The postponement of the tabling of the 2025/26 budget on 19th February due to fierce disagreement among parties in the Government of National Unity (GNU) over the original proposed VAT increase of 2%, and the subsequent tabling of the budget on 12th March with a reduced 0.5% VAT increase has been described as a significant step in South Africa’ maturing democracy.
“For the first time, South Africa is no longer bound by the economic policies of a single party, forcing political leaders to negotiate better solutions,” says Stefan Kritzinger, head of Compliance and Support at Govchain. With Parliament yet to deliberate on the budget, Kritzinger urges bold decisions to steer economic growth, as government plans to extend the Covid-19 SRD grant, raise public sector wages by 5.5%, and manage rising debt, which hit 75.1% of GDP in September 2024. He advocates cutting unnecessary spending, implementing pro-business reforms like rail and port concessions, and conducting a comprehensive government spending review.
Nonetheless, businesses will need to start preparing for a likely VAT increase of 0.5%.
“VAT applies to multiple transactions for businesses, but absorbing the VAT increase through their purchases is only one side of the coin. Many companies still offer their own VAT rated goods or services. The increase in VAT creates a financial conundrum for business owners over whether to pass on that increase to the consumers by raising the price of their goods and services or alternatively absorbing the increase without raising the price and operate at a profit loss, with the hopes that this would increase sales over time,” Kritzinger described.
For many businesses teetering on the edge of financial distress, absorbing such a profit loss is just not a viable and sustainable option.
VAT must be paid over to SARS every two months by businesses, where many already struggle to set aside that amount when trying to cover their daily expenses.
Therefore, increasing prices of goods or services is an unfortunate reality to maintain VAT payments and avoid the consequences, which could also include SARS audits and investigations – something that can create reputational damage as well.
“Nonetheless, pricing strategies exist for scenarios such as VAT increases. Businesses can adopt a gradual pricing approach with some products or services being increased immediately while others are raised further on in the financial year. Alternatively, all products or services have their prices simultaneously increased gradually throughout the year. The result is nonetheless the same with reduced customer resistance and less price shock,” Kritzinger suggested.
Other methods can include offering customers more value with the price increase. These can come in the shape of loyalty programmes, bundle deals, or special discounts.
Whether businesses absorb the increase in VAT or pass it onto the consumer through price increases, there is still an opportunity for businesses to conduct an expenditure review with the objective of cutting redundant and wasteful operational costs. This would also empower businesses to relook at their suppliers and either renegotiate contracts or find new cost-effective ones.
“Tough times require tougher decisions, but with the right strategies in place, businesses have a chance to get through the rough fiscal waves that lie ahead,” Kritzinger concluded.
