Nigeria to tax 80% informal workforce using presumptive taxes

A larger percentage of the Nigerian workforce is currently operating without a single financial record. To reach them, authorities are deploying a controversial tool: the Presumptive Tax.

The government charges a fixed or estimated charge on informal businesses based on observable indicators such as the nature of the trade, location, and scale of operations, rather than on audited accounts or formal records.

Olufemi Olarinde, head of Fiscal and Tax Reforms Implementation at the Nigerian Revenue Service (NRS), said traditional tax frameworks are ill-suited for the informal sector.

“The vulcaniser by the roadside, the barber shop, the grocery shop, they make money and spend it without keeping records,” Olarinde said. “So states have developed what we call a presumptive tax regime for the informal sector.”

This approach represents a shift from precision to estimation. Since tax officials cannot see a ledger of every haircut or tire repair, they instead use “best of judgment” assessments.

The Nigerian informal economy is vast. World Economics estimates it accounts for 57.2 percent of GDP and employs more than 80 percent of the workforce. Despite this, the sector contributes minimally to public revenue, keeping Nigeria’s tax-to-GDP ratio at 13.5 percent, below peers like Ghana (14 percent), Kenya (16.8 percent), and South Africa (27.1 percent).

According to a survey by Moniepoint, only 34 percent of informal business owners keep detailed accounting records, underscoring the challenges for tax authorities.

Under the presumptive system, tax authorities estimate earnings based on observable factors such as trade type, location, and scale of operation rather than formal accounts. Olarinde explained that location plays a key role in assessing earning capacity.

“Your barber in Ikoyi is different from a barber in Mushin. Barber in Victoria Island is different from a barber in Isale-Eko,” he said. “The regime allows them to be taxed appropriately.”

Even with better systems, analysts say illegal fees are still a huge problem. Because informal businesses are forced to pay so many unofficial charges, they see regular taxes as an unfair burden and avoid paying them.

Oluwadamilare Oladele, managing director of a Lagos-based fintech company, said small businesses need trust and protection before they can meaningfully enter the tax net.

“If citizens are encouraged to enter the formal tax net, the government must also ensure they are not simultaneously subjected to informal levies that often cost more than formal taxes,” Oladele said. “For many small businesses, the problem is not taxation itself, but double extraction.”

He added that stronger coordination between tax authorities and law enforcement, alongside enforcement against illegal levies, would improve compliance.

“Clear coordination between tax authorities and law enforcement, and the criminalisation of illegal levy collection by non-authorised actors, would significantly improve trust and compliance,” Oladele said.

Policymakers also acknowledge that most informal operators cannot realistically pay direct taxes. Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee, said over 90 percent of informal sector participants are engaged in subsistence-level economic activity.

“Most people in the informal sector are just trying to survive,” Oyedele said, cautioning that aggressive taxation could push vulnerable businesses further into poverty.

The emerging consensus is that Nigeria’s informal sector cannot be treated as a quick revenue fix. Any sustainable approach will depend on trust, gradual formalisation, and incentives, rather than coercion.

For now, while tax reforms signal government determination to boost domestic revenue, the informal sector remains both its largest untapped opportunity and its most complex fiscal challenge.(BusinessDay)