Bloomberg Tax
Oct. 15, 2020, 7:00 AM

Taxing the Informal Sector—Nigeria’s Missing Goldmine

Judith Monye
Judith Monye
Oyintare  Abang
Oyintare Abang

Over the past decades, Nigeria’s major source of revenue has been crude oil. However, due to factors such as the fall in crude oil prices and the corresponding rise of alternative energy sources, among other economic factors, the need to find other sources to sustain the government budget has become necessary.

For a number of years, the Nigerian government has identified tax revenue as a source of funding. To this end, efforts have been made to grow the tax base and increase the number of compliant taxpayers while encouraging business growth and survival. Currently, the tax base mainly comprises companies in the formal sector which, arguably, have a fairly high level of compliance. However, there still exists the informal sector of the economy (the “underground” economy), which holds the key to unlocking untapped tax revenue required to bridge the gap created by the continual fall in crude oil revenue.

This article focuses on businesses in the Nigeria’s informal sector and discusses the need to integrate them into Nigeria’s tax base, the challenges of taxing this sector and suggested tax strategies to ensure compliance.

Overview of the Informal Sector in Nigeria

According to the International Labour Organization (ILO), the informal sector is defined as those household unincorporated enterprises, informal owned enterprises and enterprises of informal employers. The informal sector comprises workers and businesses which are either registered or not registered, and which do not necessarily comply with legal or tax obligations. They are often not visible to government.

In most developing countries such as Nigeria, the majority of the populace work in the informal sector. From the farmers, traders running market stalls, hairdressers, minibuses, waged labor, private clinics and pharmacies, etc., the Nigerian economy is heavily dependent on this sector. According to the ILO report of April 30, 2018 on the informal economy, 85.8% of employment in Africa is informal; thus the importance of this sector cannot be overemphasized for a developing economy like Nigeria’s.

In Nigeria, the informal sector, classified into micro, small and medium enterprises (MSMEs), makes up 50% of the nation’s gross domestic product (GDP), making it the major source of economic growth, productivity, and competitiveness. Businesses within this category provide the most jobs, teach technical skills, and are critical to nurturing managerial capabilities for the private and public sector.

According to the Small & Medium Enterprises Development Agency of Nigeria (SMEDAN)’s MSME National Survey Report issued July 2019, total MSMEs in Nigeria were estimated at about 41.5 million, with Lagos constituting the bulk of the quoted number for a state (about 11.5%). The MSMEs, which contribute 48% of Nigeria’s GDP, generated over 59 million jobs as at December 2017, with 2.9 million jobs created by enterprises mainly in the education sector. MSMEs are categorized according to the number of assets owned by the business excluding land and buildings (R) and number of employees (E) per the National Bureau of Statistics; however, this differs from the categorization for tax by the tax authorities:

  • micro (R:5 million, E:10 persons);
  • small (R:5 to less than 50 million, E: 10–49 persons);
  • medium (R:50 to less than 500 million, E:50–199 persons).

Nigeria has consistently led the continent in the ratio of informal sector contribution to total GDP since 2010. The government, which has continually enabled the sector via specific provisions in the National Tax Policy, 2017 (NTP) and Finance Act, 2019, has enlisted supporting MSMEs as a strategic objective with incentives on income tax and value-added tax (VAT) obligations. We understand that this is in line with the 2019 SMEDAN report, which had listed “excessive regulation, complex and cumbersome tax processes” as major challenges of MSMEs in Nigeria. It is therefore important that these businesses are encouraged to grow and are captured for tax purposes.

Bridging Nigeria’s Revenue Gap—Why Tax?

According to the NTP, tax is any compulsory payment to government imposed by law without any direct benefit or return of value or a service, whether it is called “tax” or not. To the government, tax is a source of financing, a means to drive desired behavior, a license for businesses operations, and finally, a means of income redistribution within communities.

Apart from its ever-available skilled workforce, Nigeria is also richly endowed with natural resources, which is a consistent attraction to business. With the number of businesses being established in the country annually, Nigeria has the capacity to generate sufficient internal revenue from its tax functions. Tax is sustainable revenue and offers long-term prospects without any underlying cost—no interest payments or service costs. Currently, Nigeria is heavily indebted to foreign donors and banks: increasing tax revenue collection will reduce the country’s dependency on international financial supranationals.

Based on available information, Nigeria has an estimate of 56,329 active corporate taxpayers (companies income tax), 14,823 tax paying individuals/businesses (personal income tax) and 77,082 VAT filing businesses out of 3,098,193 incorporated companies, business names and incorporated trustees.

For individuals, only about 16.7% of economically active Nigerians pay taxes; 80% of these economically active Nigerians are attributable to the informal sector; thus, Nigeria surpasses the global average of 67%. It is safe to assume that the majority of the 16.7% individuals are employees of large businesses which have been acknowledged by the relevant tax authority: yet over 80% of the workforce are not paying taxes.

The gap between the number of registered companies, employed persons and tax compliant companies/persons is massive and to fully maximize tax revenue, this gap needs to be closed.

The informal sector encompasses a wide range of businesses, varying from the traditional, the non-traditional such as digital/e-commerce businesses, to private clinics and pharmacies that have not been registered for tax purposes. Many businesses have evolved into large companies but are still hiding behind the shield of informal businesses and are not paying taxes.

With the impact of Covid-19 on the global economy, there is no dispute that it is time for the country to focus on increasing its internally generated revenue and reducing its borrowing.

Challenges in Taxing the Informal Sector

Tax authorities have encountered various setbacks in their attempt to tax the informal sector: the difficulty in bringing it into the tax net stems from its inherent strengths and structural weaknesses. Challenges range from little or no information on the businesses in the sector, lack of documentation, to lack of regulation.

From their inception, MSMEs keep little or no information about their transactions and business dealings. Ascertaining revenue and expenses may, therefore, prove to be a huge task for the tax authorities. The preference for informal funding, for example funds from friends, family and/or personal savings, over more structured loans, potentially reduces the obligation for business registration and information available to the tax authorities or regulators.

The tax authorities have so far tried to assess and tax this sector using bank account transactions and receipts, which has exposed participants in the sector to punitive tax assessments, liabilities and audits. Businesses in the sector see this approach as lack of support from the government, rather than government’s drive for compliance. This mindset has created distrust between the people and government.

To further strengthen this distrust, traditional street side (brick and mortar) and other small business are currently faced with multiple taxes levied by the various agents of governments, albeit not direct tax. These include levies enforced by the local government taskforce, touts, etc. who harass and enforce compliance, leaving little or no funds for business support. Not only does this instill fear in business owners, it encourages cynicism, leaving no opportunity for tax authorities and government to encourage and drive compliance.

With their rapid adoption and use of social media, locating and enumerating businesses may pose a challenge for tax authorities, as most businesses are not operated from a registered or known business address.

Further, with the social distancing and remote working conditions imposed by the Covid-19 pandemic, businesses are now being run and managed on social media without the need for physical/traceable locations. Most of these businesses are registered with the Corporate Affairs Commission (CAC) but are not enumerated for taxes. With the volume of sales made on social media, most of these businesses may have exceeded the 25 million naira ($65,200) threshold and yet still not be assessed to taxes.

While it is important that the government encourages this sector, the challenges need to be addressed to increase tax revenue collection.

Taxing the Informal Sector: Current Status

In recognizing the need to tax this sector, the Federal Government and various state governments have embarked on strategies and collaborations. We highlight below some of the major efforts.

Federal Inland Revenue Service and Corporate Affairs Commission

The CAC recently announced the inclusion of tax identification numbers on its certificate of incorporation. While this is in line with the government ease of doing business initiative, it is also expected that it will aid the enumeration of businesses for tax purposes. Also, in 2019 the Federal Inland Revenue Service (FIRS) declared its intention to tax online transactions at the payment points: this is yet to be developed.

Kwara State

Kwara State has implemented proactive solutions to boost voluntary tax compliance within the State. The State Revenue Service established an “Informal Sector Tax Directorate” (the Directorate) responsible for the collection of personal income tax from players in the informal sector. The Directorate was split into three collecting units for ease of administration: markets, microbusinesses, and artisans. Microbusinesses are taxed under the Presumptive Tax (PT) Schedule, provided in the Presumptive Tax Regulation (PTR) Act, 2014 or “best judgment” with a 30-day grace period for objections. Markets and artisans, however, are taxed through union/association executives. The PT is payable per annum; the artisans pay a flat rate PT of 1,500 naira per annum.

Rivers State

Following the recommendations of an Informal Sector Tax Stakeholders Committee in 2019, the Rivers Internal Revenue Service (RIRS) announced the start of taxing players in the informal sector based on PT. Based on the recommendations of the Committee, the informal sector was divided into seven categories with each group having a distinct tax rate that was determined based on the structure and size of the trade groups. Collection of the tax is based on demand notice and payable to RIRS-designated banks.

Ogun State

In a bid to accelerate the state’s internally generated revenue, in 2017, Ogun State launched a sensitization program to educate the informal sector on the need for paying taxes and modalities for tax payment. A minimum tax payable of 3,100 naira per annum was set.

Lagos State

The poster state for taxation in Nigeria is Lagos. Lagos can be deemed the “tax capital of West Africa” for both the scale of its tax compliance operations and the volume of internal generated revenue. Lagos currently taxes the informal sector via various trade unions and based on PT.

Taxing the Informal Sector—Other Economies

The challenges faced in taxing the informal sector are not unique to Nigeria. However, some countries have weathered these challenges and achieved an inclusive tax system. We highlight below taxing strategies adopted by other countries.


In Ghana, about 88% of the workforce is employed in the informal sector. Taxation of this sector is carried out through association taxing. A survey of the taxing of the informal sector shows that the government collects taxes through local market associations or business groups.


In 2018, Kenya enacted the Finance Act, 2018, which repealed the provision of the Turnover Tax and replaced it with PT. The provisions of PT commenced January 1, 2019 at the rate of 15% on business permit or trading fees. PT is payable by a resident person whose turnover from business is less than 5 million Kenyan shillings ($46,000) during a year of income when the person is acquiring or renewing a business permit or license with the government. The PT is paid via the iTax portal; penalty and interest for late payment is 5% and 1% of the tax due, respectively.


Tanzania operates a PT regime for small and medium businesses. PT is charged on businesses with less than 100 million Tanzanian shillings ($43,000) for an income year. The tax is collected through a block management system by which tax collectors identify small and medium enterprises and levy PT based on turnover from records, or an estimate of turnover where there are no records available. So far, this approach has been effective in taxing informal businesses.


Brazil serves as a model economy comparable to Nigeria, as both economies are oil and agriculturally driven, with a similar population size. Like Nigeria, fiscal contributions are at less than 10% of GDP. Brazil has consistently experienced fiscal deterioration with economic downturns and falls in government revenues. The country introduced a new tax system for its small businesses in which it strengthened regional collection of taxes from local industries with the creation of a simplified system known as the “Simples” Regime.

The Simples initiative recognizes the complexity of the Brazilian tax compliance system and directs businesses to pay one tax in one document which houses six different federal taxes, one state and one municipal tax, making tax administration easier. The Simples is not applicable to companies with gross revenues of more than 4.8 million Brazilian real ($867,500) and some specific businesses (banks, transportation companies) including companies owned by foreign shareholders.

What Can Nigeria Do?

Federal and state governments still face the challenge of capturing businesses, ensuring they are assessed to pay the appropriate taxes using tax officials, court injunctions and other powers. Most local governments use associations, market groups, professional affiliations, or resort to force to drive collection but not assessment. This only leads to double taxation and revenue leakage and is not an efficient method to meet the significant tax revenue collection needed.

An ideal method of matching businesses, taxes and collection will require government to leverage technology to harmonize data collected at every stage of a business’s engagement with ministries, departments and agencies (MDAs) and cooperation of various business groups or unions.

Espouse Technology

Technology has been widely used in reducing the cost of collection to tax revenue recorded by the FIRS over the years (2014: 2.6%; 2018: 2.14%). Where a country has information on every business, adequate planning of its tax administration and collection can be achieved. For timely data collection/gathering, governments need to partner with the relevant trade unions and groups to compile the required information using technology.

Shared Enumeration

Enumeration cannot be overstated as it produces strategies that form and unify policies, laws, programs and initiatives. Currently, government has stand-alone data and identification numbers managed by various MDAs and parastatals such as national identification, bank verification, voters’ cards, international passport numbers, etc. To achieve a comprehensive electronic database, there must be data sharing among these bodies. Not only will a more comprehensive database be achieved; the cost of data collection and management will also be significantly reduced. With the use of smart enumeration an electronic directory containing the data of all businesses (collated from various MDAs) will be created, and a unique identifying code generated for each business. This code will be shared and utilized across all stakeholders’ platforms when dealing with businesses. This will create a single service platform that will serve as a mine of data for all stakeholders, including financial and security agencies.

Integration of GEEP Platforms

With the introduction of various Government Enterprise and Empowerment Programs (GEEPs) such as TraderMoni, MarketMoni and FarmerMoni, targeted at MSMEs without access to bank credit and loan facilities, information on players in the sector can be collated and enumerated alongside other businesses. State governments may, therefore, need to collaborate with the GEEPs to obtain data of MSMEs in their states. Once enumeration is achieved, the government will need to educate MSMEs on the need for taxation and reassure them of the government’s commitment to business development and growth.

Consolidated Levy or Tax

Currently, most businesses in the informal sector are faced with a multiplicity of taxes collected by different government agencies, and this erodes small businesses’ profits. To curb this, instill taxpayer confidence, show government’s commitment to business growth and survival, and encourage tax compliance among the businesses in this sector, all taxes and levies can be consolidated and levied on the business via a consolidated levy or tax. This consolidated tax, once collected, will be shared among the relevant departments, agencies and parastatals. The consolidated tax may be transaction volume based or fixed, depending on the business or industry.

Use of USSD Codes

As of December 2018, Nigeria had a telephone density (teledensity) of 123.48, up 19.18% from the previous year (2017). People have steadily adopted the most important tool and resource—the mobile phone. All those in the informal sector, including traders with roadside businesses who may not have ready access to internet services, own mobile phones. People no longer need to walk to the bank to complete transactions or enter a store to make a purchase; transactions are completed without the need for a shop and from the comfort of people’s homes using unstructured supplementary service data (USSD) codes at the very least.

To encourage compliance in this sector while encouraging business growth, government may adopt the use of USSD codes to enable taxpayers to fulfill their tax obligations with ease, irrespective of their location.

The USSD function can be enhanced to include chatbots and voice assistants in the taxpayer’s language to make it easier for taxpayers to navigate the services and find the information they need from the platforms.

Partnership with Social Media and Payment Portals

Government must also start thinking of harnessing revenue from social media-based businesses by partnering with social media and payment platforms to incorporate transaction taxes into their various business models. This would also ensure that real-time tax payment will not be affected by business cashflow cycles.

Going Forward

With the economic impact of Covid-19 on all sectors of the economy, it is more evident than ever that the formal sector needs help in funding government spend and improving the nation’s tax-to-GDP ratio. The need to enumerate and tax the informal sector has become more imperative as the informal sector makes up 50% of Nigerian GDP and should be made to contribute its fair share to the country’s tax revenues.

Judith Monye is a Senior Adviser and Oyintare Abang is a Staff Analyst, Tax, Regulatory and People Services, with KPMG in Nigeria.

The authors can be contacted at:;

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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