The R1 trillion sector in South Africa that operates outside of the country’s tax regime

South Africa’s informal economy largely operates outside of the country’s tax regime, with estimates placing its value between R900 billion and R1 trillion. 

Flying under SARS’ radar is not due to malicious intent or avoidance. Often, it is simply because the government does not provide services in the areas where informal businesses operate. 

Informal economy expert GG Alcock explained that there is a lack of government service and presence in townships, rural areas, and the inner city. 

These are areas where the informal economy is most prevalent, and a minimal state presence makes it hard for owners to register to pay tax, even if they want to. 

Alcock also points out that informality is not an advantage. It is a trap that limits business growth and employment. 

The inability to access bank loans and basic government services, from electricity to water, greatly limits the growth of these businesses. 

On top of that, there is little benefit to many of these businesses from formalising, as they do not receive better government services or assistance. 

All they get from formalising is a large regulatory burden that is likely to make their business no longer economically viable.

The process of formalising itself is onerous and, given the lack of state infrastructure in these areas, often unavailable. 

“I think paying taxes is the least concern of people in this sector. They are not concerned about paying tax and contributing,” Alcock said. 

“The majority of those businesses want to scale up and formalise. The biggest issue is the absence of resources, not just financial, but also space and infrastructure.” 

The government makes this difficult for these businesses by imposing significant regulatory burdens with formalisation. 

It also fails to give these business owners easy access to government services, where they can register their companies and use state resources. 

“The shortfalls of informality are things like security of tenure, the ability to invest in growth and more facilities, access to finance, and access to commercial equipment,” Alcock said. 

Access to these resources relies on being a formal business. This is why Alcock said the major challenge is not starting a business, but scaling it. 

Government stepping in 

This is set to change, with the government looking to place the informal sector under greater scrutiny and increase its presence in the areas where these businesses operate. 

Leading the charge is SARS, as the informal sector is one of the few areas where the tax base can be broadened. 

This will help the state generate additional revenue, boosting the government’s coffers and improving its financial health. 

South Africa has a highly concentrated tax base, with a handful of individuals and companies contributing the majority of government revenue. 

This is unsustainable, as the economy remains stagnant and more revenue must be squeezed from the same number of taxpayers. 

Finance Minister Enoch Godongwana revealed in response to a parliamentary question that SARS is looking to the informal sector to broaden its tax base. 

“The objective is to help more businesses register, understand their obligations, submit returns and pay what is due,” Godongwana said. 

He explained that SARS uses support, education, simpler processes and risk-based action where required. Key initiatives include –

• Developing an Informal Economy Response Strategy to bring more informal businesses into the formal economy over time.
• Using third-party data, digital platforms and partnerships to identify previously unregistered taxpayers.
• Reducing compliance barriers through simplified onboarding, digital channels and taxpayer education.
• Prioritising sectors with formalisation potential, including spaza shops, informal retail, food services, personal services, construction, digital micro-enterprises and other small businesses.

Since the end of the 2024/25 financial year, this has resulted in 21,890 new taxpayers being registered. These taxpayers have contributed R314 million in revenue.