South Africa could look at taxing townships and the informal economy

“Taxing the digital economy and the informal economy could potentially bring many new taxpayers into the net, although both routes could pose considerable challenges, says Robyn Berger, executive of Tax at law firm Bowmans.

Berger argues that the untaxed, informal economy could also be a focus area for expanding the tax base.

“The biggest difficulty with this is that no one really knows the value of this economy and what level of tax revenue could be generated from it. Some estimate that it contributes billions to South Africa, making up 20% of jobs in the country,” she said.

“While the informal economy has undoubtedly been significantly impacted by Covid-19, it is likely to bounce back relatively quickly or find ingenious ways to trade through Covid-19.

“It may even grow, through the addition of individuals who have been retrenched electing to start their own businesses. Targeting this economy seems like an obvious way to expand the tax base.”

The burning question, however, is how South Africa could go about this in practice, said Berger

Berger suggests a two-pronged approach. “It would be necessary to appeal to the moral conscience of taxpayers to get them to comply and then, because these businesses are predominately cash-based, there’s a need to be able to police their compliance.”

This seems a relatively easy problem to solve, even if a technological solution is implemented gradually.

“The use of a payments system like M-Pesa, which has worked so successfully in Kenya, coupled with an application that monitors revenue and taxes it as it is generated, may be the solution.”

She also suggests instituting incentives to phase out cash over a period and to link the digital payment system to a SARS application that imposes and collects a minimum percentage-based tax on all revenue generated.

“This approach may result in increased tax revenue collections through simple reporting processes, spreading the tax burden across a wider spectrum with minimal audit activity required.”

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South Africa could look at taxing townships and the informal economy