VAT increase announcement not enough: Courts reclaim parly’s power to tax

The Western Cape High Court has struck at the heart of how South Africa changes its value-added tax (VAT) rate, declaring section 7(4) of the VAT Act unconstitutional and sending a clear message: core taxing powers belong to Parliament, not the minister of finance.

Beyond VAT, the reasoning potentially opens the door to challenges against other provisions that let the minister impose or change taxes by mere announcement.

Minister’s powers

Section 7(1) of the VAT Act imposes VAT at 15% “for the benefit of the National Revenue Fund.”

Section 7(4), however, has for years allowed the minister, “by announcement in the national annual budget”, to alter that rate with immediate legal effect from a date he chooses and for up to 12 months, subject only to Parliament later passing confirmatory legislation.

Impact on budgets and forecasts

In practice, once the minister announced a new rate and effective date, vendors had to change systems, contracts and pricing, as well as start charging the higher VAT – even though parliament had not yet enacted the increase and might never do so, and, to the extent that the VAT you incur forms part of your costs (e.g. a bank, life insurer, school or government department), you will need to factor in the impact in budgets and forecasts.

This practicality is arguably one of the factors that contributes to the issues around section 7(4) – the irreversibility of VAT.

Once vendors levy and collect the VAT at the new rate, it is not possible to refund the VAT levied to the recipients, as the VAT rate increase would be law for the period mentioned in the provision, up to a maximum of 12 months.

Reversal of Vat rate hike

The VAT rate increase is not reversible, as parliament’s decision to not confirm the minister’s decision has a prospective effect – if not confirmed, the rate announced by the finance minister will not continue past the 12 months, and the VAT rate will revert to the VAT rate prior to the minister’s announcement at the lapse of the 12 months.

Currently, the only way that the minister’s decision does not come into effect is, as we saw last year, if the new rate is reversed by law before the effective date announced by the minister.

The mechanism was tested dramatically in 2025, during Budget 2.0. On March 12 2025, the minister of finance announced a phased VAT increase: from 15% to 15.5% from May 1, 2025, and then to 16% from April 1, 2026.

Political resistance

Business moved quickly, reconfiguring enterprise resource planning systems, billing platforms, and pricing to accommodate the new rates in time for 1 May, incurring financial costs in the process.

Political resistance was immediate. The speaker of parliament flagged conditions on adopting the fiscal framework, opposition parties demanded alternatives, and civil society challenged the legality of the minister’s unilateral VAT powers. Within weeks:

1. The finance minister signaled that a Bill would reverse the VAT increase;

1. High Court, by agreement, suspended the legal operation of the 12 March announcement; and

2. A “Budget 3.0” was tabled on 21 May 2025, with the minister explicitly dropping the VAT increases and proposing that the 12 March announcement “does not come into effect,” leaving VAT at 15%.

Opposition party’s constitutional challenge

By then, the industry had already absorbed significant costs to prepare for a rate change that politicians withdrew.

However, the opposition party pressed ahead with its constitutional challenge regardless.

In a detailed judgment, a full bench (Francis J, with Cloete J and Lekhuleni J concurring) held that Section 7(4) is an impermissible delegation of legislative power to the executive and therefore inconsistent with the constitution.

The key points in the court’s reasoning include:

• The power to tax is an incident of representative democracy. The power to impose national taxes resides in elected legislatures and “cannot be delegated to the executive.”

• The VAT rate is not a technical detail. It is “the defining feature of the tax,” directly determining the burden borne by every consumer.

• Section 7(4) allows the minister, acting alone, to alter that burden across the economy for up to 12 months, with no statutory caps on the size of the change, no explicit criteria, and no requirement for prompt parliamentary confirmation.

Section 7(4) crosses the line

The high court accepted that some delegation in tax matters is permissible but found that section 7(4) crosses the line. For the period of its operation, “the operative tax rate is the minister’s rate, not parliament’s rate”, and parliament’s role is only ex post—after tax has already been collected at the higher rate.

The court therefore declared section 7(4) invalid, suspended the invalidity for 24 months to allow Parliament to fix the defect, and referred the order to the Constitutional Court for confirmation.

Section 7(4) has been on the books for many years, and similar mechanisms exist elsewhere in the tax code. So why did it take until 2025–2026 for a direct constitutional challenge? Several factors may have contributed:

• It was seen as a timing device. Many treated Section 7(4) as a technical tool to align systems with budget day announcements, rather than as a fundamental shift of taxing power from Parliament to the executive.

• Political consensus. Past VAT changes, including the 2018 hike from 14% to 15%, were politically supported by the governing majority, so there was little appetite to question the underlying mechanism; and

• Administrative convenience. The National Treasury and the South African Revenue Service valued the agility of being able to announce and implement changes quickly, with the money bills to follow later.

Entire tax code may be audited

The unpleasant Budget 2.0 experience—where the market moved, IT systems changed, and then the rate was politically reversed—exposed the costs and risks of this model and provided a strong factual backdrop for constitutional scrutiny. This judgment does not just concern VAT.

The court’s logic targets any provision that effectively lets the minister impose or change a national tax by unilateral act, with parliament only catching up later.

Other pieces of legislation that may be impacted include the following:

• Section 5(2) of the Income Tax Act, which allows rates announced in the national budget to take effect from a date specified by the minister, subject to later approval in the Rates and Monetary Amounts Act, has already been identified by commentators as potentially vulnerable on the same principle;

• Other national tax or levy statutes that empower the minister to “determine” or “fix” rates by notice for general revenue-raising purposes, without clear statutory caps, criteria and real-time parliamentary control, may face similar challenges.

By contrast, more technical delegations – such as the tariff and schedule amendment powers – may be more likely to withstand scrutiny because they are narrower and more regulatory in character, as well as embedded in a framework of oversight and constraints.

‘Announce now, legislate later’

In short, parliament may now need to audit the entire tax code for “announce now, legislate later” provisions and either redesign them with tight limits and oversight or pull those decisions back into primary legislation.

For now, the declaration of invalidity is suspended for 24 months and referred to the Constitutional Court for confirmation. That means:

• Section 7(4) technically remains in force until the Constitutional Court rules or the suspension expires;

• No other High Court can come to a contradictory conclusion on the same provision; the next word belongs to the apex court.

Grounds for challenging the ruling

The minister of finance and parliament are likely to contest aspects of the judgment in the Constitutional Court, not necessarily to restore unfettered announcement powers but to argue for a narrower, better-designed delegation.

While nothing formally stops the minister from using section 7(4) during the suspension period, it is unlikely that the minister would attempt to use the provision until it is amended.

Any attempt to use the provision as it is would invite political, legal, and practical risks, which may result in litigation and could also complicate the Constitutional Court’s remedial options.

The high court grounds its analysis in section 77 of the Constitution (Money Bills) and the principle that decisions to impose, abolish, or reduce national taxes must be taken by Parliament using the prescribed legislative procedure.

Constitution-compliant process

It also emphasises that the fiscal framework and later bills, while important, do not amount to prior legislative control when the higher VAT is already being collected.

Looking forward, a constitution-compliant process to increase VAT (or other headline tax rates) is likely to have these features:

1. The minister still announces proposed rate changes in the budget either after parliament has agreed to the rate change or when a Money Bill explicitly setting the new rate and effective date is tabled at the same time or shortly thereafter. This will necessitate parliament to take into account the parliamentary process for approval of the Money Bills and parliament’s schedule and sittings when considering how section 7(4) will be amended;

1. Parliament must pass the bill (and the president must assent) before vendors are required to charge the new rate, eliminating the legally operative “announcement period.”

2. If parliament wants some agility, it can authorise limited, temporary adjustments within clear percentage caps, subject to approval from all members of parliament within a short period (for example, via resolution), borrowing from comparative models the judgment canvasses;

3. Vendors should, in time, be able to anchor system and pricing changes to the passage of an Act, or at least to the near-certain passage of a Money Bill, rather than to a politically contestable announcement;

4. Thorough discussion and representation within Parliament around the consequences of a VAT rate increase and various measures/options to alleviate the increase in the cost of goods and services. This should also increase taxpayers’ confidence in government, as South Africans will have a level of certainty and comfort that their elected representatives, through Parliament, would have considered other measures to ensure consumers are not burdened by an increase.

Redesign rate-setting tools

The full bench’s ruling is a strong assertion that the power to tax – including setting the VAT rate – is not a matter for executive decree, however convenient that may be for fiscal management.

It points toward a future in which Parliament must own rate changes more explicitly and in which any executive “shortcut” must be narrow, timebound, and subject to genuine legislative control.

For tax policymakers, the message is to redesign rate-setting tools across the tax code. For businesses, it is a cue to watch not only what the finance minister says on budget day but also what Parliament does in the weeks that follow.

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