Several difficult and new legal questions arise from finance minister Enoch Godongwana’s announcement on Wednesday night that he would “shortly” be introducing legislation to maintain VAT at 15% “from May 1 2025”.
The statement appears to contain an implicit acknowledgment that the minister is not, by law, empowered to simply, through an announcement, reverse the VAT hike.
This is because of the wording of section 7(4) of the VAT Act. It says if the minister, during his tabling of the budget, announces that the VAT rate is to be altered, “that alteration will be effective from a date determined by the minister in that announcement, and continues to apply for a period of 12 months from that date subject to parliament passing legislation giving effect to that announcement within 12 months”.
The factual scenario we are in has not ever been before a court, so all this is uncharted waters. But the section seems fairly clear: it gives the minister a one-off power, which has already been exercised; and which only parliament (or a court) can undo. The minister seems to agree with this view of the law and has already gazetted a notice of a Rates and Monetary Amounts and Amendment of Revenue Laws Bill. It provides for, among other things, “the reversal of the VAT increase”.
But can it be passed before May 1? There are only three working days before the increase comes into effect. The chances are slim.
This leads to the question whether the bill could amend the VAT rate retrospectively; in other words, whether the law, when it is passed in the future, could undo the VAT rate backwards, from May 1.
In court on Tuesday, lawyers on opposite sides of the case — for the DA and for the finance minister — agreed it could not. They both said that if parliament amended the VAT rate after May 1, the 0.5% increase would still come into effect on May 1 and would apply until parliament acted.
The VAT hike would be “immediate and irreversible”, said the DA’s counsel, Michael Bishop, in court. It would be irreversible because it is practically impossible for people to claim back VAT — that’s just the nature of VAT. Counsel for the minister, Mahlape Sello SC, agreed that the new VAT rate would come into operation immediately.
This means that — unless there is an order from court — the chances are high that a VAT increase is coming, albeit for a limited period and even though no-one seems to want it.
The court’s intervention, therefore, seems to be crucially important.
In a statement on Wednesday evening, the DA confirmed “lawyers acting for the minister of finance have approached our lawyers proposing an out-of-court settlement”. One possible deal could be that the parties ask the court for an order, by agreement: to set aside the VAT hike, as the DA and EFF asked, but with no pronouncement over whether section 7(4) of the VAT Act is constitutional. That fight could await another day and would save political face for the minister.
Does the fiscal framework — the National Treasury’s budget outline — also need to go back to the drawing board?
An order like this would halt the increase and give parliament the time it needs to pass legislation to reverse it.
Then there is another legal question: does the fiscal framework — the National Treasury’s budget outline — also need to go back to the drawing board?
The fiscal framework was the second leg of the DA’s court case and the heart of the EFF’s case. Both parties argued that parliament’s decision to accept it was unlawful. Though an interim order by court suspending the VAT hike would solve the urgent looming May 1 deadline, the question is whether, in law, a new fiscal framework must be approved by parliament before any other budget legislation can be passed.
In his statement, the minister said that the Appropriation Bill and the Division of Revenue Bill would need to be revised, given that the VAT increase was being scrapped. However, he made no mention of the fiscal framework.
In court the EFF argued that the VAT increase and the fiscal framework were “inextricably linked” and the DA argued that the fiscal framework was the first step in the budgeting process and set the parameters for the other budget legislation.
“The central purpose of the fiscal framework is thus to provide concrete revenue, expenditure and other estimates, which then determine the parameters within which parliament may enact fiscal legislation,” said the DA’s written legal argument to court.
In his statement, the minister suggested that “unavoidable expenditure adjustments” could be offset by “additional revenue collected by Sars” and that expenditure decisions would be “revisited”. The extent to which the VAT-hike reversal would affect the budget framework overall was not clear.
A recent article by Carol Paton on News24 reported that external legal advice was obtained by the Treasury, which suggested that the budgeting process was more flexible than previously thought; that the fiscal framework contained “estimates” and that amendments could be made to the Appropriation Bill and Division of Revenue Bill without going all the way back to the fiscal framework — provided expenditure and revenue balance in the end.
Though this does not seem to align with what the DA and EFF argued in court, if there is no opposition to such a course, it could finally put South Africa on the road to the adoption of a VAT-hike free budget.
Another alternative is that the parties to the court case make it part of an agreement that the fiscal framework is sent back to the parliament’s finance committees for reconsideration. This may delay matters, but not necessarily for too long.
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