VAT increase stopped

The Ministry of Finance has announced that finance minister Enoch Godongwana will soon introduce a bill in Parliament that proposes to maintain the Value-Added Tax (VAT) rate at 15% from 1 May.

This is a stunning reversal from Godongwana, who previously indicated that he did not see a way to avoid increasing VAT without alternatives for raising revenue on the table.

Earlier this year, the finance minister caused an uproar in the Government of National Unity (GNU) when he proposed increasing VAT by two percentage points.

It resulted in his February budget speech being postponed while President Cyril Ramaphosa’s Cabinet discussed alternatives with National Treasury.

When Godongwana delivered his address a month later, he said Treasury intends to increase VAT from 15% to 15.5% this year, followed by another increase to 16% next year.

He said next year’s increase could be stopped if something changed in the interim that allowed Treasury to raise more revenue.

While Godongwana has now said his new Rates and Monetary Amounts and the Amendment of Revenue Laws Bill would propose halting the increase, it came with a warning.

“By not increasing VAT, estimated revenue will fall short by around R75 billion over the medium-term,” the Ministry of Finance said in a statement on Thursday.

“The decision to forgo the increase follows extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees.”

Godongwana said he wrote to the Speaker of the National Assembly to indicate that he is withdrawing the Appropriation Bill and the Division of Revenue Bill to propose expenditure adjustments to cover the revenue shortfall.

“Parliament will be requested to adjust expenditure in a manner that ensures that the loss of revenue does not harm South Africa’s fiscal sustainability,” he said.

“The decision not to increase VAT means that the measures to cushion lower-income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.”

Godongwana said that any additional revenue collected by SARS may be considered to offset the unavoidable expenditure adjustments.

He expects to introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks.

“The initial proposal for an increase to the VAT rate was motivated by the urgent need to restore and replenish the funding of critical frontline services that had suffered reductions necessitated by the country’s constrained fiscal position,” said Godongwana.

“There are many suggestions, however some of them would create greater negative consequences for growth and employment and some of them, while worthwhile, would not provide an immediate avenue for further revenue in the short term to replace a VAT increase.”

However, Godongwana said National Treasury will consider these and other proposals as potential amendments in upcoming budgets as mechanisms to increase the resources available.