From the data pulled from the National Treasury and the South African Revenue Service’s 2024 tax statistics report, an estimated 2.6% of South Africa’s population pay 76.2% of all personal income tax.
Zinhle Mncube and Boitshoko Shoke
The postponement of South Africa’s 2025 Budget Speech from February to March has reignited discussions about the country’s economic challenges, particularly its narrow tax base and sluggish growth.
From the data pulled from the National Treasury and the South African Revenue Service’s 2024 tax statistics report, an estimated 2.6% of South Africa’s population pay 76.2% of all personal income tax. In terms of company tax, just over 1 000 companies paid 72.3% of all company income tax. This limits the government’s efforts to invest in the country while providing services that encourage growth and job creation.
A narrowing tax base leads to difficult discussions and decisions such as the much-maligned 2% increase in VAT. To chart a better economic path to growth for the country, it is clear that increasing the number of tax paying businesses will naturally lead to the creation of new jobs thus expanding the individual income tax base.
A key strategy to address these issues lies in strengthening the participation of small and medium-sized enterprises (SMEs) in the formal economy.
With unemployment standing at 31.9% as of the fourth quarter of 2024, SMEs offer a realistic pathway to job creation and economic inclusion. Over and above our high unemployment rate, South Africa faces significant socio-economic challenges, including high economic inequality, a slow and stagnant economic growth and a significant number of South Africans living in poverty.
A key factor contributing to these challenges is the country’s oligopolistic economic structure, where a few large corporations dominate key industries such as banking, the retail sector, telecommunications, the brewing industry and the fresh produce market – sectors characterised by a domination of a few large players. This limits opportunities for small and medium-sized enterprises (SMEs).
This has resulted in a tax base heavily reliant on mostly medium to large businesses, which is unsustainable in the long run. A tax system dependent on a small number of large corporations poses further significant risks such as economic distortions that favour these tax payers, capital flight, fiscal instability and increased tax avoidance. This heightens the urgent need to diversify the tax base by increasing SME participation in the formal economy.
Countries like Nigeria, which experienced a fiscal crisis due to an over-reliance on a single revenue source (oil), serve as a cautionary tale. Integrating SMEs into the mainstream of the economy has the ability of promoting economic resilience, job creation, and broader economic participation.
A fair tax system ensures that all businesses contribute to national development based on their capacity. SMEs often face disadvantages such as restricted access to financing, regulatory red tape, and skills shortages. The government has responded by implementing progressive tax structures that tax SMEs only once they reach a certain revenue threshold. This shift reduces dependency on large corporations and fosters economic equity.
South Africa’s informal sector remains a vast, untapped source of tax revenue. Formalising these businesses could significantly boost tax collections without overburdening entrepreneurs. The International Labour Organisation estimates that bringing informal businesses into the tax system could increase South Africa’s tax revenue by approximately 10% of its GDP.
The objective is not to overburden SMEs with excessive taxation but to create an enabling environment that allows them to grow, formalise, and contribute meaningfully to economic development. Vietnam, for instance, simplified tax compliance and provided targeted incentives to SMEs, leading to increased business formalisation and higher tax revenues over time. Research further indicates that SMEs contribute up to 60% of new jobs in emerging economies emphasising their potential to drive employment and economic inclusion.
International examples, such as Singapore and South Korea, illustrate the importance of focused government efforts in SME development. Singapore, through agencies like Enterprise Singapore and SPRING Singapore, has provided targeted support to SMEs via grants, tax incentives, financing schemes, and mentorship programmes.
In Singapore, the government has allocated significant resources, with over SGD 1 billion (R13.6 billion) in grants and support for SMEs in recent years, emphasising the importance of targeted financial assistance and mentorship programmes. This structured support has led to a notable increase in the number of SMEs, which contributed to about 70% of total employment in Singapore.
Similarly, South Korea's approach to SME development has evolved significantly since the establishment of the Ministry of SMEs and Startups (MSS) in 2017. The MSS has implemented various policies aimed at reducing regulatory barriers, exemplified by the "One-Stop Service" platform that simplifies administrative processes for entrepreneurs. Financial support mechanisms, including low-interest loans and grants, have been crucial in providing the necessary capital for start-ups.
For instance, the MSS reported that in 2020 alone, it facilitated over KRW 2 trillion (R33.2 trl) in funding for SMEs. Furthermore, the MSS has promoted innovation through initiatives like the "SME Innovation Programme," which has allocated significant resources towards R&D in priority sectors, including green technology and digital transformation. The impact of these government-led initiatives on job creation and economic stability cannot be overstated.
In South Korea, SMEs are responsible for approximately 88% of total employment, highlighting their critical role in the labour market. These initiatives were led by each of their respective governments. This does tell us that the government and its respective agencies are central in creating a framework and environment that directly and indirectly contributes to the success of SMEs.
The success of countries such as Singapore and South Korea demonstrates the effectiveness of strategic support mechanisms in integrating SMEs into the broader economy. Research emphasises that successful SME ecosystems thrive on collaboration between government, private sector stakeholders and civil society.
For South Africa, fostering such an environment would require coordinated efforts from multiple sectors to drive structural economic transformation and ensure the sustainable growth of SMEs. It must be apparent to us all that building SMEs is part and parcel of the nation-building work that was first charted in 1994. It is through strategically supporting them that we enable society to move from consumption to productivity. From tax beneficiary to tax contributor.
Zinhle Mncube is the head of Business and Partnerships and Boitshoko Shoke is the research and impact manager at 22 On Sloane, Africa’s largest entrepreneurship campus.
BUSINESS REPORT