A large portion of Nigeria’s workforce currently works without financial records. To approach them, authorities are introducing a controversial tool: presumptive tax.
Governments charge informal businesses fixed or estimated fees based on observable indicators such as the nature of the transaction, location, and size of the business, rather than audited accounts or formal records.
Olufemi Olarinde, Head of Fiscal and Tax Reform Implementation at the Nigeria Revenue Service (NRS), said the traditional tax framework is not suitable for the informal sector.
“Roadside vulcanizers, barbers and grocery stores make money and spend it without keeping track of it,” Olarinde said. “So the state has developed something called a presumptive tax system for the informal sector.”
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This approach represents a transition from precision to estimation. Tax officials can’t see the ledger of every haircut or tire repair, so they instead use a “best judgment” valuation.
Nigeria’s informal economy is vast. World Economics estimates that it accounts for 57.2 percent of GDP and employs more than 80 percent of the workforce. Despite this, the sector’s contribution to public revenue is minimal, with Nigeria’s tax-to-GDP ratio remaining at 13.5%, lower than peers such as Ghana (14%), Kenya (16.8%) and South Africa (27.1%).
Moniepoint research shows that only 34% of informal business owners keep detailed accounting records, highlighting the challenge for tax authorities.
Under the estimation system, tax authorities estimate revenue based on observable factors such as the type of transaction, location, and size of the business, rather than formal accounting. Mr Olarinde explained that location plays an important role in assessing earning capacity.
“A barber in Ikoyi is different from a barber in Mushin. A barber in Victoria Island is different than a barber in Isareko,” he said. “This system allows us to tax them appropriately.”
Analysts say illegal fees remain a major problem even as the system improves. Informal businesses are forced to pay so many informal fees that they view regular taxes as an unfair burden and avoid paying them.
Oluwadamilare Oladele, managing director of a Lagos-based fintech company, said small and medium-sized enterprises need trust and protection to enter the tax network meaningfully.
“If citizens are to be encouraged to participate in the formal tax network, governments need to ensure that they are not simultaneously exposed to informal taxes that are often higher than formal taxes,” Oradele said. “For many small businesses, the problem is not the tax itself, but the double taxation.”
He added that in parallel with a crackdown on illegal levies, compliance will be improved by strengthening cooperation between tax authorities and law enforcement agencies.
“Clear collaboration between tax authorities and law enforcement and the criminalization of illegal collection of levies by unauthorized parties would significantly improve confidence and compliance,” Oradele said.
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Policy makers also acknowledge that most informal operators cannot realistically pay direct taxes. Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reform, said more than 90% of informal sector participants were engaged in subsistence-level economic activities.
“Most people in the informal sector are just trying to survive,” Oyedele said, warning that aggressive taxation could push vulnerable businesses further into poverty.
The emerging consensus is that Nigeria’s informal sector cannot be treated as a simple income fix. Sustainable approaches rely on trust, gradual formalization, and incentives rather than coercion.
So far, tax reform demonstrates the government’s commitment to boosting domestic revenues, but the informal sector remains both the greatest untapped opportunity and the most complex fiscal challenge.
