Nigeria's 60 Million Informal Workers: The Tax System's Blind Spot

The Elephant in the Room

Every time Nigeria announces tax reforms, the same question goes unasked: What about the 60+ million Nigerians working in the informal sector?

The market trader. The mechanic. The tailor. The farmer. The okada rider. The food vendor. The phone repairer. The hairdresser.

These people generate economic activity, earn income, and could theoretically contribute to public revenue. But they don't pay income tax. They never have. And current reforms won't change that.

By the Numbers

Nigeria's tax-to-GDP ratio is about 6%—one of the lowest in the world. The global average is around 15%. African average is 16%.

The informal sector isn't a small exception. It's the majority.

Why the Informal Sector Doesn't Pay Tax

1. No Registration, No System

To pay income tax, you need a Tax Identification Number. To get a TIN, you need documentation. Many informal workers have:

• No business registration
• Limited documentation
• No formal bank accounts
• Cash-based operations

The system literally has no way to reach them.

2. Income is Invisible

A formal employee's salary shows up in bank records. A business's revenue goes through payment processors.

But when Mama Nkechi sells pepper soup for cash, there's no record. When Alhaji Musa fixes your car for ₦15,000 cash, there's no paper trail.

You can't tax what you can't see.

3. The Cost-Benefit Doesn't Work

For a trader making ₦30,000/month, spending time and money on:

• TIN registration
• Understanding tax obligations
• Filing returns
• Potential tax payments

...makes no sense. The hassle exceeds any benefit. There's no positive incentive to formalize.

4. Distrust of Government

Many informal workers view taxation with suspicion:

• "Government will take my money and do nothing"
• "Politicians are corrupt, why should I fund them?"
• "If I register, they'll just harass me"

This isn't irrational. It's based on lived experience of poor public services despite existing taxation.

5. No Enforcement Capacity

FIRS has limited staff. They focus on big wins—large companies, high-net-worth individuals, obvious targets. Auditing millions of tiny traders is logistically impossible.

What Other Countries Do

Kenya: iTax and Presumptive Tax

Kenya implemented:

• Simple mobile-based tax registration
• Presumptive tax: small traders pay fixed amounts based on business type, not reported income
• Integration with M-Pesa (mobile money)

Result: Millions more Kenyans in the tax net, even if paying small amounts.

Rwanda: EBM Receipts

Electronic Billing Machines required for businesses. Every transaction recorded. Incentives for customers to demand receipts.

Result: Much harder to hide income when every sale creates a record.

India: GST and Demonetization

Goods and Services Tax created a unified system. Demonetization (removing large currency notes) forced more transactions through banks.

Result: Significant expansion of the tax base, though controversial.

What Would Actually Work in Nigeria?

1. Presumptive Taxation for Micro-Businesses

Instead of complex income calculations:

• Phone repairer in Lagos = ₦5,000/month flat tax
• Market trader in Kano = ₦3,000/month flat tax
• Okada rider = ₦2,000/month flat tax

Simple. Predictable. Collectible.

2. Mobile Money Integration

Partner with OPay, PalmPay, Moniepoint. When transactions flow through digital channels, income becomes visible.

Incentive: Reduced rates for digital transactions.

3. Association-Based Collection

Work through market associations, trade unions, transport unions. They already collect dues. Add a small tax component.

The Alaba Market Traders Association could collect from members more efficiently than FIRS ever could.

4. Benefit Linkage

"Pay ₦5,000/month, get access to":

• NHIS health coverage
• Pension contributions
• Business loans eligibility
• Children's scholarship programs

Make taxation transactional, not extractive.

5. Start Tiny

Don't try to collect "proper" tax from informal workers. Start with ₦1,000/month. Get them in the system. Build the habit. Expand later.

The Honest Obstacles

Political Will

Taxing poor traders is politically unpopular. Easier to tax the formal sector that's already compliant.

Administrative Capacity

FIRS would need 10x staff to manage millions of micro-taxpayers. The infrastructure doesn't exist.

Cash Economy

Until Nigeria becomes more digital, cash transactions will remain invisible.

Federalism Complications

Personal income tax goes to states. Different states have different capacity and incentives.

What This Means for You

If you're reading this on a tax calculator website, you're probably not in the informal sector. But understanding this context matters:

For Policymakers and Advocates

Real tax reform means expanding the base, not just adjusting rates for those already paying.

For Business Owners

Your informal suppliers and vendors aren't registered. The ₦5 million penalty for engaging unregistered contractors is meant to pressure formalization.

For Employees

Your PAYE deductions fund a government serving 200 million people, paid for by ~10 million taxpayers. The burden is concentrated.

For the Formal Economy

Every time someone avoids the tax system, your relative burden increases. Broad compliance benefits everyone.

The Bottom Line

Nigeria's tax reforms are real progress for those they reach. But they reach a minority.

The Nigeria Tax Act 2025 is good policy for the formal economy. It's irrelevant policy for the woman selling zobo by the roadside or the man farming cassava in Benue.

Until we solve informal sector taxation—not through punishment but through smart inclusion—Nigeria's tax-to-GDP ratio will remain among the world's lowest.

The question isn't just "what's the right tax rate?" It's "how do we build a system where most Nigerians can realistically participate?"

That's a much harder problem. And no tax act has solved it yet.

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