The constitutionality of the delegation of law-making power to the Minister of Finance to introduce taxes and raise or reduce tax rates by way of an announcement in the annual Budget Review remains untested.
The value-added tax fiasco in Parliament was settled via an agreement between the Democratic Alliance and the Economic Freedom Fighters and the minister before the matter could be tackled in court.
The High Court in Cape Town set aside the 12 March announcement by Finance Minister Enoch Godongwana to increase the VAT rate by half-a-percentage point this year and again next year.
The DA and EFF approached the court when the National Assembly and the National Council of Provinces accepted the report of the Standing Committee on Finance and the Select Committee on Finance that provided for the VAT increase.
However, the High Court kept the door open for the DA to pursue the relief it sought in terms of Part B of its urgent application. Part B deals with the constitutionality of section 7(4) of the VAT Act.
The section gives the minister the power to amend the VAT rate at the date specified by him through an announcement in the Budget. It is subject to approval by Parliament within 12 months. This power is not limited to the VAT Act; it applies to other pieces of legislation, including the Income Tax Act (ITA).
Law by decree
In 2022, Ben Cronin, a lecturer in the Department of Commercial Law at the University of Cape Town and an Advocate of the High Court, submitted his thesis for a master’s degree in commercial law, titled “Law by decree: A critique of section 5(2) of the Income Tax Act”.
He questioned the validity of Parliament to delegate this unique power to the minister. The section bestows similar powers on the minister as the power he enjoys in section 7(4) of the VAT Act.
Cronin argued that the Taxation Laws Amendment Act of 2016 and amended again in 2018 gives the Minister of Finance “primary or plenary law-making powers”, a power which is unlawful for the minister to have.
He argued that Parliament may delegate secondary law-making power to the executive but primary law-making power, such as fixing the income tax rate, remains with Parliament. Prior to the publication of the 2016 Amendment Act, section 5(2) of the ITA held that the income tax rate would be fixed annually by Parliament.
Cronin acknowledges that the Constitution provides roles for both the executive and the legislature in respect of the legislative process. “There is no question that members of the executive perform important roles at the entry and exit points for the legislative process,” says Cronin.
“What is, however, clear from the current formulation of section 5(2) of the Income Tax Act is that the Minister of Finance is envisaged to play the central role in altering the tax rate – in effect, amending an existing statute.”
Separation of power
He also argues that the separation of powers doctrine is a fundamental principle of our constitutional democracy, and “the legislative authority… of the national sphere of government is vested in Parliament”.
Hence, the power to make the country’s written laws firmly sits with Parliament.
“When Parliament purported to delegate the power to determine and amend the income tax rate applicable for taxpayers in terms of section 5(2) of the Income Tax Act, I would submit that it was attempting to assign a power which exceeds the competence of Parliament itself.”
Cronin argues that over the years more powers have been delegated to the executive, raising concerns about the separation of powers.
Prospective legislation
Cronin also addressed the practical consequences of introducing a tax increase by announcement that is subject to approval in future. The VAT fight demonstrated the huge implications for the economy if the minister’s announcement faces resistance.
What happens if Parliament does not approve the announcement, or what if Parliament does not make the 12-month deadline for ratifying the minister’s announcement?
Or asks Cronin, perhaps more awkwardly, what happens if Parliament passes into law a statute that differs from the announcement?”
In terms of income tax, it would be possible to refund taxpayers, but it would have been impossible to unscramble the VAT eggs.
Cronin believes that section 5(2) of the ITA infringes upon the separation of powers doctrine and constitutes an unlawful delegation of the power to impose or reduce taxes in terms of the Constitution.
Uncertainty prevails, as the power to amend tax rates remains in the hands of the minister without a challenge before the Constitutional Court.
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.