South Africa scrapped a planned 2-point VAT increase after concluding that better tax compliance could close the fiscal gap. The revenue authority received €375 million for digital and AI upgrades, having warned that outdated systems leave about €40 billion uncollected each year. After the investment, net revenue rose by €3.9 billion in the first half of 2025/26, contributing to a €900 million surplus. The authority is accelerating its Tax Administration 3.0 programme — including digital identity, AI-driven compliance, instant payments, and full VAT and customs modernisation. Modelling indicates annual revenue could increase by €22–€23 billion with continued funding. Civil groups argue the stronger collections show a VAT increase was unnecessary.
South Africa Scraps VAT Hike After Digital Upgrades Boost Tax Compliance
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Author: Ljubica Blagojević
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The authority is now accelerating its Tax Administration 3.0 modernisation programme, which aims to build a smart, integrated digital tax system using advanced data science, secure digital identity, and upgraded VAT and customs platforms. Civil society groups have said this improved performance shows a VAT hike was unnecessary.
The revenue authority has stressed that continued investment is essential to sustain digital transformation, reverse years of underfunding, and remain aligned with global tax administration standards. Internal modelling suggests that with full funding, annual collections could increase by €22–€23 billion.
After initially rejecting the request, government approved the €375 million allocation in the delayed 2025 Budget to strengthen compliance and curb illicit economic activity. Subsequent fiscal updates showed improved revenue forecasts, with expected collections rising from about €99.3 billion to €100.2 billion. Gross revenue for the first half of 2025/26 reached approximately €57.9 billion (€46.2 billion net), up €3.9 billion from the previous year and contributing to a budget surplus of about €900 million.
Nearly half of this over-performance was attributed to strengthened compliance enabled by improved systems and cooperative taxpayers. Main modernisation initiatives include:
- AI-driven workforce upskilling
• A national digital identity system
• A unified taxpayer account platform
• AI-enhanced case-management tools
• A real-time, risk-based compliance model
• An instant-payment system integrated with the central bank
• Full modernisation of VAT administration
• Upgrades to customs and excise operations
Civil society organizations welcomed these developments, arguing that stronger institutional capacity is more effective than tax hikes and reduces pressure for future VAT increases.
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