Latest news with #VatAct
The Citizen
29-04-2025
- Business
- The Citizen
Vat legal challenge could have wider implications
Court still to decide on constitutional validity of altering tax rates by 'announcement'. The next crucial chapter in the value-added tax (Vat) case before the Western Cape High Court relates to the power given to the minister of finance to alter a tax rate by virtue of an announcement in the annual budget. Political parties the DA and EFF challenge the constitutionality of Section 7(4) of the Vat Act. However, this case may even have wider implications since the Income Tax Act bestows a similar power on the minister of finance to alter other tax rates, including income tax, donations tax and dividend-withholding tax. In 2022 Ben Cronin, lecturer at the University of Cape Town and advocate of the high court, in his thesis 'Law by decree: A critique of section 5(2) of the Income Tax Act' addressed the question of whether the power to 'alter a tax rate by announcement' infringes on the separation-of-powers doctrine and the Constitution. This unique power has never been tested in court. However, this specific power and Finance Minister Enoch Godongwana's reliance on Section 7(4) of the Vat Act to raise the rate in his budget from 15% to 15.5% is now being challenged. Section 7(4) of the Vat Act bestows the minister with the same powers as Section 5(2) of the Income Tax Act to increase the tax rate by way of an announcement in his annual budget. The Western Cape High Court has suspended the Vat rate increase pending the passing of legislation regulating the rate or the final determination of Part B (of the applications) – whichever occurs first. ALSO READ: Godongwana consents to court order against VAT increase Constitutional validity In Part B the DA asks the court to declare Section 7(4) of the Vat Act constitutionally invalid. The declaration should only be retrospective to 1 March 2025. It does not ask for full retrospectivity as that would undo the increase from 14% to 15% in 2018. Two issues that came before the court when the DA, EFF, speaker of parliament, and the minister of finance presented their cases related to separation of power between the legislature and the executive, and public participation. These issues were extensively dealt with in Cronin's thesis that questioned the delegation of power that allows the minister to increase tax rates in the Income Tax Act, 'whether income tax, donations tax, or dividends withholding tax'. These taxes have all been amended subject to a ratification by parliament within 12 months. This unique power given to the minister was first introduced in 2016 and has subsequently been substituted by Section 3 of the Taxation Laws Amendment Act of 2018. 'Section 5(2) of the Income Tax Act as it reads today, in fact, represents a dramatic departure from the pre-existing statutory regime which recognised the authority of Parliament to determine the income tax rate on an annual basis,' Cronin stated in his thesis. An important question that he addressed is whether parliament could 'assign an inherently legislative power to a member of the executive – namely to make law'. ALSO READ: Practical implications of reversing the 0.5% VAT increase – Sars Delegation of power Cronin quotes the Second Executive Council Judgment case before the Constitutional Court, where the court's position appeared to be that parliament simply cannot delegate its plenary function to make primary legislation. There is scope for the delegation of secondary law-making powers to members of the executive, but in this regard the legislature must nevertheless jealously guard its exclusive legislative competence and can only justifiably delegate such secondary law-making powers within the context of clear legislative guidelines. The 'outright assignment' of the power to announce new tax rates in Section 5(2) of the Income Tax Act is therefore incompatible with the application of the Separation of Powers Doctrine envisaged by the Constitutional Court. Cronin added that when parliament purported to delegate the power to determine and amend the income tax rate in terms of Section 5(2), it was attempting to assign a power that 'exceeds the competence of Parliament itself'. 'The law-making process cannot be given effect to by mere fiat declarations and in its original or plenary form it certainty cannot be delegated away by Parliament,' he argued. ALSO READ: Budget 3.0 not unexpected, possible decrease in social grant increase Public participation Cronin also noted in his thesis that parliament must create opportunities to comment and influence the final wording of legislation. This is simply 'axiomatically not possible' where laws are amended by mere announcement by a member of the executive as is envisaged in Section 5(2) of the Income Tax Act. He submitted that if the minister uses the section to 'unilaterally amend a standing law', he would be indirectly pulling the entire law-making process into the troubled waters of conflicting directly with the Constitution that requires public access to and involvement in the legislative processes of the National Assembly. This article was republished from Moneyweb. Read the original here.
The Citizen
25-04-2025
- Business
- The Citizen
Godongwana's Vat rewind may hit legal wall
Midnight media move won't stop hike without new legislation or court order. National Treasury and Finance Minister Enoch Godongwana's early morning announcement, made through a media statement, that he was reversing his decision to increase the value-added tax (Vat) appears to have no legal standing. The only way to overturn the increase is for Parliament to adopt a new Rates and Monetary Amounts and the Amendment of the Revenue Laws Bill. It is highly improbable that this will happen before 1 May, especially considering the SA public holidays next week. PwC tax partner Kyle Mandy says that Section 7(4) of the Vat Act operates as the law stands now because the minister announced in the 12 March Budget speech that the rate would increase on 1 May. The legal status of the minister's media statement released after midnight is 'probably zero'. ALSO READ: A R1 billion U-turn: Scrapping the VAT increase leaves no winners, just absolute chaos Legality vs reality 'The reality is that there are the legal and pragmatic sides to this matter. In the absence of the new bill being promulgated before 1 May, which is nigh on impossible, or an interdict being granted by the high court, it is hard to see that any Vat vendor is going to increase the rate based on pure legality. They would risk having a riot outside their doors.' This is not an ideal situation, and the whole saga has a 'Trumpish feel' to it, Mandy adds. Cedric Frolick, the house chair, said on behalf of the speaker of the National Assembly that the speaker and members of parliament in general 'have become aware' that the Minister of Finance intends to introduce a new bill proposing to retain the current Vat rate instead of the increase announced in March 2025. 'As a consequence, the minister will also withdraw the current Division of Revenue Bill and Appropriation Bill in order to propose expenditure adjustments. It is expected that the minister will then introduce new bills in the forthcoming weeks.' Frolick adds that these developments will have obvious consequences for Parliament and the National Assembly's programme. The effect of this will be the review of the parliamentary programme as it currently stands. Parliament is in recess until 1 May, and there are still several public holidays ahead. ALSO READ: Where will the minister find the money to make up for scrapping the VAT increase? Unchartered territory Aneria Bouwer, senior tax consultant at Bowmans, says Vat vendors are currently dealing with a draft bill that still states the Vat rate is 15.5%, and now there is a media statement stating that there will be a new bill proposing that the rate remains at 15%. 'You are stuck with two proposals in the form of a draft bill that has already been published, and the indication of another draft rates bill. From a legal perspective, the reversal of the increase is not something that is provided for in legislation. It really is uncharted territory.' Gerhard Badenhorst, Vat expert and partner at Cliff Dekker Hofmeyr, says vendors are at their wits' end because of the legal uncertainty they face. He has approached National Treasury and the South African Revenue Service for a directive clarifying the correct route. 'The reversal must follow a legal process, and I am not sure which process the minister has in mind before 1 May.' ALSO READ: Economists welcome scrapping of VAT increase Bartho van Tonder, director at Thomson Wilks Attorneys, says the minister has the power to change the rate and he did this on 12 March 2025. Section 7(4) does not specifically provide the power to make a further change or withdraw the change within another 12 months. The announced rate change would either be endorsed or changed through Parliament, through the adoption of the relevant bill. 'As noted from the minister's announcement, the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill will take at least several weeks to finalise. With the Vat rate scheduled to increase to 15.5% next Thursday, there is insufficient time to introduce the bill to prevent the increase in the ordinary course.' The DA and EFF have taken the minister and parliament to court, challenging the process followed to increase the rate, as well as the constitutionality of Section 7(4). Given the latest developments, it is uncertain whether the parties will settle the matter out of court or what the status of the case will be. ALSO READ: VAT U-turn: How businesses felt the brunt of political roulette It seems that the only effective and certain way that the Vat hike can be halted before the 1 May deadline is for the court to make this order on Tuesday 29 April 2025. Van Tonder says it appears that this may be the agreement reached between the minister and the DA. The DA confirmed late last night that lawyers acting for the Minister of Finance had approached the lawyers appointed by the DA to propose an out-of-court settlement. Mandy notes that 'as a general proposition' the courts don't make rulings on moot matters, although that doesn't apply here as 'legally' the media statement does not have legal standing. This article was republished from Moneyweb. Read the original here.
The Citizen
22-04-2025
- Business
- The Citizen
Decision to introduce Vat rate change ‘cannot be interdicted at this stage'
Relief sought by DA and EFF 'lacks merit' – Godongwana. Finance Minister Enoch Godongwana (left) and National Treasury Director-General Duncan Pieterse are both defending the Vat hike in court. Picture: GCIS Finance Minister Enoch Godongwana denies that he ever suggested he could revoke the implementation of the increase in the value-added tax (Vat) rate from 15% to 15.5%. The rate will increase on 1 May. In his answering affidavit to an urgent application by the Democratic Alliance (DA) and Economic Freedom Fighters (EFF), the minister also denies that he has misled the public. It has always been and still is his position, as well as those of National Treasury and the South African Revenue Service (Sars), that the Vat rate will increase this year and next year. The DA and EFF are seeking final relief from the Western Cape High Court in the form of an urgent interdict to suspend the decision to increase the Vat rate and to prevent Sars from implementing the minister's decision to increase Vat. Godongwana believes the applications lack merit. He says the DA's challenge of Section 7(4) of the Vat Act is misdirected. The bases on which it contends that the section is unconstitutional are 'bad in law'. ALSO READ: 'Decision has been made': Godongwana argues VAT hike can't be blocked, opposes DA's interdict Temporary and conditional Section 7(4) affords the minister temporary and conditional authority to adjust the Vat rate for 12 months, however, it remains subject to confirmation (or not) from parliament. Godongwana says the DA's argument that Section 7(4) permits the minister to amend Section 7(1) is 'plainly wrong'. Section 7(1) allows the minister to introduce Vat at a specific rate whereas Section 7(4) allows the minister to amend it temporary. 'It is a critical tool for meeting immediate [or near immediate] spending and debt needs,' the minister noted in his affidavit. When he announces an alteration to the rate, his power to introduce a tax remains the same and continues to exist until amended by parliament. There is no legislative amendment. Godongwana states that if no legislation is passed within 12 months, the temporary rate (15.5%) lapses and the application of the 15% in Section 7(1) resumes. ALSO READ: 'Serious option' on the table as Treasury, Sars seek ways to reverse VAT hike amid legal battle Gerhard Badenhorst, tax director at Cliffe Dekker Hofmeyr, says businesses incur substantial costs in order to implement the Vat rate increase. It takes significant time and effort to amend systems and procedures. 'It is a challenge for businesses to implement the Vat rate increase from 15% to 15.5% on 1 May 2025, and it will be a more severe challenge for businesses to implement the announced Vat rate increase from 15.5% to 16% on 1 April 2026, and then, within a month, to revert back to 15% on 1 May 2026,' he added However, Badenhorst notes that throughout the answering affidavit the minister expresses his confidence that parliament will support the Vat rate, which will make the increased rate permanent. Des Kruger, Vat specialist at Webber Wentzel, says the point is that when the minister announces a Vat increase in his annual budget it remains effective from the day he announces it. However, it is only for 12 months, and parliament must confirm it within that time. If not, the increase lapses. ALSO READ: Here's why constitutional law expert says VAT hike should be postponed Political disagreement These provisions have been used on several occasions over the years. The exact same wording (relating to the Vat increase) can be found in the Income Tax Act, and it has been used from 1962. 'Now suddenly it is an issue. Section 7(4) of the Vat Act is quite clear. I don't think the minister is amending the act. He is acting in terms of the act,' says Kruger. The minister expressed his displeasure with the DA. He says Section 7(4) was introduced through a legislative amendment signed into law in early 2017. It has been part of the tax framework for over nine years. At no point during that time did the DA seek to challenge its constitutionality. 'Only after a political disagreement about the contents of the 2025 Budget has the DA rushed to court, seeking urgent and far-reaching relief. This sequence of events undermines the urgency it claims and strongly suggests that the present challenge is driven by political dissatisfaction rather than genuine constitutional principle,' says Godongwana. 'As a member of the Government of National Unity, the DA, having failed to secure its preferred outcome, now seeks to reframe a political disagreement as a constitutional crisis. This is not the proper function of urgent judicial intervention,' the minister adds. Godongwana says it is unclear whether the EFF seeks merely to interdict the report 'which so happens to make reference to a Vat rate increase' or whether it seeks to interdict the introduction of the 0.5 percentage points increase. 'That relief would be moot. The decision to introduce the Vat rate increase has been made. My decision to introduce the Vat rate change cannot be interdicted at this stage.' ALSO READ: Economic ramifications of VAT increase: higher inflation, lower GDP The consequences Godongwana argues that there will be 'severe and far-reaching consequences' if the Vat rate is not increased. 'Government would be immediately forced either to cut expenditure or to increase borrowing. Both options carry risks.' He claims spending cuts will 'likely' affect essential services such as education, healthcare and social protection programmes. Godongwana makes no reference to suggestions to cut unnecessary fat or to review current wasteful and ineffective expenditure. The DA and EFF applications will be heard on Tuesday (22 April). This article was republished from Moneyweb. Read the original here.
