With just two working days before the contentious VAT hike is due to take effect this week, confusion reigns over whether finance minister Enoch Godongwana will be able to cancel it in time.
Late on Wednesday Godongwana made the dramatic announcement that the 0.5 percentage point increase was being scrapped — but on Friday the DA told a court only parliament had the power to do so.
The political war over the VAT hike in this year’s budget has taken South Africa into uncharted territory — Godongwana’s climb down would be the first time in 31 years of democracy that a tax increase has been reversed.
The budget dispute has rocked the government of national unity, with ANC leaders suggesting the DA would have to be “punished” for having opposed the fiscal framework in parliament and the ANC drawing in the small parties to try get a 50%-plus majority of MPs behind it.
Notwithstanding the political consensus that the finance minister’s announcement signified, legal questions that have never been considered by the courts now demand urgent answers.
On Tuesday, his lawyers told the Cape Town high court that VAT would remain at the higher level of 15.5%, unless parliament enacted legislation to undo the increase.
The DA, in an affidavit filed in the court on Friday, said: “The DA and parliament support that position. It is the only plausible reading of section 7(4) of the VAT Act.”
The DA said Godongwana’s own proposed legislation recognised that his media statement on Wednesday had no legal effect and parliament must act to cancel the increase. But it was “impossible” to do so before May 1, said the DA.
“Unless this court acts, an unconstitutional and irreversible VAT increase will be imposed on all South Africans,” said the DA’s attorney Shannon Solomon.
The finance minister is yet to respond to the DA’s latest court papers and has until 10am today to do so. However, Treasury insiders said Godongwana “might decide to withdraw his opposition to the DA case”. If he does, that decision will be taken before Tuesday, the day judgment is expected.
The draft legislation Godongwana gazetted said the VAT hike reversal would be “deemed to have come into effect on May 1”, suggesting he might have considered it a fix in law to make it retrospective — to backdate its operation.
But backdating the legislation would be “meaningless”, said Solomon. She said that in court, the minister accepted that once the increase came into effect on Thursday, it would be impossible to undo. “Consumers will not be able to recover the increased taxes paid by them,” she said.
Edward Kieswetter, commissioner of the South African Revenue Service, said Godongwana’s decision had “significant practical implications for VAT vendors and consumers”. But Sars advised vendors not to implement the increase if they had not already done so.
Solomon said: “It appears the commissioner is of the view that the increase will not take effect on May 1.” This view was “plainly wrong” and the advice to vendors “creates further legal confusion”.
The new court papers also signal that out-of-court settlement discussions, which could have led to an order by agreement, have failed. On Saturday, DA leader Helen Zille told the Sunday Times she could not give details on “without prejudice” discussions.
“They made an offer. We submitted a counter-offer. Suffice to say that no final agreement was reached, which is why the court must now determine [an outcome],” she said. But Treasury insiders said their lawyers had been in touch with DA lawyers not for an out-of-court settlement, but to talk about “options on the table”.
Lawyers for parliament also wrote to the court on Friday, saying parliament “accepts” it would have to go back to the drawing board on the fiscal framework — the National Treasury’s budget outline.
A legal challenge to the fiscal framework was the second leg of the DA’s court application and was the heart of a separate case by the EFF, with both parties saying its adoption by parliament had been unlawful.
They made an offer. We submitted a counter-offer. Suffice to say that no final agreement was reached
— Helen Zille
Parliament’s lawyers pointedly said in their letter that they were not conceding any legal flaws in the process. But, they said, when Godongwana announced that he was reversing the VAT hike, he also told the Speaker of parliament that he was withdrawing the two main pieces of budget legislation — the Appropriation Bill and the Division of Revenue Bill — which he had introduced when he tabled the budget.
In terms of the law, the fiscal framework is tabled alongside these bills, said the letter. The fiscal framework is then sent to the finance committees of the National Assembly and the National Council of Provinces.
Because of “the relevance of the fiscal framework to the broader budgetary process”, parliament’s view was that a new or amended fiscal framework would have to be tabled, said the letter. The current one “can no longer stand”.
In an affidavit yesterday, parliament clarified that it was not asking the court to set aside the fiscal framework, but informing the court that it could do so in terms of its own rules.
The EFF also filed an affidavit to underscore the “urgent need” for a court order. “The upshot is that parties simply do not agree on the interpretation of applicable provisions and crucially what legal import the media statement and minister’s actions have,” said the EFF’s attorney Rorisang Moloi.
With a new budget on the cards, insiders at the National Treasury said they believe the reversal of the VAT hike means they may have to cut some critical programmes.
These include social relief of distress grants, frontline services and infrastructure investments. The Treasury is expected to model some of these cuts and send them to the cabinet for approval, but the insiders said it was unlikely such approval would be forthcoming, essentially sending the process back to square one.
To explain the need for cuts, Treasury insiders said it cannot be assumed that the extra R9bn that Sars collected in the last financial year would be repeated because it was a one-off overcollection. Even if extra revenue did become available, it would be used to pay off debt.
While the budget fallout has exacerbated tensions in the GNU, Zille said yesterday the relationship between the DA and the ANC remained “normal”.
The two parties have divulged no details of their meeting on Friday, saying only that they agreed to meet on a regular basis.
The DA was noticeably absent from a joint media briefing held by the 11 parties that supported the budget, which included the ANC, ActionSA, IFP and Rise Mzansi.
Many of the parties in the GNU expressed displeasure at the way the DA had handled the budget row, suggesting there could be calls for its axing. During negotiations with the ANC the DA had sought to link approval of the budget with concessions on other disputed legislation.
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