South Africa: Scraping of Controversial VAT Hike After Major Pushback From Coalition Partners

Introduction:

Finance Minister Enoch Godongwana announced the reversal of the proposed Value-Added Tax (VAT) increase, confirming that the VAT rate will stay at 15% from 01 May 2025. The decision, announced on 24 April 2025, follows widespread discontent over its potential impacts on the average South African and how it would disproportionately affect low-income households already struggling with the rising cost of living. Within the Government of National Unity (GNU), internal divisions deepened over this issue. The hike was proposed by the African National Congress (ANC) but was strongly opposed by the Democratic Alliance (DA), its main coalition partner in the unity government.

2025 Budget and Proposed VAT Hike Opposition:

In February 2025, the finance minister postponed his budget presentation after fierce resistance to the proposal to increase VAT. He argued that the VAT increase would help cushion the most vulnerable from the effects of other tax measures. On 02 April 2025, the 2025 National Budget was passed following a debate in the National Assembly. The budget was passed with a slim majority of 192 for versus 182 against. The Inkatha Freedom Party (IFP), the Patriotic Alliance, and ActionSA, among others, voted for it, while the DA, Economic Freedom Fighters (EFF), and the uMkhonto weSizwe Party (MK Party) voted against it. Opposition parties, notably the DA and the Economic Freedom Fighters (EFF), voiced their strong objections to the proposed budget, particularly concerning a VAT hike which was to be increased by two percentage points to 17% over two years. The DA also threatened to withdraw its support for other key budget proposals unless the VAT hike was shelved. Both parties later filed court papers in the Western Cape High Court to challenge the legality of the budget process after it was passed by the National Assembly. According to the ministry, the initial VAT hike was meant to fund critical services such as healthcare, education and road infrastructure. The Congress of South African Trade Unions (COSATU) also warned that ignoring parliamentary concerns over tax measures would be a “travesty”.

Cracks in the GNU?

The budget impasse highlighted internal cracks within the coalition due to different views. Both parties, South Africa’s main political rivals, formed a coalition following the May 2024 elections despite having ideological differences on issues including foreign policy, land reform, education and health sector reforms. South Africa's business sector lobbied the two parties to enter into a coalition, seeing it as the best option to guarantee economic stability. Ahead of the passing of the budget, President Cyril Ramaphosa told the ANC caucus that if the DA fails to support the budget, it risks isolating itself from the GNU. President Ramaphosa also indicated that the DA would effectively be removing itself from the coalition if it chose to vote against the fiscal framework and revenue proposals. This was not the first time that both parties had clashed over a key policy. The DA strongly opposed the Expropriation Act, which allows for private land to be seized by the government without compensation in certain cases. The DA called the bill unconstitutional and accused Ramaphosa of signing it into law against its advice.

Challenges Ahead?

The finance ministry said the decision to repeal the tax was made after consultations with political parties and parliament but warned that it would cause a significant deficit in revenue. Although the decision to reverse the tax hike was met with a lot of praise, it leaves a R75 billion hole in projected revenue over the next few years. This will likely force the National Treasury to rethink spending plans. The DA had argued the government should cut expenditure instead, while some smaller political parties had also proposed deeper expenditure cuts. The Finance Minister is expected to introduce a revised version of the spending bill within the next few weeks. Godongwana is set to roll out updated versions of the Appropriation Bill and Division of Revenue Bill, spelling out how the government will adjust spending to cover the gap. The Treasury also indicated that Parliament must adjust its spending to protect fiscal sustainability, hinting that extra revenue from the South African Revenue Service (SARS) could help the economy.

Conclusion:

For now, the coalition appears to remain intact; however, DA Federal Council Chairperson Helen Zille said there was a lack of trust between the two groups, leaving the future of the coalition uncertain. Both parties had previously said that they remain committed to the coalition despite their disagreements. However, it is worth noting that the DA may have scored political points with the South African people by advocating against the VAT hike, as the party officials called it a “victory for all South African taxpayers”. The ANC, on the other hand, denied it had bowed to pressure by scrapping the VAT increase and that the decision had been taken out of "a shared commitment across party lines”. Following the announcement, the government is expected to implement expenditure adjustments to deal with the shortfall.