How the Proposed VAT Increase Could Impact Your Business & How to Prepare

The South African government is considering raising the Value-Added Tax (VAT) rate from 15% to 17%, which has brought about a debate about how this will affect businesses and consumers.

VAT is applied to almost all goods and services, meaning that an increase will have a direct impact on pricing, business expenses, and profit margins.

For business owners, understanding and preparing for this change is essential to be able to maintain financial stability and avoid compliance issues…

In this guide, we’ll explain:

• Why the government is thinking of increasing VAT
• How the VAT increase will impact your business
• Who needs to register for VAT and what the process involves
• How to adjust pricing without losing customers
• Why VAT compliance is essential to avoid penalties

Why is the Government Considering Increasing VAT?

The South African government is facing serious financial challenges, including:

1. Lower tax collection due to slow economic growth and tax evasion.
2. High national debt that needs to be repaid.
3. Increased government spending on social grants, healthcare, and infrastructure.

Why VAT? Why Not Increase Other Taxes?

The government collects tax in three main ways:

1. Personal Income Tax – Tax paid by individuals based on their earnings.
2. Corporate Tax – Tax paid by businesses on their profits.
3. Value-Added Tax (VAT) – A tax applied to most goods and services.

VAT is one of the easiest ways for the government to increase tax revenue because…

1. It applies to almost every transaction, making it a reliable source of income.
2. It spreads the tax burden across all consumers instead of only taxing high earners or corporations.
3. It is collected at multiple points in the supply chain, making evasion more difficult.

While VAT increases help the government raise revenue quickly, they also make everything more expensive, which can slow down the economy.

How Will the VAT Increase Affect Your Business?

A 2% VAT increase may not seem like much, but when applied to all business transactions, it actually has big financial consequences, such as…

1. Higher Costs for Businesses

All businesses that purchase goods or services will now pay more VAT on those expenses. This includes:

• Raw materials (for manufacturers, builders, and product-based businesses).
• Business services (marketing, legal, consulting, accounting).
• Imported goods (which already include import duties and VAT).

So, for example:

If you currently buy R100,000 worth of stock, you pay R15,000 in VAT (at 15%).

BUT, if VAT increases to 17%, you will now pay R17,000 in VAT, making the total cost R117,000.

This means your expenses increase, leaving you with less profit.

2. Higher Prices for Customers

Since VAT is included in final selling prices, businesses will need to increase their prices to maintain profitability.

An example would be…

A product that sells for R1,000 (VAT at 15%) includes R130.43 in VAT.

But at 17% VAT, the new price will be R1,017.09, with VAT increasing to R145.30.

This means customers will pay more, and some may reduce their spending, which could lower your overall sales.

3. Shrinking Profit Margins

If you don’t increase prices but instead decide to absorb the VAT increase, you will make less profit on every sale.

Here’s an example:

A business selling a service for R10,000 (VAT-inclusive at 15%) currently keeps R8,695.65 after VAT is deducted.

But at 17% VAT, the business will now only keep R8,547.01, reducing earnings by R148.64 per transaction.

For businesses already operating on small profit margins, this reduction can be very financially harmful over time.

4. Cash Flow Management Becomes Trickier

VAT is collected from customers but must be paid to SARS every two months.

Many businesses already struggle to set aside the VAT they collect, especially if they use the money for daily expenses.

And, if VAT increases…

• The amount businesses must pay SARS increases.
• Late VAT payments will result in financial penalties and interest.
• Non-compliance could trigger SARS audits and investigations, which is not something you want for your business.

To prevent cash flow issues, your business must set aside VAT funds separately to avoid unexpected tax debts.

Do You Need to Register for VAT?

With a possible VAT increase, even more businesses will reach the VAT registration threshold sooner due to higher sales and inflation.

1. Who Must Register for VAT?

If your business earns more than R1 million in revenue over a 12-month period, VAT registration is mandatory. If you fail to register, SARS can:

• Make your business pay fines for non-compliance.
• Backdate VAT payments, making you pay VAT on all past sales, even if you didn’t charge customers VAT.

Both of these are outcomes your business definitely wants to avoid.

2. Who Can Register Voluntarily?

Businesses earning R50,000+ per year can choose to register voluntarily. There are some benefits of voluntary VAT registration, such as: 

• You can claim VAT refunds on business expenses.
• It improves business credibility, making your company look more professional.

Need to register for VAT? Govchain can handle your VAT registration online quickly and easily.

How to Adjust Pricing Without Losing Customers

If VAT increases, your business will need a pricing strategy that keeps your profits stable while keeping your customers happy. You can do this by…

1. Increasing Your Prices Gradually

Instead of raising your prices all at once, increase them in small steps to reduce customer resistance and make the increase feel less shocking.

2. Offer More Value

If your customers must pay more, give them additional benefits like better service, loyalty rewards, or bundle deals to sweeten the deal.

3. Reduce Costs Elsewhere

Instead of increasing prices, cut operational costs (e.g., renegotiating supplier contracts, reducing waste

4. Be Transparent

Let your customers know that price increases are due to VAT changes rather than business greed. Chances are, they will appreciate the communication.

How to Stay VAT Compliant and Avoid Penalties

Here’s a VAT Compliance Checklist to Double Check Yourself…

✔ Register for VAT if required.✔ Submit VAT returns on time.✔ Keep detailed financial records.✔ Work with a tax expert or use a service like Govchain.

You’ve got this – and we’ve got you

If the VAT increase comes into effect, it will affect all businesses, but those who prepare in advance will protect themselves from huge financial risks, so it doesn’t have to be as stressful.

If you have any questions or concerns, our Support Team is always happy to assist!