An alternative approach to the integration of the informal sector into the South African tax base

Abstract

Small businesses in the formal sector emerge from the informal sector. These small businesses play an important role in the economy. The informal sector creates job opportunities for the unemployed and for those who seek entrepreneurship opportunities with limited capital resources. The South African Revenue Service (SARS) constantly faces a challenge of growing the tax base in order to increase tax revenues from one tax period to the next. There are a number of factors that affect the maintenance and growth of the tax base, one of which is base erosion and profit shifting. This study discusses the unique characteristics of the informal sector small, micro and medium enterprises (SMMEs) and the nature of their operations. This provides an understanding of the SMMEs in this sector and explores some of the challenges that these informal sectors businesses face in their operations. The study further discusses whether the current income tax relief initiatives can cater for the uniqueness of the informal sector SMMEs. The study discusses their objectives, practicality in applications and the challenges that could arise in applying them to encourage registration by informal sector SMMEs. In order to be able to incorporate the informal sector business into the tax base, SARS would need a mechanism or program that allows for the identification of the informal sector business. As a result this study considers a Block Management System that was implemented by Tanzania in 2005 which was developed in order to cater for the unique characteristics of informal sector businesses. The Block Management System’s objective is to focus on the physical identification and mapping of taxpayers. Conclusions drawn from this study are that SARS has realised the importance of small businesses in the economy and has put several initiatives in place for small businesses but currently these provisions do not serve as an incentive for the informal economy small businesses to register and pay taxes. It was found that SARS would benefit from the implementation of a similar program to the Tanzania Block Management System as it will assist with the identification of informal sector businesses to integrate it into the South African tax base