A third version of the Budget is under way. Finance Minister Enoch Godongwana has tabled a new Rates and Monetary Amounts and Amendment of Revenue Laws Bill, and the Appropriation Bill and the Division of Revenue Bill have been withdrawn.
These Bills are the main legislative instruments that shape South Africa’s fiscal management and budgetary process. They effectively constitute the Budget.
On Thursday, 24 April, Godongwana introduced a new draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill (Rates Bill) in the National Assembly. This was done in terms of Notice No. 6157 published in Government Gazette No. 52567.
In terms of the explanatory memorandum, the Bill seeks, inter alia, “to pre-empt” the increase of the VAT rate announced by the minister in the Budget on 12 March.
The Rates Bill sets and adjusts tax rates and amending revenue-related legislation. It addresses taxes such as VAT, income tax, and customs and excise duties.
In terms of the Rates Bill tabled on 24 April, the only change to the announcements made in the Budget is rescinding the proposal to increase the VAT rate on 1 May. The Bill maintains the amendments proposed in the Budget Speech.
Read: Two (?) VAT hikes and no adjustments to the income tax brackets
Earlier on Thursday, Treasury announced that Godongwana had written to the Speaker of the National Assembly to indicate he was withdrawing the Appropriation Bill and the Division of Revenue Bill. Following the announcement, parliamentary papers showed that both Bills have been withdrawn from the Assembly.
The Appropriation Bill outlines the government’s spending plans for the fiscal year. It specifies how much money will be allocated to various government departments, programmes, and initiatives.
The Division of Revenue Bill determines how revenue collected by the national government is distributed among the three spheres of government: national, provincial, and local.
On Sunday night, the Speaker of the National Assembly, Thoko Didiza, wrote a letter to the chief whips of all the political parties, informing them of the implications of a draft court order handed down that evening.
The order, among other things, suspended the 0.5-percentage-point VAT increase planned for 1 May, as well as the 0.5-percentage-point increase that was due to take effect on 1 April next year.
Didiza said the court order will enable Godongwana to table the Budget instruments afresh.
“As indicated previously, I have asked the Minister of Finance to give an indication of the date when the Budget will be tabled. As soon as this information is available, I will ensure that the chief whips’ forum and the programme committee will be notified and convened to consider a revised parliamentary programme,” she wrote.
Roy Havemann, a senior economist at the Bureau for Economic Research (BER), said last week that the withdrawal of the Budget Bills does not pose any risks (other than reputational risks).
“In terms of the Public Finance Management Act, spending can continue at the same rate as in the previous year.
“Constitutionally, interest payments on debt are ringfenced outside of the Budget (they are direct charges on the National Revenue Fund) and continue to be paid indefinitely. There is absolutely no shutdown scenario, at least until MTBPS.
“The exact legal status of the fiscal framework is unclear. However, a new fiscal framework seems likely due to the changes in the economic environment and the revenue implications,” Havemann said.
Regarding what is likely to be in Budget 3.0, Havemann noted that Treasury’s statement said the following: “The decision not to increase VAT means that the measures to cushion lower-income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited. To offset the unavoidable expenditure adjustments, any additional revenue collected by SARS may be considered for this purpose going forward.”
He said the BER read this to mean that the above-inflation increase in the social grants will be reduced (potentially to inflation only, and now at the much lower expected inflation rate).
Many of the spending increases in the Budget were tagged as “provisional”, and some of these could be delayed.
However, the economic environment has changed since the Budget, which has positive and negative implications, Havemann said.
“On the positive side, lower inflation means spending growth can be revised downwards in nominal terms. However, lower growth and lower inflation mean that revenue will also need to be revised.”
Constitutional challenge still stands
The order by the High Court in Cape Town ratified a settlement reached among the parties regarding the application brought by the Democratic Alliance against Godongwana, SARS Commissioner Edward Kieswetter, Didiza, and National Council of Provinces (NCOP) chairperson Refilwe Mtsweni-Tsipane.
The DA’s application is in two parts.
Part A sought interim relief to suspend the half-a-percentage-point VAT hike and return the fiscal framework to Parliament’s finance committees for reconsideration. It also asked the court to bar SARS from implementing the higher rate.
Part B challenges the constitutionality of section 7(4) of the VAT Act, which allows the finance minister to adjust VAT rates temporarily as part of the Budget process.
The Economic Freedom Fighters also brought an application to block the VAT increase and to intervene in the DA’s application. The court order granted the EFF’s application to intervene.
The order states that the suspension of the VAT increase is subject to the passing of legislation regulating the VAT rate or the determination of Part B of the application. It clarifies that the suspension of the VAT increase does not affect the DA’s constitutional challenge to the VAT Act.
The order also sets aside the resolutions of the National Assembly and the NCOP, adopted on 2 April, to accept the report of the Standing Committee on Finance and the Select Committee on Finance on the 2025 Fiscal Framework.
The court ordered Godongwana to pay half the DA’s costs, including the costs of two counsel, and the Speaker of the National Assembly and the Chairperson of the NCOP to pay the other half. The same cost order was made in favour of the EFF.
VAT increase was constitutional, says Godongwana
National Treasury released a statement on Sunday night saying that Godongwana welcomed the court order because it was “entirely consistent” with his announcement to suspend the VAT increase.
“Having already announced the withdrawal, the minister felt that he would no longer have cause to continue with the court case,” Treasury said.
Godongwana filed an affidavit on Sunday morning in response to the DA’s supplementary affidavit filed on 25 April.
According to Treasury, although the substance of the minister’s responding affidavit was to reply to the most contentious points raised by the DA in its submission, it also clarified the reason behind the proposed VAT rate increase, its subsequent withdrawal, and the procedural context that should determine the future processes.
Godongwana maintained that his proposal announced in the Budget on 12 March “was constitutional and appropriate given the limited options available to balance fiscal sustainability with service delivery needs. But having listened to the submissions made by political parties and the public and tak[ing] into careful consideration the various consultations with various stakeholders, the decision was made to withdraw the proposal, and the court gave effect to that.”
Treasury said that “in the interests of setting the record straight”, the most salient points covered in Godongwana’s responding affidavit were:
- Following the letter from the Speaker to the minister on 21 April, it became clear the VAT increase lacked the necessary political support. The Ministry of Finance subsequently announced plans to introduce legislation maintaining VAT at 15% from 1 May.
- Although the VAT increase was proposed “reluctantly”, it was considered less detrimental to economic growth and employment than the alternatives examined by Treasury.
- The withdrawal creates a medium-term revenue shortfall of about R75 billion, necessitating decreased government expenditure, which is likely to have an impact on service delivery.
Treasury said Godongwana “remains committed to fiscal responsibility and will pursue alternative measures to ensure sustainable public finances”.
No basis to charge consumers 15.5%, says SARS
Kieswetter said on Sunday night that the court order means there is no legal basis for VAT vendors to charge VAT at 15.5% from 1 May, and he urged all vendors to readjust their systems back to 15%.
He urged consumers to ensure they are charged the correct VAT rate of 15%.
“In the unlikely event they are charged 15.5%, consumers should bring this to the attention of the vendor and ensure that this is resolved at the point of sale or otherwise by mutual agreement,” he said.
If consumers are charged VAT of 15.5% and are unable to resolve the issue directly with the business, Kieswetter said they should approach the National Financial Ombud, in the case of a financial product, or the Consumer Goods and Services Ombud, the case of a non-financial retail product.
Kieswetter welcomed the court order, saying it “provides clarity to SARS to effectively and efficiently administer the VAT Act”.
SARS’s latest statement did not make it clear whether the temporary reprieve it granted to VAT vendors that cannot readjust their systems by 1 May is still in place.
In a statement on Friday, SARS said it “expected” vendors to charge VAT at the rate of 15% and not 15.5% for the relevant goods and services per the VAT Act. It “encouraged” vendors that have already changed their systems to implement the rate change and the additional zero-rating to reverse these changes before 1 May.
SARS also said that vendors that cannot revert to the 15% rate by 1 May, because of the complex system changes that may be required, must report and account for supplies and purchases at the 15.5% rate until they can adjust their systems. These adjustments should be completed by 15 May 2025.
VAT transactions that were charged at 15.5% must be reported in field 12 (for output tax) and field 18 (for input tax) of the VAT return.
Adjustments in the form of refunds of the 0.5% rate to customers and from suppliers must also be reported in fields 12 and 18, respectively, of the VAT return.
VAT return declarations made will be taken into consideration when verifications and/or audits on the affected VAT tax periods are conducted.
VAT returns submitted to SARS will continue to calculate VAT using the 15% rate from the tax periods or months commencing on 1 May.
