The potential impact on the hospitality sector with recent VAT increase

South Africa’s recent Value-Added Tax (VAT) increase, which saw a slight raising if the VAT rate from 15% to 15.5% in May 2025 and to 16% by April 2026, has sparked fierce debate, anger, and uncertainty. Political parties and analysts are sharply divided on its fallout: some warn of a crippling blow to an already strained economy, others see it as a necessary evil to shore up fiscal coffers. The impact on the country’s people—particularly the poor, who already grapple with a 32.9% unemployment rate and rising living costs—remains a key focus area, with fears of shrinking disposable incomes clashing against promises of expanded zero-rated essentials. Businesses, from spaza shop retailers to sprawling hotel chains, face an uncertain future, with opinions split on whether this spells doom and gloom or simply another hurdle in the rough-and-tumble of operating in South Africa.

As the dust settles, the hospitality industry stands at the crossroads of these tensions, bracing for what’s next. Whilst the increase from 15% to 15.5% and a further rise to 16% planned for April 2026. This gradual hike, though scaled back from an initially proposed jump to 17%, will still ripple through the hospitality industry, which includes hotels, restaurants, and all tourism-related businesses.  Here’s how it’s likely to play out based on current economic conditions and industry dynamics.

The hospitality sector, is already sensitive to cost pressures, and with this increase will immediately face higher operating expenses. VAT is levied on most goods and services in South Africa, so hospitality businesses will see increased costs for supplies such as some food items, beverages, cleaning materials, and over all utilities costs. An example of this is how a restaurant buying ingredients will now pay an extra 0.5% on taxable ingredients, which will immediately reduce profit margins (unless those costs are passed on to the customer). Hotels, which rely on a mix of taxable and tax exempt services (such as room rentals which are often zero-rated for foreign guests), will also see mixed impacts, but the taxable components such as in-house dining or spa services will get pricier to deliver due to the increase.

Another challenge that arises from the VAT increase, is the impact on the consumers and guests. The VAT increase raises the cost of dining out, booking local travel, or staying at hotels as domestic guests. Industry leaders have long argued that South Africa’s edge as a “value-for-money” destination is eroding and could further erode with higher taxes. If a meal costing R100 ex VAT, jumps from 115 rand to 115.50 rand with VAT added, and then to R116 next year, it does not seem to have a massive increase in this one transaction, but apply this to thousands of customers, it really does start to add up. The biggest impact will be on budget-conscious locals and tourists, as the increased costs could mean fewer outings or shorter stays, which then hits volume-driven businesses such as mid-tier hotels and casual restaurants the hardest.

Smaller operators, especially SMEs, are likely struggle most. These buisiness often lack the financial cushion to absorb any extra costs or the pricing power to pass them on without losing customers. A 2022 University of Pretoria study found that VAT hikes (such as the 2018 VAT increase from 14% to 15%) reduced the overall tax compliance among small businesses, and in some cases closure of small individual owned and run businesses. Another impact that was clear was an impact on cash-flow, which saw many businesses juggling or even resorting to loans to cope long-term as TAX creep set in. The larger multinationals might fare better, as they are in a better position to tweak pricing or leverage global brand loyalty, but it is independents who are likely to see bookings drop as TAX rates increase.

It is not all doom and gloom, as the government has announced it has a plan to zero-rate more essential food items such as offal, certain cuts of meat products such as heads, feet, bones and tongues as well as canned vegetables such as beans and peas) may soften the blow for businesses offering entry level food options, restaurants could try pivot to these items to keep costs down, though this is unlikely to help higher-end restaurants or hotels focused on more luxury experiences.

Tourism within South Africa as well as Africa as a global destinations is a key driver of the projected growth of the hospitality market currently worth $1.42 billion in 2025 to $1.76 billion by 2030 (in South Africa) could stall if South Africa looks less competitive to other African countries such as Kenya and Mauritius, where VAT rates may not impact as much.

Overall inflation is another wrinkle impacting doing business in South Africa. The Reserve Bank’s is already twitchy about price pressures -VAT increase could increase inflation (estimates suggest a 0.5% increase would lift inflation by 0.1-0.2 points), which impacts and leads to tighter monetary policies. Higher interest rates then squeeze consumers spending further, leaving hospitality businesses with fewer guests able to afford them. National Treasury has stated that it plans of getting around R28 billion more revenue in 2025/26 from this and other tax tweaks. The trouble is, should demand tank, this projected revenue will fall short.

It is important to remember that the 2018 VAT increase did not tank hospitality outright – overall revenue grew, but  slowly. However today’s context is far more tricky that 2018. Post-COVID recovery is uneven and has not completely gone back to 2018 levels, a coalition government of national unity (GNU), sees continuous disagreements, squabbling and uncertainty, as well as global travel being fiercely competitive. Industry voices, like Fedhasa’s Rosemary Anderson, have called such increases “devastating” for jobs and survival, most notably for small players. With employment in the hospitality sector nearing 1.3 million, any slowdown will hurt the industry, the country, and the people.

Simply put, the VAT increase will squeeze margins, drive prices up, and test the hospitality industry’s overall resilience. Those who adapt or change - perhaps by targeting less cost sensitive luxury travellers or pivot and make use of zero-rated goods - might weather it. Others, especially smaller outfits, could face a rough ride unless demand holds surprisingly strong