Informal sector taxation: a lesson for South Africa

Abstract

Most informal sector businesses in developing countries participate indirectly in the tax system through paying Value-Added Tax, as well as import and export duties, without being registered as taxpayers. This effectively results in the collection of lower tax revenue than the informal businesses would be liable for if they were registered as taxpayers. Additionally, the nonregistration of informal sector businesses in the tax system perpetuates a culture of non-tax compliance. Countries in sub-Saharan Africa have responded to this challenge by imposing direct taxes on revenue generated in the informal sector. This thesis discussed the informal sector taxation regimes adopted in Tanzania, Ghana and Zimbabwe, with the aim of identifying direct taxes that could be imposed in South Africa on the revenues generated in the informal sector. The goal of the research was to determine the nature of direct taxes that could be imposed in South Africa on the revenues generated in the informal sector, taking lessons from the sub- Saharan countries of Tanzania, Ghana and Zimbabwe. The research was based in the interpretivist paradigm. The data for the research consisted of documentary data dealing with the legislation and experiences of informal sector taxation in South Africa and the countries forming part of this research. The data were analysed using qualitative non-empirical research methods. South Africa has a presumptive tax model in the form of the Turnover Tax system, and it was recommended that this direct tax could be adapted to integrate the informal sector businesses into the tax base. The study made several recommendations to integrate informal sector businesses into the tax base. These recommendations include the implementation of the tax stamp system to tax informal businesses other than minibus taxi businesses, and an income tax sticker specifically designed for the informal minibus taxi industry.