South Africa’s informal economy is estimated to be worth R750 billion, and it is estimated that only 60% to 70% of businesses in the sector pay tax.

This was revealed at the launch of Lesaka Technologies’ South African Informal Economy Digitalisation Index.

Informal economy expert GG Alcock said most businesses in the sector are not registered taxpayers but contribute significantly to Value-Added Tax (VAT) receipts.

When considering the absolute size of the informal economy, it is clear that the South African Revenue Service (SARS) has massive potential to boost tax collection.

In total, Alcock estimated the value of the informal economy to be at least R600 billion and said it is probably worth around R750 billion.

Alcock explained that the informal economy mirrors the structure of a formal economy, with various formal sectors mimicked in townships and informal settlements.

The largest portion of the informal economy comprises small spaza shops and superettes, which do not pay tax.

Alcock said these relatively unsophisticated businesses are not registered companies and do not pay tax despite this sector of the informal economy being worth R180 billion.

However, as they are not registered taxpayers, they contribute significantly in terms of VAT as they cannot claim VAT refunds as a formal business would.

On the other hand, alcohol traders in the informal economy contribute to the country’s fiscus as many are licenced liquor traders, requiring them to be registered businesses and taxpayers.

This sector is estimated to be worth R110 billion, with over 45,000 licenced taverns and bottle stores.

Most spaza shops and alcohol traders will also contribute to the fiscus by purchasing supplies from formal businesses, often directly from large wholesalers.

For example, many spaza shops or superettes will source stock from a Shoprite Usave, Pick n Pay Boxer, or even directly from food processors such as Tiger Brands.

Taverns, shebeens, and liquor traders will purchase their stock directly from liquor wholesalers, Coca-Cola, or traditional bottle stores.

Thus, the informal economy is significantly intertwined with its formal counterpart and contributes greatly to the bottom line of large, often JSE-listed businesses, contributing to the country’s fiscus.

Furthermore, data from Lesaka’s Kazang point-of-sale system shows that the informal economy is rapidly digitising, which will give SARS the data and ability to tax it while also ensuring more of the value generated from the informal economy is filtered into the formal and is easier to tax.

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This article was first published by Daily Investor. To read the original, click here.

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