National Treasury and the South African Revenue Service are ready for a value-added tax increase of half-a-percentage point in May and another half-a-percentage point in April next year.
Treasury held a workshop on Friday where it appears that the rate and tax increases announced in the second round of Finance Minister Enoch Godongwana’s Budget Speech will go ahead.
This is despite an urgent court application by the Democratic Alliance disputing the procedural process followed to approve the Fiscal Framework in Parliament and to have section 7(4) of the VAT Act declared unconstitutional.
In 2016, the Act was amended, effectively making rate increase announcements by the Minister of Finance binding from the effective date he decides on. Parliament then has 12 months in which to approve the amendments.
Political shenanigans
After some shady political shenanigans, parties outside the Government of National Unity (GNU) voted in favour of the Fiscal Framework containing the tax and excise duty increases.
On Friday, Treasury published Notice 6105 in Government Gazette No. 52458 introducing the Rates and Monetary Amounts and Amendments of Revenue Laws Bill in the National Assembly.
The Bill provides for the amendment of the VAT Act to implement the increased rate and to introduce the expanded list of zero-rated items announced in the Budget. The Bill also allows fixing the rates of normal tax.
Godongwana wants this Bill to be voted on before 1 May. Action SA voted in favour of the framework on the condition that Treasury finds alternative revenue sources to a VAT increase and to allow for inflation-linked relief for bracket creep.
Gerhard Badenhorst, a VAT specialist and director in the tax and exchange control practice at Cliffe Dekker Hofmeyr, says absent any legislative amendment to the increases announced in the Budget, the half-a-percentage-point increase is effective from 1 May. The DA’s urgent application will be heard by the High Court in Cape Town on 22 April.
In principle, says Badenhorst, the only way the increase can be stopped is to amend section 7(4) of the VAT Act to read that the minister does not have the power to increase the rate by way of an announcement in his Budget, or the minister must retract his rate increase in a Government Gazette that is sufficient in law.
Confusion and uncertainty
Parliament has never been confronted with a situation similar to this, hence the confusion and uncertainty around the process. “I do not know how one can undo an announcement in the Budget in terms of section 27 of the Public Finance Management Act.”
Badenhorst adds that if it is done by way of a legislative amendment, it must happen before 1 May. If not, the higher VAT rate must be implemented. The same process must be followed if Treasury comes up with alternative funding to the VAT increase.
That seems unlikely given the Notice that was published on Friday.
In any event, it normally takes months for Parliament to pass the Rates and Monetary Amounts Bill. Badenhorst is not optimistic that it can be done in the time left – particularly given the public holidays in April.
Charles de Wet, an ENSafrica tax executive who has been specialising in VAT for decades, also points out that the National Assembly is in recess for two weeks in April.
If the parties that voted in favour of the adoption of the Fiscal Framework realise that the VAT increase (for this year and next year) is a given and then vote against the Rates and Monetary Amounts Bill, the minister does not have parliamentary approval.
The big question is what happens if the vote goes against the Bill after 1 May. The increase must then (if the vote is after 1 May) be undone.
Unscrambling the egg
De Wet says it is unclear whether the increase must then be undone retrospectively until 1 May, or whether the old rate will become effective only from the date on which it was voted on.
“Currently, legislation does not make provision for this situation. If the vote against the Bill is done before 1 May, then the increase cannot be implemented. If it is undone after 1 May, it seems practically impossible for SARS to refund all the VAT it has raised,” he adds.
Badenhorst says absent any legislative amendment, the increase will go ahead on 1 May. This means that consumers will be subject to the increase on all their transactions and monthly contracts. There are certain transitional measures where the old rate will still apply – for example, advanced payments on a cellphone contract.
“The old rate will apply where a premium was paid late, or a debit order goes through after 1 May, but the payment relates to a cover-period before 1 May. This has a major cost and administrative impact for businesses.”
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. The information in this article is a general guide and should not be used as a substitute for professional tax advice.
So what do Action S A say now
All I can say is that those “clever” politicians outside the ANC who voted for this have created this scrambled egg and need to be punished severely by voters in the next election.
Action SA as the leading contributors should have known better. Too late, she cried. This VAT increase is theft from every member of the public. The members of parliament will not feel the 0.5% but thought they were clever enough to negotiate with a brick wall and now they have given the ANC a huge position of power! Discraceful actions by Action SA, Maimane (BOSA), de Lille (GOOD) and IFP.