VAT Rate Changes and The Impact on SMEs

It was expected to see many VAT changes in 2025. In the third quarter of 2024, many outlets started reporting the proposed changes to value added tax in South Africa. These included changes such as a change in the VAT rate expanding the zero-rated food basket, amending VAT charges on e-commerce transactions, and narrowing the period for VAT claims.

VAT is tax that is charged on every stage of the production and distribution process, as well as on imported goods and services. Currently, it is the government’s second biggest source of income with income tax being the number one.

Proposed VAT Rate in South Africa

One of the biggest areas of debate the past few weeks has been about the potential VAT hike. The proposed rate change would move value added tax from 15% to 17%. The last time that the rate was increased was on 1 April 2018, when it was raised by 1%.

“Any increase to VAT will have a ripple effect on the cost of most goods and services as they will significantly go up,” says Nkosinathi Mahlangu, Youth Employment Portfolio Head at Momentum Group. “This will make day to day living more expensive for the South African consumers.”

He highlights that daily items like groceries, clothing, electronics and services will cost more for all consumers. “The poor households will find it steep to deal with the cost of essentials, even though some are deemed to be zero rated, but most items will remain in the VAT basket.”

But it isn’t just households that will be affected, small businesses will also feel the pinch. “Businesses, especially SMEs will be expected to increase prices to cover the rising cost of trade, and this may lead to loss of customers.

“The 2% VAT increase means an increase of goods and services for SMEs for two reasons. Firstly because of tax being added throughout the value chain such as raw materials and services that are VAT inclusive. Secondly, profit margins will be affected by the rising input cost thereof and business owners might struggle to keep up.

Mahlangu states that with the volatile economy in South Africa, consumers might reduce their spending due to the rise in prices. “VAT reporting may continue to be a challenge for the informal sector as it may be difficult to comply with VAT reporting,” he adds.

Why VAT Rate Changes Were Propposed

The easy answer to why the value added tax rate increase was recommended to parliament was because the income that the government received from VAT over the past few years have been steadily decreasing.

Within the previous financial year, the government only collected an additional 0,4% income through VAT. However, to make a noticeable difference in income, the government can increase the money received by R 60 billion if tax was increased to 17%.

This additional income is vital because the budget for the next tax year (2025/2026) had a R 22,3 billion shortfall. The minister failed to get cabinet approval for 15% to 17% and the publication of the new budget was withdrawn last minute, throwing the coalition cabinet into a deadlock of raising and not raising value added tax. To break the stalemate, President Ramaphosa suggested a 0,75% increase.

Coalition leaders have until 12 March to discuss the change before the new budget is implemented on 1 April.

What Can SMEs Expect?

Mahlangu highlighted that should the VAT not increase, or be implemented at a lower rate, there will be relief for SMEs. “This would mean consumers will continue to spend since prices will relatively be the same and input costs will not be tempered for the entrepreneurs.

“SMEs close to the VAT registration threshold will not feel the pressure for registration purposes. Overall prices will remain the same and this may be a competitive advantage for businesses.”

He concluded that this would possible the better outcome for small businesses, because the knock-on effect across the SME value chain would mean no administrative nightmare to adjust pricing. “This is a positive outlook for their survival and growth prospects in these tough economic times.”