Anticipated Increase in Consumer Prices Linked to VAT Hike Implementation Costs

Businesses will have to adapt their systems due to a 0.5 percentage point rise in the standard value-added tax (VAT) rate, and this additional cost may be transferred to consumers.

Kabelo Moutloatse, a senior expert in tax debt and accounting at Latita Africa, stresses that companies need to evaluate whether they can absorb the increased VAT costs by reducing their profit margins or if they will need to pass these costs on to customers through price hikes.

Read: Various political influences on tax policy

“The decision will be influenced by several factors, such as market competition, consumer demand, and the long-term sustainability of the business. Strategically addressing the VAT increase will be vital for companies aiming to stay profitable and competitive,” Moutloatse advises.

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

Read: #Budget2025 overview – Godongwana advocates for a 0.5 percentage point VAT increase

While the VAT rate adjustment may not require major regulatory or procedural changes, it will require significant updates to systems and processes.

Businesses will have a month before the new VAT rate takes effect, which most will likely utilize to finalize any pending quotes and pro forma invoices, aiming to prevent substantial price increases while informing customers or clients about the upcoming change in the applicable rate.

“In previous instances of VAT rate increases, we’ve seen confusion arise in billing and related systems, but it should theoretically be manageable,” asserts Moutloatse.

He highlighted that companies will need to adapt their systems in light of the VAT hike, and those involved in food sales must ensure that any items currently classified as zero-rated are correctly categorized.

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The need for decisive action
Zero-rated food items will encompass offals and canned vegetables
Concerned about the wording of the new VAT zero-rated list? You’re not alone

Beginning May 1, the list of VAT zero-rated food items will expand to include edible offal from cattle, sheep, goats, and swine, as well as specific cuts like heads, feet, bones, and tongues. Additionally, select dairy liquid blends and canned vegetables will be exempt from VAT.

“For businesses preparing pro forma invoices for their clients, it’s crucial to ensure that invoices are finalized before the implementation of the new rate or to adjust their pro forma invoices accordingly. Failing to do so could lead to higher prices for clients or decreased revenue for businesses,” Moutloatse explains.

Retailers are still evaluating their strategies and have chosen to refrain from commenting at this time.

Woolworths mentioned: “Our teams are currently planning our response to the VAT increase, a process that will take some time to finalize.”

Moutloatse cautions that businesses with long-term supply contracts that are unable to adjust for the VAT increase may experience reduced profitability, especially those with slim margins.

Read: No budget cuts, only tax increases: Treasury’s solution to the fiscal crisis

An additional anticipated challenge, besides potential errors in system updates for the new VAT rate, is the risk that many businesses may neglect to implement the necessary changes.

Moutloatse observes: “Given that most businesses file VAT returns bi-monthly, this presents a unique risk if one’s VAT reporting period overlaps with the two-month transition. 

“Companies must ensure that when they file their declaration for the May 2025 period, they accurately account for the VAT discrepancy.”

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