Households in South Africa facing high electricity bills are forced to seek other forms of financial relief as the Ministry of Finance has ruled out the possibility of cancelling Value Added Tax (VAT) on electricity purchases.
According to DebtBusters, electricity tariffs have increased by 101% since 2021 and could reach 165% over the last decade. Despite these significant increases, the Ministry maintains that it does not plan to set a zero rate for electricity, either fully or up to a certain household consumption level.
The Department notes that the Ministry of Finance is aware of the tariff increases in recent years, but it has not yet conducted a specific assessment of the impact of VAT on electricity for low-income and middle-income segments. The Ministry insists that maintaining a broad VAT base is critical for the efficiency of the tax system, and a zero rate would lead to a reduction in government revenue.
According to the South African Revenue Service for 2025, the electricity, gas, and water sector generated approximately 22.21 billion rand in net VAT income in the 2024/25 fiscal year. Calculations show that an additional 150 rand in VAT is paid on a purchase of 1000 rand, and 450 rand on a purchase of 3000 rand.
Political pressure for VAT exemption
The uMkhonto weSizwe (MK) party is one of the parties advocating for including electricity in the list of goods and services subject to a zero VAT rate. MK Member of Parliament, Crown Prince Adil Nchabaleng, stated that the party presented this proposal to the Ministry during debates on VAT increases last year.
Nchabaleng emphasized that VAT increases financial pressure on households already struggling to pay for electricity. He considers it senseless to levy VAT on electricity in a weak economy that has yet to recover. Furthermore, he characterizes the tax as an 'inflationary tool' that diminishes the value of state-provided services.
He also raised the issue of double taxation, pointing out that VAT is charged even on free basic electricity, even though this provision is a grant. Nchabaleng noted that a household with an annual income of 50,000 rand spending 1000 rand per month on electricity dedicates almost a quarter of its annual income to energy, of which 1800 rand over 12 months is attributable to VAT.
However, the Organisation Against Tax Abuse (Outa) has not taken a final position on exempting electricity from tax. Executive Director Advocate Stephanie Fick believes that electricity should be subject to VAT unless it is recognized as a vital service requiring exemption. She added that the state would lose significant revenue that it cannot afford if it fails to act effectively.
The Ministry has not calculated the current fiscal cost of zero-rating all residential electricity and has not modeled the potential costs of exempting the first 50, 100, or 200 kWh consumed monthly by households.
Long-standing debate over zero rate
The proposal to cancel VAT, even partially, on household electricity consumption is not new. When VAT was introduced in 1991, the VAT Committee reviewed requests for a zero rate for basic electricity volume. It was ultimately decided that assistance to poorer households should be provided outside the tax system, rather than through VAT concessions.
This issue resurfaced in 2007 when the Ministry commissioned a study on the feasibility of maintaining existing VAT concessions. The analysis showed that a zero rate on electricity would be regressive, as wealthier households consume more electricity in absolute terms and would therefore receive the greater financial benefit. At that time, households spent about 15 billion rand annually on electricity, generating approximately 1.85 billion rand in VAT revenue.
In 2018, electricity was considered again when an independent commission appointed to review the list of zero-rated goods in South Africa received proposals for its inclusion. The commission rejected this proposal for similar reasons, concluding that higher-spending groups constitute a larger share of electricity expenditure and consequently receive greater benefits.
Free basic electricity remains the government's preferred option
Instead of providing aid through the VAT system, the government continues to rely on the Free Basic Electricity program to support needy households. Eligible households are allocated 50 kWh of electricity per month, and 21.6 billion rand has been allocated for basic energy in the 2026/27 budget.
The adequacy of this volume is currently under discussion. Last Friday, the Department of Energy published a revised Electricity Pricing Policy for public comment. The Department stated that pricing must balance economic efficiency with 'affordability and social justice considerations.' The policy stipulates that low-income households must have access to basic electricity through special or essential tariffs and other forms of direct or indirect subsidies.
The Ministry asserts that an intergovernmental working group is examining whether the existing monthly allocation of 50 kWh remains sufficient. However, the department warns that increasing this volume may not help more households if existing issues with the distribution of free basic electricity are not resolved. The Ministry points out that many needy households still do not receive the full benefit of the current provision due to weaknesses in registration, targeting, and delivery systems. Therefore, increasing the volume itself will not improve access or guarantee that additional funding reaches the intended recipients.
