The South African Tax Base at a Glance
The South African Revenue Service (SARS), collects the bulk of its revenue from three main sources – Personal Income Tax (PIT) at 37.4%, Value Added Tax (VAT) at 25.7%, and Company Income Tax (CIT) at 18.2% of total tax revenues collected. In addition, they collect other income from import duties and other excises on products.
The reality about the state of taxes though is that there is a very small number of tax payers that contribute the bulk of the income that government uses to fund its operations.
In 2023/24, there were 959,000 registered VAT vendors, but only 488,118 were active, amounting to just 50.9% of the total. Out of 3.6 million registered CIT taxpayers, only 1.16 million are actively contributing – 643,948 are registered for PAYE, 389,302 are registered Trusts, with only 172,611 enterprises registered for Small Business Corporation (SBC) tax. Although over 1 million businesses were assessed for CIT in 2023/24, a staggering 66.5% of all CIT revenue was received from only 549 companies.
Return on Taxes Poor – Creating Gaps in Collections
While small business growth could be the key to expansive economic growth and job creation, the current landscape for small business developments in the country are restrictive.
Despite a full ministry dedicated to small business growth in South Africa, which carried a budget of almost 2,5 billion (ZAR) in the 2024/2025 financial year, small businesses are struggling with high input costs such as electricity and fuel costs as well as high telecoms cost structures. In addition, the burden for labour costs, minimum wages, administrative costs to simply comply with tax requirements is often inhibitive.
The big problem for a lot of start-up and SME businesses in South Africa is simply that the return they get for their tax money does not equate to better infrastructure and smooth running transport, export and import facilities that can cause huge delays and even losses for these businesses.
While it is true, that broadening the tax base should be beneficial to all, by ensuring better overall market and operational conditions, this is seldom the case in reality.
Small Business Challenges
Small businesses in South Africa are also often managing multiple priorities such as business efficiency, innovation and growth. Amidst these daily challenges, and so many overlook the value of claiming the full range of tax benefits available to them.
Despite the impressive growth revealed in the latest tax statistics, it’s clear that a significant gap in tax compliance exists.
There is great opportunity for small businesses who are underrepresented in tax compliance and contribution to review their tax strategies and reap the rewards of compliance, while it is equally in the government’s best interest to see that tax money is spent in a way that beneficiates the market and drives compliance due to perception of benefits received.
While the SA government currently offers major reductions in tax rates to large international companies who invest in the country, this often only grows a small and specific sector in terms of jobs and much of the profits are often moved off-shore. In comparison, Small business growth could bring much higher job expansion with much of the profits remaining within the country.
It is also clear, in the interest of economic growth, that when the minister of Finance announces his budget tomorrow, there should be a greater consideration to reduce the tax rate for smaller businesses, even if this was limited to an initial 2 to 3-year period of establishing the business. Return on this type of incentive could boost economic growth far beyond a single large investor. This is however unlikely.
Significant Revenue Growth would spread the Tax liability
SARS’s total tax revenue has shown impressive growth, from R1,355.8 billion in 2019/20 to R1,740.9 billion in 2023/24, marking an annual increase of 3.6%. This growth is a testament to two key factors. Firstly, SARS has invested heavily in advanced technology to simplify and streamline tax filing processes. Secondly, there is an increasing number of small businesses that are growing their education around tax, often guided by the crucial advice of their accountants.
“SARS is a well-run organisation that is currently using and planning to increase the use of technology, especially AI, to improve its already efficient processes. VAT and Payroll eFiling are examples of great innovations that have made the process smoother for taxpayers and increased compliance. Small businesses should follow and be modernising their thinking and systems. Using digital tools to manage your finances and working with a digital-minded accountant will help small businesses keep up with SARS’ efforts,” says Colin Timmis, Country Manager at Xero South Africa.
Tax Incentives Tailored for Small Businesses
While SARS is investing in making tax filing processes even more efficient through advanced technology, there are still very few small businesses reaping the rewards of available tax incentives. For example, there was a 15.5% increase in the limit for the first SBC tax bracket, from R79,000 to R91,250 for the 2023 tax year. This change allows small businesses to earn more income before facing higher tax rates. Enabling small businesses to retain more of their earnings signals a more supportive policy environment for SBC growth. However, only 172,611 businesses have registered for the SBC tax regime in 2023/24. This low uptake highlights a missed opportunity. Not enough small businesses are taking advantage of such incentives that directly support their growth and profitability.
Challenges Faced by Small Businesses
Another concerning statistic from the 2022 tax year reveals that only 20.7% of companies declared a positive taxable income, with 54.6% reporting zero taxable income. However, small businesses actually did a lot better with 57.5% declaring a positive taxable income even with only 4,261 small businesses having a taxable income in excess of R1m.
“What the stats say is that small businesses are more likely to be profitable but at a much smaller scale and they contribute very little to tax revenue. Cash flow is therefore critical given these small margins,” says Pieter Faber, Executive: Taxation at SAICA.
Colin Timmis says: “This underscores the need for smarter financial management tools and more professional support. SARS is at the forefront of digital transformation reshaping how businesses interact with tax compliance. For SMEs, adopting digital tools under the expert advice of their accountants is not just about ensuring that they are up to date with regulatory changes. It unlocks the opportunity to enhance overall business efficiency.
Building Trust Through Improved Compliance
“SARS has a clear vision and strategy for how to improve the tax system. Small businesses should have the same level of focus on their tax and accounting processes, and work with their accountant to outline goals and objectives,” says Timmis.
He adds, “It’s crucial that business owners, accountants, and tax advisors work alongside each other to develop forward-thinking tax strategies that consider current frameworks as well as future prospects. In a world where every rand and cent counts, it’s less about questioning if you can afford to claim these tax benefits but rather, can you afford not to.”
Small businesses are the backbone of South Africa’s economy and by harnessing every tax advantage available they can free up critical resources for growth and innovation. However, this relies on small businesses seeing tax compliance as less of an administrative obligation and more of a strategic asset.
