A research by an Africa-focused geopolitical research firm, SBM Intelligence, has revealed that 98 percent of businesses in Nigeria’s informal sector pay taxes, but to non-state regulated actors.
This finding is the outcome of a survey of the informal sector in nine states across Nigeria, namely the Federal Capital Territory – Abuja, Anambra, Bauchi, Cross River, Delta, Oyo, Kano, Lagos and Rivers.
In a report titled, “Under the Hood: A Look into Taxation in Nigeria’s Informal Sector,” it noted that the informal sector has business activities that operate outside of government regulation and are largely unregistered.
They include commercial bus drivers, artisans such as dressmakers, hairdressers, vulcanisers etc., mainly those in the low socio-economic strata, with low skills and poor education.
According to SBM, a major reason for the low tax-to-GDP ratio in Nigeria, which is 6 per cent and below the World Bank’s recommendation of a minimum of 15 per cent for economic growth and poverty reduction, is the large size of the country’s informal economy.
The informal sector is “estimated by the International Monetary Fund (IMF) to be around 65 per cent of the GDP, which is higher than the sub-Saharan average of 34 per cent. By comparison, the informal economy in Europe is 23 per cent of its GDP, and 17 per cent of the GDP in OECD countries.”
The SBM report added that a participant in the informal sector earns about N150,000/month on average and pays to prevalent tax groups, including trade unions.
“Most (38 per cent) participants in the informal sector earn N5,100 a day and above, followed by those whose earnings are between N2,100-N3,000 and N3,100-N4,000, an equal percentage of 17 per cent for both income groups.
“16 percent of the participants earn between N4100-N5000, 8 percent earn between N1100-N2000, and a small percentage earn less than N1000,” the report said.
“This shows that most informal sector participants earn between N2,100-N5,000 and above. Segregating this by types of businesses shows that bus drivers (52%), open market traders (52 percent) and okada riders (48 per cent) have more high earners (people who earn N5,100 and above) than the other categories of informal businesses.
“Also, a slim majority in the hairdressing (33 percent) and dressmaking (30 per cent) businesses also earn between N5100 and above. Vulcanisers have the highest percentage of people who earn less than N1000.”
The report added that most of the tax payments were made to prevalent tax groups such as state governments, local governments, market organisations and unions. They paid the taxes either daily, weekly or monthly.
It stated that taxes are paid to governments, trade unions are largely informal with no legal backing or framework. This is because they can command compliance from their members. These are “lords” or members of the union who acts as tax collectors.
The organisation advised the government to put in place a mechanism to incorporate the informal sector into the tax base of the country. It identified the NIN registration as one way to give a foundational identification to Nigeria upon which tax numbers can be tied.