Finance Minister Enoch Godongwana delivers the 2025 Budget. Photo: Jeffrey Abrahams/Gallo Images
The treasury announced shortly after midnight on Thursday that the VAT rate will remain at 15%, bringing to an end a two-month political battle over an imminent unpopular increase to the tax.
Finance Minister Enoch Godongwana will introduce legislation that reverses his decision to implement an initial 0.5 percentage point hike on 1 May, followed by a second hike by the same margin on April 1 next year.
“The minister of finance will shortly introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill), which proposes to maintain the Value-Added Tax (VAT) rate at 15% from 1 May 2025, instead of the proposed increase to VAT announced in the budget in March,” the treasury said.
The official announcement came shortly after the Democratic Alliance issued a statement confirming that it had been approached by counsel for the minister proposing a settlement in its legal challenge to the VAT hike.
This came a day after the Western Cape high court heard the first part of the court application in which the DA sought an urgent interdict to prevent the increase from taking effect next week. The Economic Freedom Fighters have joined in the matter.
The standoff between the DA and the ANC over the tax increase has in recent weeks brought the ruling coalition to the brink, after the former official opposition defied instructions to vote in support of the fiscal framework.
But in the end, neither party was prepared to walk away from their post-election pact.
Godongwana has insisted that there was no viable alternative that would allow him to raise the revenue needed to shore up social services after a series of cuts resulted in a shortage of teachers and doctors.
In its statement, the treasury said reversing the decision to increase VAT would result in a R75 billion budget shortfall, which would demand a reprioritisation of expenditure for the next three years. It said any additional revenue collected by the South African Revenue Service would be used to mitigate the downward revision of spending.
“By not increasing VAT, estimated revenue will fall short by around R75 billion over the medium term,” the department said.
“As a result, the minister of finance has written to the Speaker of the National Assembly to indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill, in order to propose expenditure adjustments to cover this shortfall in revenue.”
This would be done in a way that did not prejudice South Africa’s fiscal sustainability, it added.
Godongwana will introduce revised versions of the two bills within the next few weeks.
The VAT debacle has been personally bruising for Godongwana, who said publicly that he took the decision to increase the rate despite reservations from senior treasury officials.
The fiscal framework was adopted by the National Assembly by 194 to 182 votes after ActionSA agreed to support it on condition that the minister urgently considered alternatives to the VAT hike.
But in his court papers, Godongwana insisted that it was impossible to halt the increase at this stage.
On Tuesday, counsel for the EFF told the court this was proof that support for the fiscal framework was secured through deception, rendering parliament’s decision unlawful and void.