In Nigeria, the enormous influence of the informal sector on our feeble economy cannot be overemphasized, yet policymakers have fallen on deaf ears to the critical need of implementing numerous initiatives that would make its tax administration on the informal sector sustainable. This article is geared towards suggesting favourable measures which would bring about sustainability while taxing the informal sector.
For clarity, in Nigeria, the informal sector is classified as those business activities that are not registered with the Corporate Affairs Commission (CAC).¹ Gleaned from the foregoing, I’m certain various images would reflect on our minds as to the types of enterprises and persons that make up the informal sector. The artisans, provisions, and food (kosei and awara) vendors on our campuses are all components of the informal sector. Now, how can the government, through the tax administrators, thrive in taxing these people to attain sustainability? This is a cue regarding the aim and objective of this article.
Before shooting straight at our aim, it is pertinent to note that the method of assessment used by the government in retrieving tax dues from the informal sector is “presumptive” in nature. Presumptive tax simply means an informal tax regime of assessing taxpayers to tax, where for all practical reasons, their income cannot be ascertained or records are not kept in such manner as would enable proper assessment of their income. This mode of assessment is supported by section 36(6) of the Personal Income Tax (Amendment) Act 2011 and is regulated by the ‘Presumptive Tax Regulation, 2015’.
In Northern Nigeria, locals of Kaduna state, home to the Zaria emirate, refer to informal taxation as Agaji or Aiki Gayya, which describes a form of self-help funding to provide basic amenities ranging from infrastructure to security.² The informal sector in the north is dominated by small-scale farmers who make a living slightly above subsistence by selling agricultural produce. However, research has shown that the problems with the taxation of informal traders up north include a lack of tax statistics and transparency, poor tax administration, and multiplicity of tax payments. One trader in Kuje, Abuja, once narrated that she demanded to see her tax receipt and discovered that the amount written was one-eighth of what she had paid. Various complaints have also been made in Kaduna South about harassment of traders by tax administrators, especially the illiterate and foreign traders.
Conclusively, this piece would be devoid of its primary aim if the trajectory set out in the first paragraph is not met. By way of recommending measures for policymakers in navigating the hindrance of taxing the informal sector, the following measures are suggested:
- The government should ensure that there is a clear distinction in taxing the informal sector, between those who earn too little to meet VAT or income tax thresholds and those ‘hiding’ in the informal economy to evade taxes. The latter should be brought into the formal economy and then paid income taxes and VAT.
- Improve transparency, with public postings of rates payable and standardized receipts. Those paying taxes should always demand and save receipts, which can be useful in holding local officials accountable for the use of the revenue raised.
- Ensure that there is sufficient skilled revenue authority capacity to implement the taxation.
- Ensure that informal sector taxes are fair and progressive by:
- Carrying out impact assessments, with a focus on women and poor people, to ensure those groups are not disproportionately affected.
- Applying presumptive taxes progressively, for example, by levying proportionately higher charges on, say, larger businesses or buses with more seats, choosing proxies according to the impact assessments.
- Having estimated thresholds, below which informal workers and businesses are not taxed.
- Maintaining an overview of taxation of the informal sector and trying to reduce multiple taxation.
As John Marshall rightly said, “The power to tax is the power to destroy”. Hence, policymakers must be meticulous in wielding this double-edged sword (tax).
REFERENCE
1. National salaries, incomes and wages commission, ‘incomes survey of the informal sector of the Nigerian economy’ [2023] https://nsiwc.gov.ng/incomes-survey-of-the-informal-sector-of-the-nigerian-economy-2023/#:~:text=In%20Nigeria%2Cthe%20informal%20sector,Corporate%20Affairs%20Commission%20, accessed June 20, 2024
2. A Jacob ‘Informal taxation in Nigeria: Significance, benefits and challenges’ international centre for tax and development [2021] https://www.ictd.ac/blog/informal-taxation-nigeria-significance-benefits-challenges/#:~:text=In%20Northern%20Nigeria%2C%20locals%20of,ranging%20from%20infrastructure%20to%20security,accessed June 22, 2024.
ABOUT THE AUTHOR
Aminu Ashraf is a law student from Ahmadu Bello University Zaria, Kaduna State. He has a penchant for writing about different areas of law and other fields ranging from taxation, to trending political issues amongst other areas
+2349026023702 [email protected]