Reversing the VAT increase: What the future holds

By Louis Botha

It feels like an understatement to say that the events that unfolded since the tabling of the Budget on 12 March 2025 have been unprecedented. Here we are, approximately six weeks later, and National Treasury has indicated that the proposed 0.5% value-added tax (VAT) rate increase, which would have come into effect on 1 May 2025, is being reversed. This was communicated through a media statement in the early hours of 24 April 2025.

The decision follows the highly contested passing of the fiscal framework in Parliament a few weeks ago and the hearing in the Western Cape High Court on Tuesday, 22 April 2025, where the passage of the fiscal framework and the proposed VAT increase were challenged.

In this article, we touch on some of the key matters to consider.

When does the increase have formal legal effect?

There has been some debate about what needs to happen before the reversal has formal legal effect. Although section 7(4) of the Value-Added Tax Act, 89 of 1991 (VAT Act) allows for the VAT rate to increase from a date announced by the Minister of Finance, subject to the relevant legislation being passed within 12 months from the announcement, it does not contain an equivalent provision for reversing the announcement. The constitutionality of the abovementioned provision is also being challenged in the matter heard on Tuesday, in Part B of the Democratic Alliance’s (DA) court application, but remains effective in the interim – at least until the outcome of this challenge.

Given that the parties to the dispute are now attempting to settle the matter, it appears that the reversal decision can take formal legal effect in one of two ways:

• By way of an order of court, based on a settlement stating that the VAT increase is reversed or suspended; or
• By way of compliance with the money bills legislation, which appears to require that legislation must be passed which confirms that the VAT rate remains at 15%. The Rates and Monetary Amounts and Amendment of Revenue Laws Bill was tabled yesterday, 24 April 2025 and states in section 13(1) that “despite section 7(4)…the alteration of the VAT rate does not come into effect…”. Section 13(2) states that section 13(1) is deemed to have come into effect on 1 May 2025, as it appears unlikely that the bill will be passed before 1 May.

If the parties cannot reach a settlement before the High Court gives judgment, the reversal will take formal legal effect based on what the judgment orders.

SARS guidance

Earlier this afternoon, Friday 25 April 2025, the South African Revenue Service (SARS) issued a media statement providing some guidance. It states the following, amongst other things:

• From 1 May 2025, vendors are expected to charge VAT at the rate of 15% and not 15.5% for the relevant goods and services as per the VAT Act.
• VAT vendors who have not implemented the change in rate must not proceed with the change.
• Should a vendor not be able to revert to the 15% rate due to complex system changes that may be needed, such changes must be reported and accounted for at the rate of 15.5% but must be changed to 15% by no later than 15 May.
• VAT transactions which were charged at 15.5% must be reported in field 12 (for output tax) and field 18 (for input tax) of the VAT return.
• Adjustments in the form of refunds of the 0.5% rate to customers and from suppliers, must equally be reported in fields 12 and 18 of the VAT return.

The full statement is available on the SARS website.

The future of section 7(4) of the VAT Act and similar provisions

It remains to be seen what the outcome of the DA’s challenge to this provision will be, which will be heard later in Part B of its application. Regardless of whether the issue in question is considered by the court or not, it would be prudent for this and similar provisions in tax legislation to be taken under consideration. We touched on this issue in a recent previous Tax Flash. Our tax legislation currently allows for rate changes to income tax, estate duty, the skills development levy, securities transfer tax, unemployment insurance contributions and the mining royalty to be made in the same way.

It is hoped that National Treasury will consider addressing this  when the draft Taxation Laws Amendment Bill and draft Tax Administration Laws Amendment Bill are tabled later this year.