South Africa’s hidden economy – where they don’t pay tax

South Africa has a large and vibrant informal economy, which is seldom counted and where the taxman has virtually no presence.

This is the message from entrepreneur and informal economy expert GG Alcock, who said South Africa’s economy is much healthier than what people are told.

Alcock said it is a false narrative that South Africa suffers from widespread poverty and inequality, with most people living in a shack.

He said there has been a tremendous housing transformation in townships across South Africa, with many impressive houses springing up.

“If you go into townships today, you will find that most houses are impressive formal houses,” he said.

In Orange Farm, for example, there used to be rows and rows of shacks a decade ago. Today, most people live in formal houses.

It is striking that none of it has happened through official home loans. These houses were mostly built using lay-bys, stokvels, and informal loans.

Stats SA’s Census 2022 substantiated his claims, showing that households that resided in formal dwellings increased sharply from 65.1% in 1996 to 88.5% in 2022.

The chart from Stats SA’s Census 2022 statistical release below shows households by type of main dwelling between 1996 and 2022.

Another misconception is that South Africa is characterised by large households with many people living under one roof.

Alcock said this is a misconception as people move from their communal households into their own homes, creating a large sector of backroom rentals.

The backroom rental economy has grown to an estimated R20 billion annually. “That is a conservative figure. It is most likely double that,” he said.

This is part of the move to smaller households with more disposable income and where people spend more money on themselves.

Again, Stats SA’s latest data substantiates Alcock’s claims. The average household size decreased from 4.5 people in 1996 to 3.5 in 2022.

Provincial variations showed that provinces like Gauteng (2.8) and the Western Cape (3.3) recorded the lowest average household sizes.

Alcock said South Africa’s black middle class is now estimated at 3.4 million people, accounting for nearly half of South Africa’s total middle class.

“There are a lot more incomes out there than what the official unemployment figures suggest,” he said.

The chart below shows how the average household size by province changed between 1996 and 2022. 

An interesting observation about the informal economy is that the South African Revenue Service (SARS) has virtually no presence in the informal economy.

Investec said informal businesses and entrepreneurs typically do not contribute directly to the fiscus through taxes.

Many informal businesses pay value-added tax (VAT) on purchases, but that is where the taxman’s reach stops.

UCT researcher Luvuyo Mncanca said businesses operating in the informal economy do not want to be regulated or registered for tax, as shown during the Covid-19 pandemic.

During the pandemic, the government launched the Spaza Shop Support Scheme, which included access to R3,500 working capital and an additional R3,500 in revolving credit.

To qualify for this scheme, spaza shop owners needed, amongst other things, a valid and original municipal trading licence or permit.

Spaza shop owners who were not registered businesses, tax compliant, or paying the Unemployment Insurance Fund (UIF) were required to accept assistance to register for these.

Many township business owners were reluctant to register as they viewed this as the government’s strategy to compel them to pay taxes.

Although these businesses and employees don’t contribute to state coffers, it has the benefit of removing friction and complicated bookkeeping to run a business.

These informal businesses provide livelihoods, employment, and income for approximately 2.5 million workers.

According to Stats SA, the median income of workers in the informal sector is about R2,000 per month, compared to R4,300 in the formal sector.

Self-employed workers, particularly men, earned more. Data shows that they earn around R6,700 per month, on average.

Alcock said the informal economy, often left out of official national figures, is booming in South Africa.

• South Africans earn at least R20 billion per year in backroom rentals.
• Salons and hair extension sellers earn R10 billion per year.
• Spaza shop rentals earn R25 billion per year.
• The spaza shop market is worth R160 billion annually across 100,000 spaza shops.
• The informal fast-food market is worth around R50 billion annually across 45,000 outlets.
• 45,000 licensed taverns and shebeens earn R110 billion per year.
• The taxi industry earns R50 billion per year.

Many other examples of thriving informal economic sectors exist, which are overlooked by mainstream reporting and media articles.

“There is incredible growth in entrepreneurship and independent businesspeople in South Africa,” Alcock said.

“We should be celebrating this entrepreneurial revolution and look at how we can enable and support them.”