
The Nigerian tax authorities, led by the Federal Inland Revenue Service (FIRS) and State Internal Revenue Services, have been actively working to enhance tax collections and increase government revenue through various schemes and tax amnesty programs. Despite these efforts, the level of tax compliance in Nigeria remains relatively low. A recent report from the International Monetary Fund (IMF) indicates that only about 10 million people out of a labor force of approximately 77 million are registered for taxes in the country.
This low tax registration rate creates a narrow tax base, limiting the government’s ability to collect taxes and impacting overall revenue generation. Additionally, it places a significant burden on existing taxpayers who are often targeted for audits and tax enforcement measures.
The Informal Sector: The informal sector encompasses economic activities that operate with limited government regulation and organizational structure. It includes micro, small, and medium-scale enterprises, traders, and artisans, constituting a substantial portion of the Nigerian economy. The informal sector is a critical component that significantly contributes to the country’s GDP.
Despite efforts to improve the tax-to-GDP ratio, currently standing at 6.1%, the informal sector remains largely untapped. Effectively subjecting this sizable segment of the economy to taxation is essential for a substantial improvement in the tax-to-GDP ratio.
Challenges of Taxing the Informal Sector: One of the major challenges in taxing the informal sector is the lack of proper record-keeping by most businesses operating within it. Many informal sector businesses do not maintain accurate records of their daily transactions, including proper books of account that would enable the production of audited accounts for tax computation. Operators in this sector often prioritize business growth over record-keeping, making it difficult to assess their financial position independently.
Another challenge is the commingling of personal and business funds. Informal sector businesses commonly use the same bank accounts for both business and personal transactions, mix personal loans with business finances, and withdraw money from the business without proper documentation. This lack of financial separation complicates the accurate evaluation of a business’s financial standing for tax assessment purposes.
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