Important court ruling about VAT increases in South Africa

The High Court has declared section 7(4) of the VAT Act inconsistent with the Constitution, limiting the power of the Finance Minister to change tax rates without Parliamentary participation. 

This was the section Finance Minister Enoch Godongwana planned to use when he announced a hike in the value-added tax (VAT) rate when presenting the first national Budget in 2025. 

Ultimately, the plans to hike the VAT rate were withdrawn to taxpayers’ relief, but, more concerning for some, was the minister’s ability to unilaterally increase tax rates. 

This prompted the DA to lodge a case with the High Court to clarify the Finance Minister’s powers to increase tax rates in South Africa. 

The tax hike in 2025 was not the first time VAT was increased under this piece of legislation. The VAT rate was increased in 2018 under section 7(4) without any resistance. 

PwC’s tax experts explained that Section 7(4) was first introduced in 2016 to address the issue of the power given to the Finance Minister to change income tax rates, which had been declared unconstitutional.

This section gave the minister the power to change tax rates, but only in specific cases and within certain time frames. 

For example, a 12-month rule was introduced, under which the Finance Minister can announce a change to tax rates, but Parliament must approve it within 12 months. If it is not approved, then it is reversed. 

As a result, Godongwana has the power to change tax rates immediately by announcement, with Parliament’s approval arriving within one year. 

However, when this was applied in March 2025, the VAT increase was met with stiff opposition from various political parties and organisations. 

This brought intense scrutiny to the powers given to the Finance Minister to unilaterally hike tax rates, subject to Parliament’s approval. Many of these powers had never been tested in court. 

The DA strongly opposed the VAT hike and sought to have it removed by declaring the mechanism by which it was imposed unconstitutional. 

PwC’s experts said the DA’s case centred around the powers granted to the Finance Minister to impose, increase, or reduce tax rates, when this ability is supposedly reserved for Parliament. 

In opposition to the DA, the Finance Minister and SARS argued that there was a difference between imposing a new tax and altering an existing tax rate and that the latter was regulatory in nature and not prohibited.

Finance Minister’s powers curbed

The High Court ultimately ruled in the DA’s favour as it found section 7(4) to be inconsistent with the Constitution. Only the Constitutional Court can now rule it unconstitutional.

This means that the legislative branch, Parliament, retains supremacy with regard to altering tax rates in South Africa and not the Finance Minister. 

However, Parliament does have the power to delegate elements of tax rate setting to the Finance Minister, but within a framework that includes clear limits and ultimate Parliamentary control. 

PwC’s experts said the judgment reinforces the supremacy of legislative authority in taxation and calls for clear, constitutionally compliant statutory frameworks that balance expediency with democratic oversight.  

“The decision signals to the legislature that any delegation of tax rate alterations to the executive must be tightly circumscribed, with prompt and effective parliamentary scrutiny,” it said. 

This effectively ends any chance of another fiasco, such as the one in 2025, where a sudden increase in taxation announced at the last minute led to a significant administrative burden. 

The burden in this case was ultimately borne by retailers and other businesses, who had to alter their systems to accommodate the new VAT rate. This happened not once, but twice, to reverse the original changes. 

“It is likely that the outcome of the DA Case, as it relates to the increase in taxes, may impact these other taxes as well,” PwC’s experts said. 

 “Legislative amendments may be required to align the operation and effect of any such charging provisions in equivalent taxing statutes.” 

One piece of legislation that may require changing is the Income Tax Act of 1962, which affords the Finance Minister significant powers to alter tax rates and income tax brackets. 

“That is not to say that the equivalent provisions for all taxes will be problematic, given their differing contexts and the manner in which they are levied,” PwC said. 

“However, most transaction-based taxes or taxes that are economically borne by downstream consumers, such as the general fuel levy, dividends tax, and securities transfer tax, are likely to run into similar difficulties as were experienced with VAT.”  

“Accordingly, legislative revisions are expected, and taxpayers should remain vigilant with regard to potential future amendments.”