Anticipated Increase in Consumer Prices as VAT Hike Implementation Expenses Take Effect

Companies will need to modify their systems to accommodate a 0.5 percentage point rise in the standard value-added tax (VAT) rate, and this additional cost may be passed on to consumers. 

As noted by Kabelo Moutloatse, a senior tax debt and accounting expert at Latita Africa, businesses should evaluate whether they can absorb the higher VAT costs by reducing their profit margins or if they need to shift the expense onto customers through increased pricing. 

Read: Many political elements in tax policy

“The decision will be influenced by various factors, such as market competition, consumer demand, and the overall sustainability of the business. Strategizing effectively on how to manage the VAT increase will be vital for companies looking to stay profitable and competitive,” Moutloatse advises. 

During his budget speech, Finance Minister Enoch Godongwana proposed an increase in South Africa’s VAT rate by 0.5 percentage points in 2025/26 and again in 2026/27. 

Read: #Budget2025 summary – Godongwana suggests a 0.5 percentage point VAT increase

Although the change to the VAT rate may not necessitate regulatory or procedural modifications, it will require adjustments to systems and processes. 

Companies will have one month prior to the new VAT rate taking effect, which most use to finalize outstanding quotes and pro-forma invoices to prevent significant price increases while informing customers or clients about the upcoming change in the applicable rate.

“We’ve experienced, during previous VAT rate increases, that this can lead to confusion with billing and other systems, but it should be manageable in principle,” Moutloatse states.

He emphasized that businesses will need to adapt their systems for the VAT hike, and those that provide food products must ensure that goods that are now zero-rated are classified correctly.

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Zero-rated food items to include offals and canned vegetables
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Effective May 1, the list of VAT zero-rated food products will expand to include edible offal from sheep, poultry, goats, swine, and cattle, along with specific cuts such as heads, feet, bones, and tongues. Additionally, certain dairy liquid blends and tinned or canned vegetables will be exempt from VAT. 

“For businesses that generate pro-forma invoices for clients, they must ensure that invoices are finalized before the new rate is introduced or amend their pro-forma invoices. Failing to do so will either lead to higher prices for clients or reduced revenue for the businesses,” explains Moutloatse. 

Retailers are still determining their approach and have opted not to comment on the matter.

Woolworths remarked: “Our teams are in the process of deciding our approach to the VAT increase, which will require some time to finalize.”

Moutloatse warns that businesses with long-term supply contracts which cannot be adjusted in light of the VAT increase could face decreased profitability, particularly those operating on narrow margins. 

Read: No budget cuts, just tax increases: Treasury’s answer to the fiscal crisis

Another anticipated hurdle, in addition to potential errors when updating systems with the new VAT rate, is that many businesses might overlook making the necessary adjustments.

Moutloatse notes: “Given that most businesses file VAT returns every two months, this poses a distinct risk if one’s VAT reporting period coincides with the two months in which the change occurs.

“Businesses need to ensure that when they file their declaration for the May 2025 period, they account for the VAT difference appropriately.” 

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