The informal economy in South Africa contributes about 5 percent to gross domestic product and 15 percent to employment. It is not as large as in other African economies, but it still plays a significant role in production, distribution, wealth creation and support for the country’s most vulnerable citizens. Only a fifth of people working in the informal sector do so by choice.
The informal economy is not taxed on income or revenue and presents an opportunity for the National Treasury to broaden its tax base. But aside from the practical challenges of taxing unrecorded economic activity, taxing the informal sector needs to adhere to an important social contract: that paying taxes leads to a more enabling business environment and a better country to live in. In their budget announcements earlier this month, Kenya, Tanzania and Uganda committed to increasing taxation of informal businesses.
In 2008, Kenya introduced a compulsory Turnover Tax (ToT) on all businesses that earn between 500 000 Kenyan shillings (R71 600) and 5 million Kenyan shillings per year. It requires businesses to submit annual sales receipts and invoices, cashbook, daily sales summaries and bank statements. This year Kenya wants to expand ToT to include informal traders and commuting services, essentially bringing them into the formal economy.
Yet Kenya offers little in terms of infrastructure for informal business activity, access to markets or easier channels to obtain credit. From the point of view of the informal trader – assuming they can dodge the monitoring teams of the understaffed Kenyan Revenue Authority – there is little incentive to register for ToT and most do not.
Voluntary payment
Tanzania and Uganda have partly addressed the incentive for voluntary tax payment by introducing a presumptive tax. In the case that businesses are not registered and do not submit complete or accurate records, the tax they need to pay is presumed and negotiated between the tax collector and the taxpayer. The tax rate on presumptive tax is higher than the normal business tax, theoretically encouraging taxpayers to keep better records.
The system requires that state resources be invested into the identification of tax evaders and the negotiation and processing of individual tax disputes. The programme is costly and ineffective.
About 20 developing and middle-income countries in the world use electronic fiscal devices (EFDs). EFDs are electronic sales registries that automatically send the relevant tax information of every sale to the national tax authority. They are able to work on battery power in order to reach rural areas, and record and store all transaction details offline until they connect to the central server.
EFDs are primarily used to capture VAT and are an effective way to reduce the trader’s burden of ploughing through individual sales slips and sorting items according to their tax obligations. EFDs require that the trader uses them for every sale and once again, unless the trader perceives that there is tangible benefit to paying taxes, the implementation of EFDs requires expensive monitoring.
South Africa does not make use of EFDs, Uganda has announced plans to introduce them and Kenya and Tanzania plan to expand existing EFD programmes.
Tax collection is a business case for the tax regulator, the trader and the economy. Government would like to claim that all tax collection benefits the country and helps the state to support the country’s businesses and its people. Clearly, under current circumstances, this is not entirely true. When a state spending system is plagued by inefficacy and corruption, it is better to leave the money in the pockets of vulnerable citizens and free them to support themselves and their businesses.
In the case where the state can offer little in return to the informal economy, tax submission will never be voluntary. Increases in taxation will result in higher investments in evasion by traders and monitoring and conviction by the state, leading to a net loss in growth enabling spending.
For now, the east African economies are not role models for South Africa and informal business activity should be left untaxed and unhindered.
* Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein.
* The views expressed here do not necessarily reflect those of Independent Media.
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