By Azwidohwi Mamphiswana
Finance Minister Enoch Godongwana’s announcement of a value-added tax (VAT) increase in his revised 2025 Budget Speech has sparked concern among small business owners.
The revised plan proposes to raise VAT by 0.5 percentage points on 1 May 12025, followed by another 0.5 percentage points in April 2026, bringing the rate from 15% to 16% by the 2026/27 financial year.
While the government argues this will help close the fiscal gap, SMMEs fear rising costs and reduced consumer spending.
The VAT increase follows a week of rand weakness against the US dollar and internal disagreements within the Government of National Unity. Initially, Treasury had proposed a two percentage point VAT hike, but opposition amongst Cabinet members led to a last-minute postponement of the Budget in February.
Godongwana defended his decision to increase VAT.
“New and persistent spending pressures require additional funding, and after thorough consideration, raising VAT proved to be the best solution,” he said.
According to the National Treasury, the new tax measures are expected to generate R28 billion ($1.53 billion) in the upcoming fiscal year, significantly lower than the R58 billion initially targeted.
Small businesses, which form the backbone of South Africa’s economy, worry that the VAT hike will further weaken consumer demand, increase costs and slow down growth.
Oscar Siziba, head of coverage in business banking at Standard Bank South Africa voiced concern about the VAT increase burden on small enterprises.
“I think most SMMEs still believe they’re being taxed at levels that are punitive. This does not take into account that they are starting small, growing and needing encouragement to expand,” Siziba said.
Busisiwe Mtembu, who owns Sacred, which is a retail store in KwaZulu-Natal, warned that the increase could hurt sales.
“The VAT increase adds pressure on small businesses already struggling with high inflation and weak demand. Many of us cannot pass these costs onto customers without losing sales,” said Mtembu.
Clementine Phahlamohlaka, the owner of Lesedi Health Group in Limpopo, echoed similar frustrations.
“I am not happy because everything, including services, is going to be expensive,” Phahlamohlaka said.
To reduce the impact on small businesses and lower-income households, the government has expanded the basket of zero-rated VAT items, effective 1 May 2025. This expansion will include tinned vegetables, dairy liquid blends and various meat products.
The National Treasury has also introduced tax relief for businesses investing in renewable energy and increased funding for SMME support programmes.
Godongwana has acknowledged the concerns.
“This decision was not taken lightly. We thoroughly examined alternatives to raising the VAT.”
Despite these measures, business advocacy groups have warned that consumer spending could decline, particularly in industries reliant on discretionary income.
Some SMMEs are calling for additional tax exemptions or rebates to help offset rising costs.
President Cyril Ramaphosa said later in his reaction to the Budget in a television interview that “minister Godongwana has made the tough choices, and now Parliament will have to come up with solutions”.
Black Business Council president Kganki Matabane told the SABC that they would not support any VAT increases.
He said the hike would negatively impact SMMEs, especially since many of them were not registered for VAT and could therefore not reclaim the money from the SA Revenue Service.
