Harnessing the bottom billions in the Informal sector

It is not unusual to broadly classify the economy into formal and informal sectors. The informal sector is generally accepted to comprise the economic activities or interactions of individuals, enterprises or other unincorporated entities or organisations whilst the formal sector represents the economic interactions of organised individual or corporate entities.

One major diagnostic conclusion in the National Tax Policy (NTP) is that “compliance has been a great problem in the Nigerian tax system as a result of the large scale informal sector”. The NTP admits that “the administrative burden of applying of tax laws may be cumbersome for some of these entities and therefore efforts should be made to deal effectively and efficiently with them. This involves strategies to increase both compliance and revenue whilst keeping the cost of administration low as possible”.

Taxpayers are the single most important group of stakeholders in the tax system. They are therefore the focus of all tax authorities. The appeal for administrative efficiency which dictates short-term focus on the basis of 80/20 rule must be balanced with the need to ensure equality amongst existing and potential taxpayers as well as release the potential revenue due to government but substantially locked up in the informal sector.

The NTP envisages already that tax authorities need to evolve strategies which would enable them to increase compliance and revenue from the informal sector. This reflects implicitly the limitation of any present approaches adopted so far. In evolving fresh strategies to drive increased compliance and revenue from the informal sector, it may be necessary to pose and seek answers to the following questions:

• Is there a need to stratify the informal sector?
• If so, along what lines to achieve optimum stratification?
• Is the current tax regime optimal for the informal sector?
• Is there a need for an alternative tax regime for the informal sector?
• Is the informal sector eligible for incentives? If so, what type?
• Should focus be on direct or indirect taxation for the informal sector?
• What assurances are available in respect of voluntary disclosures of tax default?

The issue of stratification is important in that Small & Medium Enterprises (SMEs) are sometimes classified within the informal sector. This is to ensure appropriateness of strategy and focus. There is also the concern that the existing tax rates whether at personal income tax level or companies income tax level are still too high in relation to the margins earned from their respective businesses.

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