The 0.5 percentage point VAT hike, scheduled to be implemented on May 1, will be terminated, with finance minister Enoch Godongwana introducing the new Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill).
The amended legislation reverses the VAT hike introduced in the budget on March 12 and will be introduced to parliament within the next few weeks. The termination will leave a R75bn expenditure hole in the fiscus, the Treasury says.
Godongwana is also withdrawing the Appropriation Bill and the Division of Revenue Bill to propose expenditure adjustments to cover the shortfall. These two pieces of legislation were due to be considered by the National Assembly in May and June, respectively.
The VAT hike has been a pressure point for the 10-member government of national unity (GNU) since the proposal to initially hike VAT by two percentage points in February. The matter brought the coalition government to the brink of collapse after the DA, which is the second-largest party in the GNU, did not support the initial February budget nor the revised budget, which included the 0.5 percentage point hike.
The ANC sought support outside the GNU to pass the fiscal framework, which includes the hike, to the ire of the DA, which described the move as the ANC defining itself outside the GNU.
“The decision to forgo the increase follows extensive consultations with political parties and careful consideration of the recommendations of the parliamentary committees. By not increasing VAT, estimated revenue will fall short by around R75bn over the medium term,” the Treasury said in a statement.
“As a result, the minister of finance has written to the speaker of the National Assembly to indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill in order to propose expenditure adjustments to cover this shortfall in revenue. Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm SA’s fiscal sustainability.”
Measures to cushion lower-income households against the VAT increase will be withdrawn and other expenditure decisions will be revisited. Additional revenue collected by the SA Revenue Service (Sars) may be used to offset unavoidable expenditure adjustments.
“The initial proposal for an increase to the VAT rate was motivated by the urgent need to restore and replenish the funding of critical frontline services that had suffered reductions necessitated by the country’s constrained fiscal position,” the Treasury said.
The National Assembly endorsed the fiscal framework 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.
The ANC has also been leading marathon meetings with parties within and outside the GNU regarding alternative revenue streams to the VAT hike. The outcome of the meetings are expected to be announced on Thursday.
Business Day previously reported the National Treasury and the DA were in discussions for an out-of-court settlement to the DA’s court case to interdict the VAT hike.
“There are many suggestions, however, some of them would create greater negative consequences for growth and employment and some of them, while worthwhile, would not provide an immediate avenue for further revenue in the short term to replace a VAT increase,” the Treasury said.
“The National Treasury will, however, consider these and other proposals as potential amendments in upcoming budgets as mechanisms to increase the resources available.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.