Contentious VAT hike scrapped

Following intensive consultations among political parties, National Treasury last night (Wednesday) announced the scrapping of the contentious VAT increase.

Finance Minister Enoch Godongwana’s proposed increase of 0.5% was to take effect on 1 May.

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In an about-turn, Godongwana announced a Rates and Monetary Amounts and the Amendment of Revenue Laws Bill (Rates Bill), which proposes to keep VAT at 15%.

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

“By not increasing VAT, estimated revenue will fall short by around R75-billion over the medium term,” said Godongwana.

As a result, the finance minister has written to the speaker of the National Assembly to indicate he is withdrawing the Appropriation Bill and the Division of Revenue Bill, to propose expenditure adjustments to cover this shortfall in revenue.

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.

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measures to cushion lower income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited.

“To offset the unavoidable expenditure adjustments, any additional revenue collected by Sars may be considered for this purpose going forward,” added Godongwana.

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.

“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.

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

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