South Africa's finance ministry has confirmed the cancellation of the proposed increase in value-added tax (VAT), initially scheduled for May 1. This decision comes after significant opposition from political parties and internal disagreements within the ruling coalition government. The National Treasury had planned to raise VAT by 1 percentage point over two years as part of the 2025 national budget's revenue measures, with an initial 0.5 percentage point increase on May 1 and another 0.5 points expected the following year. However, this proposal led to discord between the African National Congress (ANC) and the Democratic Alliance (DA), the two largest coalition partners.

The finance ministry has stated that VAT will remain at 15% for the time being. Finance Minister Enoch Godongwana is set to introduce a revised version of the Appropriation Bill and the Division of Revenue Bill in the coming weeks, following consultations with political parties and parliamentary committees. The ministry has acknowledged that the absence of the VAT increase will result in a projected revenue shortfall of approximately 75 billion rand ($4.02 billion) over the medium term. Parliament will be tasked with adjusting expenditure to ensure the fiscal sustainability of the country’s finances.

The proposed VAT hike also faced legal challenges, with Minister Godongwana arguing that failing to raise VAT would severely harm state finances. Some smaller political parties suggested alternative solutions, such as deeper expenditure cuts, but the ministry claimed that these would not generate immediate revenue to replace the VAT increase. While the decision to forgo the VAT hike may temporarily ease political tensions, it poses a significant fiscal challenge for South Africa’s government as it aims to balance its budget amid increasing economic pressures.

The Economic Freedom Fighters (EFF) are demanding the immediate resignation of Finance Minister Enoch Godongwana and National Treasury director-general Duncan Pieterse following the reversal of the proposed VAT hike. EFF spokesperson Sinawo Thambo criticized the 2025 budget as “misguided, ill-conceived, and reckless,” arguing that it fails to address the economic crisis, unemployment, and poor economic growth in South Africa. Thambo also stated that the budget process was flawed and the proposals “illegal and unconstitutional.”

Other political parties, including the DA, ActionSA, Build One SA, and the IFP, also opposed the VAT hike. Build One SA leader Mmusi Maimane welcomed the VAT hike reversal, praising the negotiations that led to the decision. The DA and the EFF had challenged the VAT hike in court, while other parties engaged with the ANC to find alternative solutions. The government's decision to scrap the VAT increase may have been influenced by a legal challenge and settlement talks, with lawyers representing Finance Minister Enoch Godongwana allegedly approaching the DA’s legal team with an out-of-court settlement proposal.

National Treasury has indicated that the decision to maintain VAT at 15 percent follows extensive consultations with political parties and careful consideration of recommendations by parliamentary committees. Azar Jammine, Director & Chief Economist at Econometrix, suggested cost-cutting measures and revised economic forecasts as alternative solutions to the revenue gap. The decision to withdraw the VAT hike highlights the importance of consultation and cooperation among political parties, signaling a shift towards more inclusive and democratic governance in South Africa. The finance ministry warns that the effect of this new move may mean a revenue shortfall of about R75 billion (roughly $400 million) over the medium term.