Alcoholic beverages and cigarettes also receive a tax increase.
National treasury said an additional personal income tax rate increase would have had greater negative consequences for growth and investment than a VAT hike.
Old age, disability and care dependency grants for 3.7 million people will increase on April 1, 2018 from the existing R1 600 by R90 to R1690 and by a further R10 to R1 700 on October 1, 2018.
With a budget shortfall of R50 billion and government juggling numbers to find R40 billion for free tertiary education, compounded by the economy only growing at an uneasy 1%, the finance ministry will need to resort to tax increases to try and balance the books, without increasing government debt.
"Considering this, the smaller increase was a reasonable decision", it said, adding that businesses and consumers would also feel the effect of an increased fuel levy.
"Some relief will be provided for lower income individuals through an increase in the bottom three personal income tax brackets and the rebates". And figure out he did, allocating an additional R57 billion of funding for fee-free higher education.
This is the second time he has mentioned the startup fund, the first being previous year in October during the 2017 Medium Term Budget Policy Statement. This will be rolled out in subsequent years until all years of study are covered. Returning students who had received financial support from the National Student Financial Aid Scheme would see their loans converted into bursaries.
However, buried in the budget review document was the cyanide in the punch: cuts to other education programmes in the medium term, including goods and services.
"If the government is serious about water scarcity, climate change and a turnaround strategy for (cash strapped power utility) Eskom, the only viable option is for the utility's entire coal-based business model to be completely revised, and for water-intensive projects like mega coal-fired power station Kusile to be cancelled", Greenpeace Africa said.
"Government is concerned by the potential job losses in vulnerable farming communities as a result of the drought".
Therefore, although the Wits unit admits that increased Value-Added Tax is successful if considered exclusively from the perspective of revenue-raising, it cautions that the potential negative impact on the poor should not be ignored when other options are available.
He also said Treasury "had to strike a balancing act" by dealing with the economy's problems rather than taking a populist, pro-growth programme to win the next election.