The value-added tax (VAT) increase will have significant implications for low-income households, particularly concerning essential goods and services such as transport, food and electricity.

The new rate was increased from 15% to now 15.5% by Finance Minister Enoch Godongwana this week and will be effective May 2025, if the Budget is ratified by Parliament.

Andrew Bahlmann, the Chief Executive Officer of Deal Leaders International broke down what the new increase will mean for your transport and electricity bill.

Bahlmann said that South Africa’s public transportation services, including buses and trains, are typically exempt from VAT.

Consequently, the VAT hike should not directly influence public transport fares.

“However, indirect effects may arise if transport providers face increased operational costs due to higher VAT on other inputs, potentially leading to fare adjustments. If transport providers pass on higher costs due to increased VAT on fuel, maintenance, and other inputs, the fare increase will depend on the extent of those cost adjustments,” he added.

Bahlmann said that if we assume an indirect increase of 1% to 3% in fares due to these cost pressures, the additional monthly cost for a poor person spending R1,000 on transport could range from:

1% increase → R9 extra per month
2% increase → R18 extra per month
3% increase → R27 extra per month

Electricity

Electricity is subject to VAT and for a household consuming, for instance, 350 kWh per month at an average rate of R2.00 per kWh, the monthly electricity cost is R700.

With the VAT increase, the additional cost would be R3.50 per month (0.5% of R700), totalling an extra R42 annually, he said.

Food

Bahlmann noted that while individual increases may seem modest, the cumulative effect on low-income households can be more pronounced.

“For instance, the Pietermaritzburg Economic Justice & Dignity Group reported that the average cost of a household food basket increased from R5,277.30 in February 2024 to R5,313.22 in February 2025. Applying the 0.5% VAT increase to this basket adds approximately R26.57 per month, or R318.84 annually.”

Is the VAT increase a solution or just a short-term fix?

Dr Velenkosini Matsebula, a senior lecturer in development finance at Stellenbosch Business School said that the VAT decision, though justified as necessary to fund critical social services, is yet another indication that the economy is caught in a self-perpetuating cycle of stagnation, increasing public debt, and over-reliance on a shrinking tax base.

He said that government justified raising VAT by arguing that increasing corporate or personal income taxes would be more harmful.

Corporate tax revenue is already declining due to reduced business profitability, and personal income tax is high relative to GDP.

With nearly 28 million South Africans relying on social grants, further tax increases could weaken consumer spending, according to the scholar.

Meanwhile, South Africa’s GDP growth has been stagnant, averaging below 2% over the past decade, with only 0.6% growth in 2024 and a projected 1.8% medium-term growth rate.

Matsebula said that this slow growth limits the state's ability to expand its tax base, meaning additional tax hikes only burden existing taxpayers without significantly improving public finances.

IOL BUSINESS

Get your news on the go, click here to join the IOL News WhatsApp channel.