Finance minister Enoch Godongwana.(Brenton Geach/Gallo Images via Getty Images)
Finance Minister Enoch Godongwana has responded to the court bid by the Democratic Alliance (DA) to avert a VAT increase being implemented in a fortnight by arguing that the relief sought is moot as the tax increase can’t be interdicted at this point.
“The decision to introduce the VAT rate increase has been made,” the minister said in his replying affidavit to papers the DA filed on 3 April.
“My decision to introduce the VAT rate increase cannot be interdicted at this stage.”
The case the DA brought before the Western Cape high court is twofold.
In the first part, the party asks the court to set aside the decision by the National Assembly and the National Council of Provinces to adopt the fiscal framework underpinning the budget Godongwana tabled on 12 March.
It seeks an order sending the framework back to parliament’s standing and select committees on finance for reconsideration and suspending the minister’s announcement that VAT will increase by 0.5% from May and by a further 0.5 percent from 1 April next year.
The adoption of the committee reports by the two chambers a fortnight ago paved the way for the legislature to pass the legislation underpinning the budget but the DA argues that the process was flawed because those reports did not provide a clear answer to whether members accepted or amended the fiscal framework.
It contends that, because MPs believed that the inclusion of a non-binding recommendation that Godongwana urgently seeks alternatives to a VAT increase would stop the hike taking effect in May, their adoption of the fiscal framework on 2 April was based on a material error in law.
In part two of its application, the DA asked the court to declare section 7(4) of the Value Added Tax Act unconstitutional. It did so on the basis that the law improperly granted the finance minister the authority to impose tax increases without full parliamentary approval.
Godongwana’s replying affidavit is confined to dealing with the party’s prayer for interim relief in the form of an interdict preventing the tax increase from taking effect.
He said the party had failed to meet the test for interim relief.
The DA had not demonstrated that it had a right to the relief it sought, because its application was based on a misreading of the VAT Act that had prompted it to launch an ill-informed constitutional challenge to the law
Nor did the DA demonstrate a reasonable fear of irreparable harm or that the balance of convenience weighed in favour of granting the relief.
“Given the enormous public interest at stake, the balance of convenience favours the dismissal of the relief.”
Godongwana said section 7(4) of the law conferred on him the power to change the VAT rate for a limited period of time, via a budget announcement, subject to parliament passing legislation within 12 months to give effect to that change.
He said he exercised that power last month, after careful consideration of the policy trade-offs implicit in balancing the budget and preserving the fiscal stability of the country.
“The prevailing economic climate, which requires careful consideration around the management of public funds, has necessitated an increased focus on reprioritising existing government resources to areas where the most value can be derived for the benefit of all South Africans.”
Godongwana said suspending the VAT increases would change the macroeconomic projections that underpinned the fiscal framework since alternative tax proposals would have “quite different implications for the distribution of growth and the resulting economic growth outlook”.
He cautioned that delaying the implementation of the VAT increase would result in a revenue shortfall because there would be a “mismatch” between the money available and the spending priorities set out in the fiscal framework.
This, Godongwana said, would necessitate higher borrowing in the short term.
“This would increase our debt-to-GDP ratio, leading to higher debt service costs that crowd out other expenditure.”
The litigation is a continuation of a standoff between the minister and the ANC’s largest partner in the ruling coalition over tax increases.
In February, Godongwana abandoned his prepared budget at the podium after the DA made public that it would not support the 2% VAT hike he was poised to announce, forcing an unprecedented redraft of the budget.
According to the March budget, gross loan debt is set to stabilise at 76.2% of GDP in 2025-26, thanks to a primary budget surplus. It is 0.1% higher than the figure Godongwana gave in the budget he had prepared for February.
The consolidated budget deficit is projected to narrow from 5% in the current year to 3.5% in 2027-28.
Debt service costs will amount to R389.6 billion in the current year.
Attempting to put that figure into context in his budget speech, the minister said: “It is more than what we spend on health, the police and basic education.”
The minister’s main justification for the initial VAT increase he proposed — the first since 2017 — was finding R60 billion to replenish the education and health budgets and provide urgent support for passenger rail. The revised increase, plus leaving personal income tax brackets as is, would generate R28 billion in 2025-26 and R14.5 billion in 2026-27.
The standoff over the impending tax hikes — both the VAT increase and bracket creep — has in recent weeks brought the so-called government of national unity to the brink of collapse, though both the ANC and the DA have proved reluctant to walk away from the centrist pact formed after the May 2024 elections.
The reports of the finance committees were adopted by a slim margin of 194 to 182 in the National Assembly after the DA rebelled against a coalition order to support the measure.
ActionSA, which is not part of the coalition, was instrumental in unlocking approval at the committee stage by proposing the inclusion of the recommendation that Godongwana find alternative sources of revenue before May.
It infuriated the DA, much as the party’s court application has angered the ANC.
And the recommendation does nothing to interrupt the legislative processing around the impending VAT hike.
Godongwana said in his court papers that the process to pass this type of legislation contemplated in section 7(4) was already underway.
He reiterated that he believed the increase was necessary and prudent, adding: “I also anticipate that a majority of parliament will support it for the same reasons.”
In response to the constitutional challenge to the Act, Godongwana said while he did not agree with the arguments advanced by the DA, he would respect the court’s findings.
“While I believe that this relief lacks merit, I will abide by the decision of this court in relation thereto.”
The Economic Freedom Fighters has filed papers in support of the DA’s court application.