Get ready for a bumpy ride ahead – VAT increase, stealth tax and rising electricity prices

South Africans are about to face several financial challenges in the coming months as taxes and tariffs increase. The biggest concern is that the proposed increase in VAT (value-added tax) has distracted people from more pressing issues. Not only will South African citizens feel the impact of the VAT increase, but they will also face financial strain from other rising costs.

First, the poor will carry the weight of the VAT increase. Second, South Africans will see electricity prices increase by 12.7% starting April 2025. Third, citizens will also face a hidden tax often referred to as a “stealth tax”. All these changes mean that South African citizens will be financially worse off in the next few months.

Vat increase

The government plans to raise the VAT rate to 15.5% in May 2025 and to 16% in April 2026. This increase in VAT will most certainly result in an increase in the prices of goods and services. For example, if a blanket costs R400 before VAT, and the current VAT rate is 15%, the total price for the blanket would be R460 (including VAT). When the VAT rate goes up to 16%, the price of the blanket will rise to R464.

While this increase might seem small for one item, think about the number of shopping items a person buys each month. Also, VAT applies to many essential items, such as food, clothing, water, and electricity. Businesses can claim back the VAT they pay, but consumers cannot. This means that households carry the weight of VAT.

Some people argue that most essential goods are VAT-exempt or zero-rated, meaning they are sold at a 0% VAT rate. However, it is important to note that zero-rating does not cover all essential items that low income households need such as groceries, clothes, water and electricity.

Electricity price increase

Electricity prices in South Africa are already high, and more increases are coming starting in April 2025. In some areas, electricity prices are expected to rise by 12.7%. This increase will be made worse by a rise in VAT, which is applied to electricity. For example, if someone paid R1 000 for electricity in 2024, they will now pay R1 133 for the same units of electricity starting in April 2025.

Electricity is also a key cost for businesses when producing goods and services. Therefore, when electricity prices go up, the cost of producing these goods and services will increase. Businesses are likely to pass these extra costs onto consumers, meaning that people will pay more for groceries, clothes, furniture, and other essential items.

Ordinary citizens will most certainly feel the impact of these price increases. Businesses might also struggle to keep up with the increase in operating costs, thereby retrenching several employees. This is already evident in most sectors as several businesses are shutting down and retrenching employees due to the high cost of doing business in South Africa.

Stealth tax

A stealth tax is a type of tax that people often don’t notice. The government has announced that it will not adjust tax brackets for inflation. This is a form of a stealth tax and implies that when employees receive their cost of living adjustments, which will likely happen in April 2025 or later, many workers will end up in higher tax brackets and will pay more in personal income tax.

For example, suppose an employee currently earns R25,000 per month and has an effective tax rate of 13.9%. If this employee receives a 7% cost of living raise, their salary will increase to R26,750 per month. However, they will then be in a higher tax bracket with an effective tax rate of 14.7%. If the government had adjusted the tax brackets, the employee would still pay more in tax, but it would be in line with their salary increase.

Also, this implies that certain people who didn’t have to pay tax before (because they earned below the threshold) will now have to pay tax. By keeping the tax brackets the same, the government expects to collect R18 billion more in tax revenue. Unfortunately, this will hurt taxpayers, especially those with lower incomes, as they will pay more in personal income tax.

Inflation

The combination of an increase in VAT and electricity prices will likely lead to higher prices of goods and services. This might contribute to inflation pressures and raise the inflation rate. If inflation goes up as expected, the Reserve Bank might respond by increasing interest rates, which would put more financial strain on ordinary citizens.

In conclusion, as of April 2025, South Africans can expect to witness a further rise in the cost of living. While most employees receive salary increases during this time, known as cost-of-living adjustments, they won’t be enough to cover the increased costs from higher VAT rates, electricity prices, and personal income taxes.

The whole point of cost-of-living adjustments is to ensure that inflation does not catch up with the salaries of employees. Unfortunately, this is not the case in South Africa.