAT on consumption, governments can reduce income inequality, promote economic growth and support sustainable development,” she said.

VAT revenue is allocated to critical public services such as infrastructure development, including roads, bridges and airports. A portion of the revenue also goes to the Provincial Equitable Share and the Local Government Equitable Share, which fund education, healthcare, social welfare programmes, law enforcement and defence.

This includes support for schools, educational institutions, public hospitals and clinics.

Additionally, VAT revenue assists vulnerable populations, such as the elderly, people with disabilities and low-income households.

Minister Godongwana announced that the list of food items that are exempt from VAT will be expanded to include more meat and vegetables to support low-income households.

Some of the funds are also allocated to provincial governments, municipalities and state-owned enterprises.

VAT and economic growth

VAT contributes to economic growth by funding infrastructure projects, fostering entrepreneurship and supporting small businesses and local economies.

It can also influence consumer behaviour by encouraging environmentally responsible purchasing decisions.

By paying taxes, individuals contribute to societal well-being, economic growth and responsible governance.