For Ndumiso Madlala, the owner of a small South African beverage company producing alcoholic ginger beer and non-alcoholic drinks, the government’s plan to raise value-added tax (VAT) by 1 percentage point starting May 1 is causing significant concern.
The VAT increase, which will push the current 15% rate higher, is part of South Africa’s broader strategy to boost government revenue.
For small businesses like Madlala’s, the tax hike presents a difficult decision: raise prices or lower profit margins, neither of which are appealing options, especially in the current challenging economic climate.
“For us as small guys, you first hit a problem of being competitive on price,” Madlala said. “Big companies can just switch prices at any time; they can reduce their price to drive the volume up. For us, that’s something we can’t do.”
This VAT increase comes at a precarious time for South Africa’s economy, which has been struggling with various challenges, including slow recovery from a decade of unreliable electricity supply, internal political tensions, and global trade tensions.
Businesses have been hit hard by ongoing power cuts, which have pushed them to rely on costly alternative energy sources such as diesel generators.
In addition to rising energy costs, South Africans are grappling with inflation-driven increases in other essential services, such as electricity and water tariffs.
While the National Treasury has pledged to expand the basket of zero-rated VAT items to cushion the blow for low-income households, many economists believe this may not be enough to protect the broader population, including the middle class.
“VAT hikes are never a good idea,” said economist Nomahlubi Jakuja. “The ones that are going to be hard hit by any increases in VAT are the middle class to the poor. South Africa already has high levels of unemployment, and adding an additional tax on daily goods decreases the purchasing power of ordinary South Africans.”
The VAT increase, which is part of the revenue measures outlined in South Africa’s 2025 budget, has also intensified the rift within the ruling coalition, pitting the pro-business Democratic Alliance (DA) against the African National Congress (ANC).
The DA, the junior partner in the coalition, voted against the budget and is now taking legal action to block it.
Despite the political and economic uncertainties, Madlala remains hopeful, relying on the strength of his brand, Dragonfire Ginger, to retain customer loyalty.
“My comfort is the brand that I own, which is Dragonfire Ginger. It’s one of its kind,” he said. “So we find that our loyal base of customers comes back for our products all the time.”
