Treasury on Thursday said Godongwana will shortly introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill, which proposes to maintain the VAT rate at 15%.
Image: Independent Newspapers
Finance Minister Enoch Godongwana has announced that the National Treasury will no longer be implementing the controversial 0.5 percentage points increase in the value-added tax (VAT) from 1 May, which was proposed in the National Budget to plug the R58 billion fiscal deficit.
his decision marks a significant victory for financially constrained consumers and highlights the government's responsiveness to widespread pushback and legal challenges, even from its own coalition partners within the Government of National Unity (GNU).
Godongwana had last month proposed to increase the VAT from 15% to 15.5% from 1 May, and to 16% a year later, after his Budget Speech was unexpectedly postponed at the eleventh hour in February when he proposed to increase VAT by a once-off 2 percentage points.
Instead, Treasury on Thursday said Godongwana will shortly introduce the Rates and Monetary Amounts and the Amendment of Revenue Laws Bill, which proposes to maintain the VAT rate at 15%.
In a statement, Treasury said the decision to forgo the increase followed extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees.
The Democratic Alliance, the GNU partner which filed a court application to interdict the VAT increase, on Wednesday said lawyers acting for Godongwana had approached its lawyers proposing an out-of-court settlement.
“By not increasing VAT, estimated revenue will fall short by around R75bn over the medium-term,” Treasury said.
As a result, Godongwana has written to the Speaker of the National Assembly to indicate that he was withdrawing the Appropriation Bill and the Division of Revenue Bill, in order to propose expenditure adjustments to cover this shortfall in revenue.
Treasury said 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 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measures to cushion lower income households against the potential negative impact of the rate increase now need to be withdrawn and other expenditure decisions revisited,” Treasury said.
“To offset the unavoidable expenditure adjustments, any additional revenue collected by SARS may be considered for this purpose going forward.”
In order to cushion poor households from the impact of the increasing tax measures, Treasury had initially proposed to expand the list of VAT zero-rated food items to include edible offal of sheep, poultry, goats, swine, and bovine animals; specific cuts such as heads, feet, bones, and tongues; dairy liquid blend; and tinned or canned vegetables.
Though it was estimated that expanding the VAT zero-rated list will cost the government about R2bn in forgone revenue, analysts had cautioned that the VAT would still be passed through to lower-income households via electricity and transport costs, among others.
As a result of scrapping the VAT increase, Treasury said Godongwana would 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,” it said.
“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.”
Treasury said it will, however, consider these and other proposals as potential amendments in upcoming budgets as mechanisms to increase the resources available.
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