The government seeks to redirect a slice of VAT revenue to local government by giving municipalities a share of the more than R400bn South African Revenue Service (Sars) collects in VAT annually.
VAT is a key tool available to national governments to raise revenue, second only to personal income tax.
In the 2024/25 financial year, Sars raked in about R457bn in VAT, R733bn in personal income tax and R323bn in corporate income tax.
The proposal to dip into the VAT kitty forms part of the sweeping proposals by the department of co-operative governance & traditional affairs to overhaul municipal funding.
Minister in the presidency Khumbudzo Ntshavheni on Thursday said the cabinet has approved the white paper.
The origin-based VAT revenue sharing arrangement is outlined in the draft local government white paper, which was gazetted on Thursday. It is proposed as a replacement for the fuel levy income that has eroded since 2011 and is expected to decrease further as electric vehicles replace those with internal combustion engines.
Municipalities also depend on income from property rates, electricity charges and grants to fund operations. Property rates are, however, no longer sufficient as they have increased by 134% on average across all classes of municipalities since 2003, amid fast-growing cities that need more infrastructure and services.
The reforms are being proposed as political parties prepare for local government elections scheduled for November 4 in which service delivery and municipal governance are expected to dominate campaigning.
“Origin-based VAT revenue sharing would not affect the way VAT is levied,” the document states, adding that it will require statistical rules to assign geographic origin to revenue.
The transition will be managed to preserve revenue neutrality at the national level, with growth upside flowing to municipalities over time.
“This could be done by maintaining revenue neutrality at the transition while creating the basis for revenue increases as the local economy grows,” the white paper says.
“It would also reward municipalities that provide a good platform for growth by allowing them some share in the revenues generated by that growth.
“Origin-based VAT revenue sharing would not affect the way VAT is levied but would require the development of rules to statistically assign origin.”
Financial strain
The proposal comes as municipalities face mounting financial strain from rising debt, poor revenue collection and ageing infrastructure.
The white paper says many municipalities are trapped in a downward cycle in which service delivery failures erode public trust and payment levels, further weakening their finances and accelerating infrastructure decay.
Consumer debt owed to municipalities for services and taxes exceeded R400bn in 2024/25. Eskom’s tariffs to municipalities have risen 910% in nominal terms since 2008 against consumer price inflation of 147% over the same period.
Bulk service costs that consumed 47.6% of service charge revenues in 2003/04 now absorb 72%, leaving municipalities with 28% from every tariff rand to actually run their networks.
The fuel levy, which replaced Regional Services Council levies for metros in 2006, was meant to give cities a growth-linked revenue stream.
It has instead shrunk in real terms as high fuel prices, more efficient cars, and post-Covid commuting patterns compressed consumption. The white paper signals that an instrument tied to broader economic activity is needed in its place.
Proposed restructuring
The white paper also proposes restructuring of the broader local government fiscal framework. It proposes a differentiated system in which financially stronger municipalities retain greater revenue-raising powers while weaker municipalities could receive additional support from provincial and national government or have some functions shifted elsewhere.
The grant system, which distributes funding from national to local government, would be reoriented once new own-revenue instruments are in place. The intended effect is that growing metros, absorbing large flows of poor immigrants, would eventually generate sufficient own revenue to reduce their dependence on equitable share grants, freeing those transfers for poorer rural municipalities that have no economic base to tax.
The national government lacks the “fiscal space to do so without squeezing other critical services such as education, health and policing”, the paper reads.
Due to the “extent of maladministration in parts of the system, there is no guarantee that increased transfers would translate into improved services or better financial discipline”, the paper reads.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.