South Africa’s turnover tax eases micro business compliance but cannot make informal traders a revenue base
Introduction
South Africa taxes its smallest businesses with a regime that was built to be simple. Turnover tax replaces income tax, VAT, provisional tax, capital gains tax and dividends tax for micro businesses with a qualifying annual turnover of R2.3 million or less, and for years of assessment ending between 1 March 2026 and 28 February 2027 nothing is payable on the first R600,000 of turnover (SARS, 2026). Above that the rate climbs in steps to 3 per cent of turnover over R1.4 million. On paper this is exactly the kind of presumptive device that advisers have pushed in developing countries for a long time, because turnover is easier to see than profit (Wei and Wen, 2023). The trouble starts when the regime is asked to do a second job as well, which is to pull informal traders and spaza shop owners into the net and raise real money from them.
This paper argues that the turnover tax is a reasonable way to cut compliance burdens for micro businesses that SARS can already see, but a weak instrument for raising revenue from informal traders, and that enforcement aimed at those traders is likely to cost more goodwill than it brings in cash. The argument draws on South African work on informality and small business compliance (Rogan and Skinner, 2021; Dixon et al., 2024) and on evidence from Ethiopia, Uganda and sub-Saharan Africa more widely (Asmare et al., 2023; Gwokyalya and Okumu, 2023; Moore, 2023). It starts with who the informal economy actually consists of, moves to compliance costs and then to enforcement, and ends with what other African experience adds.
Who the regime is really dealing with
Rogan and Skinner (2021) review the South African debates and then run Quarterly Labour Force Survey data, and what comes out is an informal economy that is very uneven. Status in employment and sector differ a lot, the whole thing is heavily gendered, and earnings are low for all but a few groups of informal workers. They also report evidence that the sector does not take in newcomers easily, and least of all in a crisis. That sits awkwardly with the picture of informal traders as people who could pay tax and simply choose not to. Gallien (2025) comes at the same point from the tax side, arguing in a policy brief that the idea of informality as a goldmine of untaxed revenue rests on a misreading of the statistics, of tax handles and of how income is spread inside informal sectors.
The practical conclusion in Gallien’s brief is that doubling down on current approaches is unlikely to bring in much money, while raising collection costs and equity worries, largely because those approaches miss the higher-income operators (Gallien, 2025). Moore (2023) is blunter. Looking across sub-Saharan Africa, he describes tax administrations that keep records on vast numbers of small enterprises yielding no revenue and still push to register more of them, which he reads partly as a way of looking busy. The informal sector story, in his account, also moves attention away from the failure to tax more privileged people and larger firms. It would be unwise to carry Moore’s reading straight over to SARS, since it rests on a regional picture and his dealings with administrators and not on SARS data, but it is a useful warning about what registration counts can and cannot show.
Spaza shops make the problem concrete. Selepe and Litheko (2025), in a review of secondary literature centred on North West Province, report that these township retailers are held back by limited finance, poor infrastructure, legal barriers and rising competition from formal and foreign-owned retailers. That is a thin evidence base, a literature review and not a survey of owners, so it needs careful reading. Even so, it fits the wider picture of low and uneven earnings in Rogan and Skinner (2021). If a typical spaza owner turns over less than the R600,000 zero band in the SARS (2026) schedule, then registering that owner for turnover tax would produce a record and a return but no payment at all. Whether that is typical in South Africa is something none of the sources used here measures directly.
Compliance costs and why simplicity matters
The economic case for a turnover tax is mostly a compliance case. Wei and Wen (2023) note that turnover is widely used as a presumptive base in developing countries because it economises on administration costs and on the effort taxpayers have to put in. Their IMF working paper builds a model with a size threshold separating firms on turnover tax from firms on profit tax, and with an option for firms to stay informal altogether. The optimal turnover tax rate for countries with large informal sectors comes out at around 2.5 per cent in most scenarios, and a well-designed turnover tax cuts informality by about 12 percentage points in their calibrated model. Those are simulation results, so they show what the design could do under stated assumptions and not what it has done anywhere. South Africa’s top rate of 3 per cent (SARS, 2026) sits in the same neighbourhood, although the abstract says nothing about a zero band like the one in the SARS schedule, so the match should not be pushed too far.
What does compliance actually cost South African micro businesses? Dixon et al. (2024) start from the admission that nobody had a proper baseline. Their online survey of SMMEs registered with SARS was meant to supply one, and they frame it around the association between high compliance costs and larger informal sectors, more corruption and less investment. Without a baseline you can’t tell whether reforms such as the turnover tax have made life cheaper or dearer over time, which is a bit awkward for a regime sold on simplicity. On top of that, a survey of registered firms leaves out the traders who never registered, so the people who matter most for the informality question are the ones missing from the data (Dixon et al., 2024). That gap looks rather like the one Moore (2023) describes, where counting registrations seems to stand in for evidence of results.
There is a case on the other side that deserves a fair hearing. Registration might be worth something even when it yields no revenue, because Gallien (2025) lists data and dialogue among the pillars of a more productive approach, and a register of traders with some turnover information is basically data. The question is what it costs to build and keep that register, and whether owners read it as the start of a relationship or the start of enforcement. Moore (2023) is sceptical, reading registration drives as serving administrative interests more than revenue ones. The compliance cost question in Dixon et al. (2024) bites here as well, because even a return with nothing to pay plausibly costs the owner time and perhaps a practitioner’s fee. Those costs are hard to defend if nothing comes back in services or support, and that’s why the regime’s case rests more on what the trader gets than on what SARS collects.
Owners’ difficulties tend to show up at particular points. Ndlovu and Schutte (2024) interviewed 22 tax practitioners who serve small business owners in Gauteng, and the practitioners described owners who do not grasp VAT agency, who use VAT money for day-to-day operating needs, who struggle with accounting on an invoice basis and who are not ready for the compliance burden when they reach the compulsory VAT registration threshold of R1 million. Turnover tax is the obvious way to put that moment off, since a qualifying micro business can stay out of VAT until it passes R2.3 million, although it may elect to remain in the VAT system (SARS, 2026). Whether owners know this, or whether their advisers steer them that way, is not something the practitioners’ accounts tell us. Still, it suggests that the regime’s main value lies in smoothing the early growth stage of businesses that already trade formally, not in capturing informal traders.
Enforcement, penalties and the unregistered trader
Penalties are where compliance policy runs into cash flow. Ndlovu and Schutte (2023) interviewed small business owners in Gauteng and found that penalties do push owners, to an extent, to pay on time. Heavy penalties can also discourage owners from registering at all, and where non-compliance comes from cash flow trouble the penalty simply turns into a cost of doing business. A lack of skills and basic tax knowledge led to unintentional non-compliance, so the authors say penalties need to be paired with training and awareness. For a spaza owner who is not yet registered, the message heard may well be that registering opens the door to penalties. The study supports that only indirectly, because its participants were small business owners generally and not informal traders in particular, but Selepe and Litheko (2025) also list legal barriers among the constraints on spaza shops, which hints at a similar wariness of formal rules even though they do not study penalties as such.
Uganda gives a sharper example of what happens when the rules are unclear. Gwokyalya and Okumu (2023) interviewed nine small business owners, eight Uganda Revenue Authority officers and eight tax consultants about the presumptive tax on gross turnover. Owners were unsure what the tax was, how it was assessed on annual sales, which indicators were used to estimate turnover and what they actually owed. That produced resistance and weak voluntary compliance, and owners tended to wait for officers to assess them and then bargained or bribed their way to paying little or nothing. South Africa differs on one important point, because the SARS description speaks of a rate applied to the taxable turnover of the micro business (SARS, 2026), which appears to rest on what the taxpayer declares and not on officers’ estimates from indicators. That removes a good deal of room for bargaining, though it puts the weight on record-keeping and honest declaration, and that is exactly where the compliance cost question raised by Dixon et al. (2024) comes back in.
If enforcement is going to have a place at all, Gallien (2025) suggests it belongs with the higher-income operators inside informal sectors, as part of a wider approach built around targeting, development, data and dialogue. Moore (2023) reaches a compatible conclusion by another road, urging great caution about claims that registering large numbers of new taxpayers is worth the resources, and suggesting that the very term informal sector is confusing when used in tax policy discussions. In a South African setting this would mean spending audit effort on the larger operators in informal trade and keeping a lighter touch with the many traders whose earnings are low (Rogan and Skinner, 2021). It is a judgement and not a proven design, since no source here tests it, but it follows from where the evidence on revenue and on goodwill seems to point.
What Ethiopia, Uganda and the wider region show
Ethiopia’s turnover-based presumptive tax has been examined for fairness, and the results are not flattering. Using 2021 survey data on informal micro enterprises in Addis Ababa and a representative taxpayer approach, Asmare et al. (2023) find that the system would be both horizontally and vertically inequitable. About 44 per cent of the surveyed businesses earn below the minimum formal sector business income tax threshold, and most of those are owned by women. The authors put the problem down to the complexity of how the burden is worked out and the lack of clarity about the process, and they call for a serious discussion of revision. The lesson for South Africa is less about the rate than about design. A presumptive tax that bites on people whose profits would never reach the formal threshold is hard to defend, and the SARS zero band (SARS, 2026) does something close to the opposite by exempting the first slice of turnover. Whether R600,000 is generous or meagre for a retailer on thin margins depends on margin data that none of the sources here report.
Put the African cases next to the modelling and a disagreement shows up. Wei and Wen (2023) treat a well-designed turnover tax as a way of drawing firms out of informality, and in their simulation it does. Asmare et al. (2023) and Gwokyalya and Okumu (2023) describe turnover-based taxes that are seen as unfair, unclear or open to bargaining, which hardly reads like an invitation to formalise. The gap may come down to design details, such as how clearly turnover is defined and who gets to determine it, but it may also reflect the difference between a model and a revenue authority’s everyday capacity. The sources do not settle this, and it would be overconfident to say which explanation holds in South Africa.
What the South African context changes is mostly institutional. Spaza shops and other informal traders face a bundle of legal requirements alongside tax, and Selepe and Litheko (2025) call for easier formalisation processes together with finance and capacity-building. Rogan and Skinner (2021) likewise examine how South Africa has responded to the global call to promote formalisation, which places tax as one lever among several. A trader who has to deal with a string of offices to become legal will probably not rank the tax office first, which means the simplicity of turnover tax can only help so much while the rest of the process stays complicated. That is an inference and not a finding, and the thin evidence base noted earlier applies again, but it explains why a tax-led approach to informality looks like it is starting from the wrong end.
Conclusion
The turnover tax is a sensible answer to a compliance problem. It lets micro businesses that already deal with SARS skip several taxes, it gives them a zero band and modest rates, and it may delay the shock of VAT registration at R1 million (SARS, 2026; Ndlovu and Schutte, 2024). The modelling literature suggests that a turnover tax of this kind can reduce informality, but only under assumptions that remain to be tested in South Africa (Wei and Wen, 2023). What the evidence does not support is the idea that the regime, or tougher enforcement of it, will turn informal traders and spaza shop owners into a meaningful revenue base (Gallien, 2025; Moore, 2023).
Three things follow, and they are modest. SARS and National Treasury could repeat the compliance cost survey that Dixon et al. (2024) began, and extend it to unregistered traders, so that simplicity can be judged on numbers and not on hope. Penalties for small firms could be tied to training and awareness, given the cash flow and knowledge problems that Ndlovu and Schutte (2023) report. And audit attention could shift towards the larger informal operators while the many low-earning traders are treated mainly as a development and data question, as Gallien (2025) and Rogan and Skinner (2021) point towards. The evidence behind all this is thin, mostly qualitative and often from small Gauteng samples or other countries, so these are positions to test, not conclusions to bank.
Reference list
Asmare, F., Yimam, S. and Semreab, E. (2023) Presumptive taxation and equity: evidence from the Ethiopian informal sector. ICTD African Tax Administration Paper 32. Brighton: Institute of Development Studies. doi:https://doi.org/10.19088/ICTD.2023.056
Dixon, H., Smulders, S. and Odendaal, E. (2024) The cost of tax compliance for small, medium and micro enterprises in South Africa. International Journal of Advanced Business Studies, 3(4), pp. 23-51. doi:https://doi.org/10.59857/IJABS5109
Gallien, M. (2025) Why the informal sector is not a tax goldmine. ICTD Policy Brief 20. Brighton: Institute of Development Studies. doi:https://doi.org/10.19088/ICTD.2025.054
Gwokyalya, W. and Okumu, I.M. (2023) Gross turnover assessment and tax compliance in Uganda’s small businesses: a deep inquiry on the certainty of presumptive tax law. International Journal of Law and Management, 65(5), pp. 405-424. doi:https://doi.org/10.1108/IJLMA-10-2022-0221
Moore, M. (2023) Tax obsessions: taxpayer registration and the ‘informal sector’ in sub-Saharan Africa. Development Policy Review, 41(1), e12649. doi:https://doi.org/10.1111/dpr.12649
Ndlovu, M. and Schutte, D. (2023) The influence of penalties on the tax compliance behaviour of small business owners. Southern African Business Review, 26, pp. 1-19. doi:https://doi.org/10.25159/1998-8125/12573
Ndlovu, M.O. and Schutte, D.P. (2024) Understanding the challenges encountered by small business owners regarding value-added tax compliance. South African Journal of Economic and Management Sciences, 27(1), a5589. doi:https://doi.org/10.4102/sajems.v27i1.5589
Rogan, M. and Skinner, C. (2021) ‘The South African informal economy’, in Oqubay, A., Tregenna, F. and Valodia, I. (eds) The Oxford Handbook of the South African Economy. Oxford: Oxford University Press, pp. 757-776. doi:https://doi.org/10.1093/oxfordhb/9780192894199.013.33
Selepe, B. and Litheko, A. (2025) A conceptual comprehension of factors that impede growth of spaza shops in South Africa. International Journal of Innovative Research and Scientific Studies, 8(4), pp. 2354-2364. doi:https://doi.org/10.53894/ijirss.v8i4.8390
Wei, F. and Wen, J.-F. (2023) Designing a presumptive income tax based on turnover in countries with large informal sectors. IMF Working Paper 2023/267. Washington, DC: International Monetary Fund. doi:https://doi.org/10.5089/9798400261015.001
Legislation and case law
South African Revenue Service (SARS) (2026) Turnover tax. Available at: https://www.sars.gov.za/types-of-tax/turnover-tax/ (Accessed: 18 October 2026).