Round and round we go – for those who’ve been following the VAT saga over the past few months, it’s starting to feel like a carnival ride that just won’t stop. One moment there’s clarity, the next confusion. Positions are announced, then paused, then rephrased, then reversed. If you’re feeling dizzy, you’re not alone.
Over the long weekend, South Africa’s VAT increase, initially announced in Finance Minister Enoch Godongwana’s 12 March Budget, was officially suspended following a High Court order and the withdrawal of key Budget Bills. The court ratified a settlement reached in response to legal challenges led by the Democratic Alliance and supported by the Economic Freedom Fighter, effectively halting the planned 0.5-percentage-point increase from 1 May – as well as another 0.5% hike that was due in 2026.
The minister has since tabled a third version of the Budget through a revised Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which maintains the original tax proposals but formally removes the VAT rate hike. This move follows Godongwana’s acknowledgment that the increase lacked political support and his commitment to pursuing alternative fiscal measures.
The Appropriation Bill and Division of Revenue Bill – central instruments of South Africa’s budgetary process – were also withdrawn. Until new versions are passed, government spending will proceed under provisions in the Public Finance Management Act (PFMA), based on previous year’s allocations.
SARS Commissioner Edward Kieswetter confirmed vendors must not charge 15.5% VAT, reaffirming the current rate of 15%. Vendors that already adjusted their systems must revert by 15 May, and incorrectly applied VAT must be refunded or corrected in future returns.
Meanwhile, the constitutional challenge to section 7(4) of the VAT Act – which empowers the finance minister to set VAT rates as part of the Budget process – remains active. The suspension order does not affect this part of the case, which could have longer-term implications for how VAT changes are enacted.
Moonstone asked Louis Botha (pictured), a tax and exchange control specialist at WTS Renmere, to shed light on some key questions.
Given that the 0.5% VAT increase had not yet come into effect (implementation was set for 1 May), is it now entirely off the table? Or could there still be downstream consequences?
Now that there is a court order in place confirming that the VAT rate increase is suspended, it is off the table. The suspension remains in place until legislation is passed regulating the VAT rate or Part B of the DA’s application, where they challenge the constitutionality of section 7(4) of the VAT Act.
In terms of downstream consequences – on Friday (25 April), before the court order was given on 27 April, SARS issued a media statement giving VAT vendors some leeway in correcting their systems by mid-May, if it was set up for 15.5% from 1 May and was too complicated to immediately revert back to 15%.
After the court order, SARS issued a media statement on 27 April stating that VAT vendors have no basis to implement a VAT rate increase, and if a consumer is charged 15.5%, consumers should bring this to the attention of the vendor and ensure this is resolved at the point of sale or otherwise by mutual agreement.
What guidance do the Constitution and the PFMA provide on reversing key elements of a Budget that has already been tabled?
Neither the Constitution nor the PFMA gives specific guidance on this. Section 27 of the PFMA merely requires the Minister of Finance to table the Budget before the start of the financial year or, in exceptional circumstances, on a date as soon as possible after the start of that financial year, as the minister may determine. In the current context, one could argue that the next Budget to be tabled by the minister is due to exceptional circumstances, being the court proceedings and reversal of the proposed VAT increase.
Is it constitutionally permissible for Parliament to adopt a revised Budget after it has already adopted a fiscal framework and appropriated funds?
Each financial year/budget cycle will involve the passage of the fiscal framework and the passage of appropriation legislation to give effect to what is contained in the tabled Budget. The appropriation legislation, once passed, is binding, in accordance with the legislation.
Until such time as the appropriation legislation is passed, section 29 of the PFMA will apply, which states that if an annual Budget is not passed before the start of the relevant financial year, funds may be withdrawn from the relevant National Revenue Fund/a Provincial Revenue Fund for the services of the state or province concerned until the budget is passed.
This is subject to several limitations, such as that the funds withdrawn may be utilised only for services for which funds were appropriated in the previous annual Budget or adjustments budget. Another limitation is that the funds withdrawn may not during the first four months of the financial year (until the end of July this year) exceed 45% of the total amount appropriated in the previous annual Budget.
Could the reversal of the VAT increase set a precedent for legal or taxpayer challenges to future Budgets, particularly where there has been limited parliamentary debate?
Potentially yes, but one should appreciate that the current circumstances are quite unique. The funding of this Budget was linked to the VAT increase of 0.5%, even though section 7(4) of the VAT Act, which gives the minister the power to increase VAT through an announcement, does not make any reference to the legal provisions regarding the Budget.
Arguably, if there was no VAT increase, the situation may have played out differently.
One should also keep in mind that the principle of separation of powers could also affect potential future legal challenges. The DA and EFF challenges related to the procedure in passing the fiscal framework and the increase in the VAT rate in terms of section 7(4) of the VAT Act. If someone challenged the fiscal framework, without questioning the VAT rate increase provision or the procedure for passage of the fiscal framework, the legal considerations would be very different.
If the court rules in favour of the DA on Part B of its legal challenge, what could this mean for the finance minister’s future budget-making powers?
If the DA is successful with Part B of its legal challenge in the High Court, the finding of unconstitutionality must be confirmed by the Constitutional Court. Assuming they’re successful overall, the finding would mainly affect the minister’s ability to fund the Budget through a tax increase.
It’s important to bear in mind that our tax legislation currently provides for other taxes (not only VAT) to be increased in the same way, including income tax, estate duty, the skills development levy, securities transfer tax, unemployment insurance contributions, and the mining royalty.
It would be prudent for National Treasury to consider addressing this when it tables the draft tax amendment legislation later this year.
