Vat legal challenge could have wider implications

The next crucial chapter in the value-added tax (Vat) case before the Western Cape High Court relates to the power given to the minister of finance to alter a tax rate by virtue of an announcement in the annual budget.

Political parties the DA and EFF challenge the constitutionality of Section 7(4) of the Vat Act. However, this case may even have wider implications since the Income Tax Act bestows a similar power on the minister of finance to alter other tax rates, including income tax, donations tax and dividend-withholding tax.

In 2022 Ben Cronin, lecturer at the University of Cape Town and advocate of the high court, in his thesis ‘Law by decree: A critique of section 5(2) of the Income Tax Act’ addressed the question of whether the power to “alter a tax rate by announcement” infringes on the separation-of-powers doctrine and the Constitution.

This unique power has never been tested in court.

However, this specific power and Finance Minister Enoch Godongwana’s reliance on Section 7(4) of the Vat Act to raise the rate in his budget from 15% to 15.5% is now being challenged.

Section 7(4) of the Vat Act bestows the minister with the same powers as Section 5(2) of the Income Tax Act to increase the tax rate by way of an announcement in his annual budget.

The Western Cape High Court has suspended the Vat rate increase pending the passing of legislation regulating the rate or the final determination of Part B (of the applications) – whichever occurs first.

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Constitutional validity

In Part B the DA asks the court to declare Section 7(4) of the Vat Act constitutionally invalid. The declaration should only be retrospective to 1 March 2025. It does not ask for full retrospectivity as that would undo the increase from 14% to 15% in 2018.

Two issues that came before the court when the DA, EFF, speaker of parliament, and the minister of finance presented their cases related to separation of power between the legislature and the executive, and public participation.

These issues were extensively dealt with in Cronin’s thesis that questioned the delegation of power that allows the minister to increase tax rates in the Income Tax Act, “whether income tax, donations tax, or dividends withholding tax”.

These taxes have all been amended subject to a ratification by parliament within 12 months.

This unique power given to the minister was first introduced in 2016 and has subsequently been substituted by Section 3 of the Taxation Laws Amendment Act of 2018.

“Section 5(2) of the Income Tax Act as it reads today, in fact, represents a dramatic departure from the pre-existing statutory regime which recognised the authority of Parliament to determine the income tax rate on an annual basis,” Cronin stated in his thesis.

An important question that he addressed is whether parliament could “assign an inherently legislative power to a member of the executive – namely to make law”.

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Delegation of power

Cronin quotes the Second Executive Council Judgment case before the Constitutional Court, where the court’s position appeared to be that parliament simply cannot delegate its plenary function to make primary legislation.

There is scope for the delegation of secondary law-making powers to members of the executive, but in this regard the legislature must nevertheless jealously guard its exclusive legislative competence and can only justifiably delegate such secondary law-making powers within the context of clear legislative guidelines.

The “outright assignment” of the power to announce new tax rates in Section 5(2) of the Income Tax Act is therefore incompatible with the application of the Separation of Powers Doctrine envisaged by the Constitutional Court.

Cronin added that when parliament purported to delegate the power to determine and amend the income tax rate in terms of Section 5(2), it was attempting to assign a power that “exceeds the competence of Parliament itself”.

“The law-making process cannot be given effect to by mere fiat declarations and in its original or plenary form it certainty cannot be delegated away by Parliament,” he argued.

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Public participation

Cronin also noted in his thesis that parliament must create opportunities to comment and influence the final wording of legislation.

This is simply “axiomatically not possible” where laws are amended by mere announcement by a member of the executive as is envisaged in Section 5(2) of the Income Tax Act.

He submitted that if the minister uses the section to “unilaterally amend a standing law”, he would be indirectly pulling the entire law-making process into the troubled waters of conflicting directly with the Constitution that requires public access to and involvement in the legislative processes of the National Assembly.

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