Decision to introduce Vat rate change ‘cannot be interdicted at this stage’

Finance Minister Enoch Godongwana denies that he ever suggested he could revoke the implementation of the increase in the value-added tax (Vat) rate from 15% to 15.5%.

The rate will increase on 1 May.

In his answering affidavit to an urgent application by the Democratic Alliance (DA) and Economic Freedom Fighters (EFF), the minister also denies that he has misled the public. It has always been and still is his position, as well as those of National Treasury and the South African Revenue Service (Sars), that the Vat rate will increase this year and next year.

The DA and EFF are seeking final relief from the Western Cape High Court in the form of an urgent interdict to suspend the decision to increase the Vat rate and to prevent Sars from implementing the minister’s decision to increase Vat.

Godongwana believes the applications lack merit.

He says the DA’s challenge of Section 7(4) of the Vat Act is misdirected. The bases on which it contends that the section is unconstitutional are “bad in law”.

ALSO READ: ‘Decision has been made’: Godongwana argues VAT hike can’t be blocked, opposes DA’s interdict

Temporary and conditional

Section 7(4) affords the minister temporary and conditional authority to adjust the Vat rate for 12 months, however, it remains subject to confirmation (or not) from parliament.

Godongwana says the DA’s argument that Section 7(4) permits the minister to amend Section 7(1) is “plainly wrong”. Section 7(1) allows the minister to introduce Vat at a specific rate whereas Section 7(4) allows the minister to amend it temporary.

“It is a critical tool for meeting immediate [or near immediate] spending and debt needs,” the minister noted in his affidavit.

When he announces an alteration to the rate, his power to introduce a tax remains the same and continues to exist until amended by parliament. There is no legislative amendment.

Godongwana states that if no legislation is passed within 12 months, the temporary rate (15.5%) lapses and the application of the 15% in Section 7(1) resumes.

ALSO READ: ‘Serious option’ on the table as Treasury, Sars seek ways to reverse VAT hike amid legal battle

Gerhard Badenhorst, tax director at Cliffe Dekker Hofmeyr, says businesses incur substantial costs in order to implement the Vat rate increase. It takes significant time and effort to amend systems and procedures.

“It is a challenge for businesses to implement the Vat rate increase from 15% to 15.5% on 1 May 2025, and it will be a more severe challenge for businesses to implement the announced Vat rate increase from 15.5% to 16% on 1 April 2026, and then, within a month, to revert back to 15% on 1 May 2026,” he added

However, Badenhorst notes that throughout the answering affidavit the minister expresses his confidence that parliament will support the Vat rate, which will make the increased rate permanent.

Des Kruger, Vat specialist at Webber Wentzel, says the point is that when the minister announces a Vat increase in his annual budget it remains effective from the day he announces it.

However, it is only for 12 months, and parliament must confirm it within that time. If not, the increase lapses.

ALSO READ: Here’s why constitutional law expert says VAT hike should be postponed

Political disagreement

These provisions have been used on several occasions over the years. The exact same wording (relating to the Vat increase) can be found in the Income Tax Act, and it has been used from 1962.

“Now suddenly it is an issue. Section 7(4) of the Vat Act is quite clear. I don’t think the minister is amending the act. He is acting in terms of the act,” says Kruger.

The minister expressed his displeasure with the DA. He says Section 7(4) was introduced through a legislative amendment signed into law in early 2017. It has been part of the tax framework for over nine years. At no point during that time did the DA seek to challenge its constitutionality.

“Only after a political disagreement about the contents of the 2025 Budget has the DA rushed to court, seeking urgent and far-reaching relief. This sequence of events undermines the urgency it claims and strongly suggests that the present challenge is driven by political dissatisfaction rather than genuine constitutional principle,” says Godongwana.

“As a member of the Government of National Unity, the DA, having failed to secure its preferred outcome, now seeks to reframe a political disagreement as a constitutional crisis. This is not the proper function of urgent judicial intervention,” the minister adds.

Godongwana says it is unclear whether the EFF seeks merely to interdict the report “which so happens to make reference to a Vat rate increase” or whether it seeks to interdict the introduction of the 0.5 percentage points increase.

“That relief would be moot. The decision to introduce the Vat rate increase has been made. My decision to introduce the Vat rate change cannot be interdicted at this stage.”

ALSO READ: Economic ramifications of VAT increase: higher inflation, lower GDP

The consequences

Godongwana argues that there will be “severe and far-reaching consequences” if the Vat rate is not increased.

“Government would be immediately forced either to cut expenditure or to increase borrowing. Both options carry risks.”

He claims spending cuts will “likely” affect essential services such as education, healthcare and social protection programmes. Godongwana makes no reference to suggestions to cut unnecessary fat or to review current wasteful and ineffective expenditure.

The DA and EFF applications will be heard on Tuesday (22 April).

This article was republished from Moneyweb. Read the original here.