South Africa ruling ANC on Thursday suspended a controversial plan to increase value-added tax from May 1, that threatened to fracture a fragile coalition with the Democratic Alliance DA, who voted to oppose a budget proposal that included the new tax.
The proposed hike and the political turbulence it generated led to investor fears amid worries that the coalition government could split.
The National Treasury had planned to raise VAT by 1 percentage point spread over two years as part of revenue measures for the 2025 national budget.
Finance Minister Enoch Godongwana while stating the VAT will be maintained at 15%, also announced that he will introduce a revised version of the Appropriation Bill and Division of Revenue Bill within the next few weeks.
“The decision to forgo the increase follows extensive consultations with political parties, and careful consideration of the recommendations of the parliamentary committees,” the ministry said.
Without the VAT increase, estimated revenue is expected to fall short by around 75 billion rand ($4.02 billion) over the medium term.
“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,” it added.
The DA had challenged the planned tax hike in court and voted against the budget’s fiscal framework in parliament because of it.
On Thursday the DA celebrated the decision to backtrack on the VAT increase, but senior party official Helen Zille said its relations with the ANC were characterised by mistrust and the future of the coalition was still unclear.
Finance Minister Godongwana had argued in court papers that failure to raise the VAT would cause severe harm to state finances.
Some smaller political parties had put forward proposals that would include deeper expenditure cuts instead of a VAT hike.
The finance ministry said while some suggestions were worthwhile, they “would not provide an immediate avenue for further revenue in the short term to replace a VAT increase”.
