The recent judgment by the Western Cape High Court extends far beyond the Minister of Finance’s ability to change the rate of value-added tax.
The Court declared unconstitutional the section of the VAT Act that empowers the minister to amend the rate in the annual Budget. Notably, similar provisions exist in other tax laws and suffer from the same constitutional flaws, although they have not yet been legally contested.
Read: High Court: Minister’s power to set VAT rate is unconstitutional
Finance Minister Enoch Godongwana’s unsuccessfully attempted to increase the VAT rate in his 2025 Budget, first proposing a rise from 15% to 17%, and later suggesting a more gradual increase from 15% to 16% over two years.
The Democratic Alliance took the matter to court, raising concerns about the separation of powers, the constitutional allocation of taxing authority, and the permissible limits of legislative delegation.
A powerful function given away
Edlan Jacobs, associate director at BDO, says one of the reasons the High Court declared section 7(4) of the VAT Act unconstitutional is that it delegates a very powerful function – the taxing function – to one executive, taking it away from Parliament.
The section places no limit on the maximum increase or decrease, neither does it set out the specific policy criteria on which the minister can rely for increasing or decreasing the rate. Another important reason is the irreversibility of a VAT rate change. “It will be impossible to trace all the anonymous purchases and refund consumers.”
Paul Gering, tax director at PKF, says the Income Tax Act contains similar wording to section 7(4) of the VAT Act. The minister can announce a rate change in the February Budget and company payrolls will collect the increased amount of tax at the end of March.
Parliament must confirm or reject the change within 12 months.
The difference between income tax and VAT is that once VAT has been paid, the deal is done. If Parliament does not confirm the increase, the millions of eggs (transactions) that have been scrambled (performed) cannot be undone, says Gering. With income tax, the money can be refunded if the increase is reversed.
Mike Teuchert, head of tax at Forvis Mazars, says Parliament should not only redesign the section in the VAT Act, but also in other tax legislation that has the same wording.
Besides the Income Tax Act, it also effects transfer duties, excise duties, annual rebates, and the medical scheme tax credits. There was a process where all the Acts were amended to have the same effect, says Teuchert. “The judgement is going to be most persuasive for all the other taxes. They will have to rethink it.”
Constitutional defects
Jacobs says the Court made it clear that the real defects lie in the breadth of the delegated power and the absence of prompt legislative control, but it also signalled that the problem is curable.
“Parliament can redesign the mechanism with real limits, criteria, and genuine oversight. This means the minister’s authority may survive, but only in a more constitutionally constrained form.”
He also questions whether the constitutional problem would apply only to tax rate changes announced in the Budget, or whether inflation-linked adjustments to the personal income tax brackets and the other income tax thresholds made by announcement are equally vulnerable in terms of the Court’s reasoning.
He believes it will be wise for Parliament to deal with the wider implications, unless the legislature believes the irreversibility of a change in the VAT rate does not apply in other instances. The fact is that the defects remain relevant to the other tax types.
The purpose of power
Gering adds that the VAT rate has been increased in the past, and another rate increase might be required in future if revenue is not spent properly.
“The reality is that the minister cannot be denuded from every taxing power, otherwise what is the point of the Budget speech. The problem is the wording of the section.”
Jacobs agrees there is a purpose behind the minister’s authority to raise taxes. “The minister needs flexibility and agility in applying fiscal policy because the law-making process takes time. But there must be less harmful ways to achieve fiscal stability.”
This includes more prompt parliamentary intervention, public consultation before making the announcement, and setting policy criteria for the use of the power to alter rates.
“When people see these features in the economy, they know to expect tax rate changes. It will increase transparency. It must still require parliamentary confirmation, but a lot sooner than the current 12 months.”
Gering says the process can be sped up. “My expectation is that the minister ought to have proposals drafted in a form that could be tabled within a month of his speech to allow for consultation.”
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
