Good news about VAT increase

Finance minister Enoch Godongwana has reached a settlement with the Democratic Alliance (DA) and Economic Freedom Fighters (EFF) in their legal challenge against the budget that Parliament passed in March.

The Western Cape High Court ruled that the fiscal framework that Parliament adopted must be set aside, formally suspending a VAT increase from 15% to 15.5% that would have taken effect on 1 May.

This comes after the African National Congress (ANC), Inkatha Freedom Party (IFP), ActionSA, and several other smaller parties voted in favour of Godongwana’s proposed budget earlier this year.

While they registered objections to the minister’s VAT increase, they argued that the budget must be passed and could be amended later.

As a result, Parliament voted 194 to 182 to adopt the 2025 fiscal framework report, which the Standing Committee on Finance later approved without any amendments.

The standing committee shot down proposals to formally amend the budget, which would have forced the matter back to National Treasury for reconsideration.

Instead, the ANC and IFP committee members supported ActionSA’s non-binding recommendation to scrap the VAT hike and the lack of inflationary adjustments of tax brackets.

The recommendation requested that alternatives to the VAT hike be found within 30 days, but it made no proposals on how to do this.

The DA and EFF challenged the legality of this process and the constitutionality of the Minister of Finance being able to increase VAT without Parliamentary approval.

Last week, Godongwana’s office issued a statement saying that he would introduce a new Rates and Monetary Amounts and the Amendment of Revenue Laws Bill to halt the increase.

However, experts warned that with the fiscal framework approved, there was no mechanism to legally halt the VAT hike without it being set aside by a court.

Godongwana’s settlement offer and the Western Cape High Court’s ruling have ensured that the process to reverse the VAT hike is legal.

News24 reported that Godongwana filed an affidavit on Sunday stating that the settlement agreement should not be misconstrued as conceding that the process was unconstitutional.

The minister said he was only no longer contesting the DA and EFF’s legal bids as it relates to the announcement of the VAT increase.

He said he only reluctantly proposed the VAT hike initially because the alternatives would potentially be worse. However, he was moved to reconsider it after realising that he lacks political support for the increase.

Political theatre

Despite reports that Godongwana had denied negotiating a settlement with the DA and EFF, he confirmed the talks in the affidavit.

“Subsequent to the matter being argued, I was aware that judgment had been reserved and that it was not proper to influence this process other than with the consent of the parties,” he stated.

“My legal team reached out to the legal teams of all the parties involved in this litigation to try to get the parties to agree on a draft settlement agreement.”

Godongwana said he opened settlement talks on the basis that they would be confidential. However, the DA issued a public statement about it the moment his office began the process.

“This was obviously highly inappropriate and raised concerns about whether this process could continue in good faith. We concluded that it could not, and the process accordingly had to be abandoned,” he said.

Following the High Court’s ruling, the DA issued a statement welcoming the development.

“The court’s decision ensures that any changes to the VAT rate must be properly approved by Parliament before taking effect, and sets aside the unlawful support lent to this VAT hike by a number of parties,” said DA federal chair Helen Zille.

“We are pleased that the Minister of Finance eventually came back to the table and agreed to suspend the VAT increase in a lawful manner.”

Zille said this showed that government decisions cannot be made without proper oversight.

“It also gives South Africans certainty that changes affecting their pockets will not happen without the necessary checks and balances in place,” she said.

“The impending VAT hike has now been formally stopped by an order of court agreed between the Minister of Finance and the DA. This also includes a settlement with the Speaker.”