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 implications.
Image: Ayanda Ndamane / Independent Newspapers
By Bhekani Zondo
The South African government has proposed an increase in several taxes such as the Value Added Tax (VAT) and excise duties, as part of its fiscal strategy to generate additional revenue and address public health concerns. 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 6.83% 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 implications.
These measures, aimed at boosting revenue and addressing public health concerns, will significantly impact household consumption, economic growth, and key industries, such as the agriculture and food manufacturing.
While taxation is a crucial instrument for fiscal sustainability, its unintended consequences must be carefully managed to mitigate economic shocks, especially for low-income households and vulnerable industries.
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 R13.5 billion annually. However, historical trends indicate that such increases can exacerbate poverty and inequality.
For example, research suggests that the 2018 VAT increase from 14% to 15% led to a marginal rise in poverty, highlighting its regressive nature.
Moreover, a collaborative study by researchers at the National Agricultural Marketing Council (NAMC) and the University of Pretoria (UP) on quantifying the economywide effects of the proposed hikes in VAT and excise duties reveals that the proposed VAT increase will have an inflationary effect of 0.04% and 0.03% in 2025 and 2026, respectively. In the medium term, gross domestic product (GDP) is projected to decline by 0.21%, while household consumption will contract by 0.22%.
Notably, the reduction in disposable income and subsequent decline in economic activity because of the proposed tax increases may result in lower personal income and corporate tax collections, counteracting some of the anticipated revenue gains.
Considering these general equilibrium effects, an increase in the VAT rate to increase government revenue by R30 billion is foreseen to increase a net tax collection of only approximately R20 billion.
In terms of sector-specific effects, industries heavily reliant on VAT-inclusive purchases, such as vehicles, electronics, and retail, will be most affected. In agriculture, output across all subsectors is expected to decline, with forestry (0.4%), livestock (0.26%), field crops (0.24%), and horticulture (0.23%) experiencing notable contractions.
Food manufacturing will also be affected, with the fisheries industry experiencing the sharpest sales decreases (0.41%), followed by grains (0.34%) and meat processing (0.29%).
To minimise the likely regressive impact of the VAT increase, the government has proposed expanding the list of VAT zero-rated foodstuffs.
The government’s idea of expanding the list of zero-rated food items is recommended to soften the impact especially against low-income households, but additional targeted interventions may be necessary to prevent exacerbating food insecurity, which already affects 3.7 million households.
Excise taxes serve a dual purpose: raising revenue and curbing the consumption of harmful commodities. South Africa has long used excise duties on alcohol to align with the World Health Organization’s global strategy to reduce alcohol-related harm.
Despite these measures, per capita alcohol consumption remains at 7.1%, underscoring the challenge of achieving significant behavioural changes solely through taxation.
The proposed 6.83% increase in excise duties is expected to generate R1 billion in additional revenue. However, economic simulations indicate a 0.01% decline in GDP and a marginal drop in household consumption.
More significantly, the beverage industry, particularly wine and brandy will see a 1.5% decline in output sales. This translates to approximately R150 million in lost wage earnings, with potential spillover effects on agriculture and retail.
South Africa’s wine industry, a major economic contributor, is already grappling with climate change, reduced producer numbers, and illicit trade.
The additional tax burden may further erode its competitiveness.
The introduction of a three-tier progressive excise duty rate structure, based on alcohol content, adds another layer of complexity.
While this measure aligns with public health objectives, it risks driving more consumers toward illicit or lower-taxed alternatives, undermining the intended fiscal and health benefits.
While the government’s fiscal strategy seeks to stabilize public finances and promote healthier lifestyles, the economic trade-offs must not be ignored.
VAT increases, if not paired with robust mitigation measures, could deepen inequality and slow economic growth. Expanding the zero-rated food basket is a crucial step, but further social protective measures may be required to prevent worsening poverty levels.
For the alcoholic beverages sector, targeted support measures, such as trade promotion strategies and incentives for value-added production could assist to offset potential job losses and economic contraction.
Additionally, strengthening food security policies will be crucial to ensure that rising consumer costs do not exacerbate hunger and malnutrition.
Ultimately, a holistic approach that balances revenue generation with economic resilience and social equity is essential. Fiscal sustainability must not come at the cost of deepening hardship for vulnerable households and key industries.
BUSINESS REPORT