Court battle looms over Treasury’s power to adjust VAT rate

Denying the National Treasury limited powers to “swiftly” adjust the VAT rate to respond to pressing fiscal pressures, as it attempted to do last year, will see the government taking up more debt to plug holes in the budget.

This is the position adopted by the South African Revenue Service (Sars) in its court papers before the Constitutional Court in a high-stakes legal battle that could ultimately determine whether the executive can adjust the VAT rate.

At the heart of the argument by Sars, which reports to the Treasury, is that the executive has limited powers to make short-term adjustments to VAT to adapt to changing circumstances more rapidly than parliament can.

Sars says that while it accepts that only the legislature may impose taxes, once this is done it may delegate to the minister a limited power to make temporary adjustments to the tax rate.

It says such a delegation by parliament gives effect to its constitutional power of taxation and does not fall foul of it.

“The minister also explains why there is a need for swift executive action to address urgent budget pressures and that a delay in the increase in the VAT rate (if the increase were to await the enactment of legislation by parliament) will leave a shortfall in terms of revenue due to a mismatch between the expenditure and funding elements of the fiscal framework,” the tax agency argues.

The last time the Treasury hiked the VAT rate was in 2018, when it increased from 14% to the current 15%. VAT raked in about R460bn in the 2024/25 financial year, an amount second only to personal income tax

“The revenue shortfall would require higher borrowing in the short term to fund the additional expenditure, which is incurred in the budget, absent the additional revenue budgeted. This would increase South Africa’s debt-to-GDP ratio, leading to higher debt service costs that crowd out other expenditure.

“The practical effect of this is that if legislation is required to give effect to a VAT rate increase rather than an announcement in the budget, an increase in VAT cannot then be factored into the government’s revenue estimate (or into the expenditure estimate) at all in the year in which the increase is announced.”

A proposed 0.5% VAT increase scheduled for May 2025 was suspended and later abandoned following legal and political pressure.

Sars and the Treasury are asking the Constitutional Court to set aside the ruling by the Western Cape High Court that ruled that section 7(4) of the VAT Act — which allows the minister to change VAT unilaterally before parliamentary approval — is unconstitutional and invalid.

The essence of the high court’s decision is that granting the finance minister stand-alone power to alter the VAT rate (effective immediately, subject to a 12-month delayed parliamentary review) constitutes an unlawful delegation of legislative authority.

The last time the Treasury hiked the VAT rate was in 2018, when it increased from 14% to the current 15%. VAT raked in about R460bn in the 2024/25 financial year, an amount second only to personal income tax.

The apex court will hear the matter in the last week of this month, with the outcome set to be settled law, binding on future administrations.

The DA will pour cold water on Sars’s argument. The party, a key member in the government which, along with other parties, opposed last year’s proposed VAT hike, will argue in court that VAT is a tax and setting the rate is an essential element of that tax, and altering the rate constitutes exercising the taxing power.

The government spends more than R1bn a day servicing its existing debt, which is expected to reach R6.3-trillion in the 2026/27 financial year, equivalent to 77.3% of GDP

“This court has held, over and over, that the taxing power is reserved for parliament and may not be delegated to the executive. If setting the rate of VAT is not part of the taxing power, it is difficult to think what is,” the DA’s papers read.

“The DA’s central submission is a simple one — the constitution grants the power to tax to parliament and does not permit it to delegate that power. This court has, on at least five occasions, endorsed that constitutional rule. It has never departed from it or suggested it is subject to exception.

“It is regarded as a founding principle of parliamentary democracy that there should be ‘no taxation without representation’ and that the executive branch of government should not itself be entitled to raise revenue for its operation but should be dependent on the taxing power of a democratically accountable parliament.

“Unlike in the context of customs rules, where swift action is necessary to regulate — for example, to prevent dumping or stop diplomats from abusing the system — VAT changes are not needed urgently. There has only been one so far in the democratic era, in 2018,” the country’s second-largest party said.

“VAT is also not a tax where there is a risk that a prior announcement of a change will cause tax avoidance. Because VAT is charged on almost all goods and services, parties cannot arrange transactions to avoid it. Indeed, it can only be implemented with significant advance notice because every vendor in the country has to alter their systems to accommodate an alteration.”

The government spends more than R1bn a day servicing its existing debt, which is expected to reach R6.3-trillion in the 2026/27 financial year, equivalent to 77.3% of GDP.

Attempts to get hold of the Treasury’s court papers proved futile.