The government will either have to increase its debt or implement spending cuts to plug a R13.5bn shortfall in revenue should the 0.5 percentage point VAT hike be suspended, finance minister Enoch Godongwana said.
The VAT hike, which comes into effect on May 1, would stabilise the government’s revenue streams in the short term, allowing increased spending in education, health and upholding debt repayments, which were estimated to increase to 76.2% of GDP in 2025/2026, Godongwana said.
In response to the DA and EFF application to halt the VAT hike , the minister has defended the constitutionality and lawfulness of section 7(4) of the VAT Act and the VAT rate announcement.
Godongwana also opposed the interim relief sought by the two political parties due to its potential harm to the public fiscus, arguing that case was politically motivated.
The court case, which is due to be heard in the Western Cape High Court on April 22, comes amid separate discussions being held by the ANC among parties within the government of national unity (GNU) and parties represented in parliament.
Business Day understands that during talks held last weekend with various parties the ANC conceded that an alternative to the VAT hike was required after being told by coalition partners and other parties to scrap the VAT hike.
The DA and the EFF also want the court to set aside the decisions taken by the National Assembly and National Council of Provinces on April 2 to adopt the fiscal framework. Both parties voted against the adoption of the fiscal framework.
“Section 7(4) [of the VAT Act] operates independently of the fiscal framework resolution. Any alleged irregularity in adopting the fiscal framework does not invalidate my announcement. Only an act of parliament can confirm or override the rate change,” Godongwana said.
The National Assembly endorsed the fiscal framework in March along with a recommendation that the Treasury find alternatives within 30 days to the one percentage point VAT increase over two years and the non-adjustment of personal income tax brackets to account for inflation, a total of R31.5bn.
Parliament is due to consider the passing of the Appropriation Bill and the Division of Revenue Bill in May and June, respectively. The ANC will once again have to canvas votes from all political parties represented in parliament for the two pieces of legislation to pass.
In the court papers, Godongwana argued that any change to the VAT rate announced by him on March 12, would require a separate money bill.
“This would require a lengthy procedure involving committees, public participation, and multiple readings. Although that process is necessary and appropriate for major or lasting tax reforms, this process is ill-suited to meet urgent fiscal demands requiring immediate intervention,” Godongwana said .
The minister argued that the increase in the VAT rate announced on March 12 was made under section 7(4) of the VAT Act and was independent of the fiscal framework adopted by parliament. Even if the fiscal framework adoption was flawed, it did not affect the lawfulness of the VAT rate announcement, which remained valid and effective, he said.
“The degree of delegation is extremely limited. The power to adjust the VAT rate under section 7(4) is temporary and operates strictly within the framework of the annual budget process,” Godongwana said.
“It lapses automatically if parliament does not pass legislation within 12 months, reinforcing the temporary nature of the delegation.”
“The authority to establish a permanent VAT rate remains firmly with the legislature, as demonstrated by the proposed amendment to section 7(1) that I have already introduced through the draft bill. This illustrates that parliament must enact any lasting change to the VAT rate through the ordinary legislative process for passing money bills.”
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