Explainer: Presumptive Tax – How Nigeria plans to tax its informal economy

Most small businesses in Nigeria make money without keeping records and pay multiple informal levies, rarely filing taxes. The government is now trying a new approach to bring them into the formal tax system.

Authorities are turning to presumptive taxation, a system that estimates what informal businesses earn based on what can be seen, such as their trade, location, and scale of operations, rather than audited accounts.

The move targets an informal economy that employs more than 80 percent of workers but contributes little to public revenue.

Here’s what presumptive tax means, how it works, and what small businesses need to know to navigate the new system.

What is Presumptive tax?

Presumptive tax allows tax authorities to estimate a business’s tax liability when formal records are unavailable.

Instead of reviewing profit-and-loss statements, officials rely on proxies such as what kind of business it is, where it operates, how busy it appears, and the typical earning capacity of similar enterprises.

Olufemi Olarinde, head of Fiscal and Tax Reforms Implementation at the Nigerian Revenue Service (NRS), said the system is designed to address the structural realities of informal work.

“The vulcaniser by the roadside, the barber shop, the grocery shop, they make money and spend it without keeping records,” Olarinde said. “So states have developed what we call a presumptive tax regime for the informal sector.”

The shift represents a move from precision to estimation. Where tax officials cannot see a ledger of every haircut or tyre repair, they apply what is often described as a “best of judgment” assessment.

Why the government is using it …

Nigeria’s informal economy is one of the largest in the world. World Economics estimates it accounts for 57.2 percent of gross domestic product and employs more than 80 percent of the workforce.

Despite this scale, the sector contributes minimally to government revenue, leaving Nigeria with a tax-to-GDP ratio of just 13.5 percent below peers such as Ghana (14 percent), Kenya (16.8 percent), and South Africa (27.1 percent).

Poor record-keeping remains a major barrier to formal taxation. A survey by Moniepoint found that only 34 percent of informal business owners keep detailed accounting records, reinforcing the limits of conventional income tax enforcement.

Rather than waiting for millions of small businesses to formalise or start keeping proper books, the system allows the government to tax them based on what can be seen and reasonably estimated.

With the government trying to raise revenue and tax reforms picking up pace, policymakers see presumptive tax as a more realistic option.

Read also: NRS sees 44% revenue jump as tax overhaul takes shape

Legal backing for presumptive tax

According to Section 29 of the Nigeria Tax Act (NTA), assessments shall be made on terms prescribed by the Minister of Finance, based on advice from the Joint Revenue Board.

“Where for all practical purposes, the income of a person chargeable to tax under this Act cannot be ascertained, or records are not kept in such a manner as to enable proper assessment of income, then such person shall be assessed under a presumptive tax regime.”

In simple terms, if a taxpayer does not keep adequate records, the law allows tax authorities to estimate what should be paid under a regulated framework.

How assessments are determined: Step by step …

Oluwafemi Odusote, a fellow of the Chartered Institute of Taxation of Nigeria (CITN), explained that the presumptive tax process begins when a taxpayer fails to keep proper financial records.

Step 1: The taxpayer does not keep proper records

The process begins when a business does not keep financial records, or keeps them in a way that makes it impossible for tax authorities to determine its true income.

Under the law, where income “cannot be ascertained” or records are not kept in a manner that allows proper assessment, the taxpayer may be moved into a presumptive tax regime.

Step 2: Income cannot be accurately assessed

If tax officials cannot determine the assessable income using normal methods, they do not attempt to reconstruct detailed accounts. Instead, they move to estimation.

Step 3: The minister prescribes the framework

The law gives the Minister of Finance the authority to issue regulations on how presumptive tax should be applied, based on advice from the Joint Revenue Board. In practice, this framework guides how tax authorities implement the system.

Step 4: Authorities apply a fixed or minimum amount

Rather than calculating tax based on declared profit, authorities may apply a fixed amount or minimum threshold based on business type or category.

For example, market traders may be asked to pay a set amount annually. Certain categories of informal professionals or artisans may also be assigned an amount considered appropriate for that line of business.

Step 5: Other applicable levies may still apply

Paying presumptive tax does not necessarily eliminate other lawful charges. Depending on the nature of the business, additional levies or licensing fees may still apply.

Why compliance remains weak …

Even with simplified tax systems, analysts say informal businesses remain reluctant to comply because of widespread illegal levies and unofficial charges imposed by non-state actors.

Oluwadamilare Oladele, managing director of a Lagos-based fintech company, said many small businesses view formal taxes as an additional burden layered on top of existing informal payments.

“If citizens are encouraged to enter the formal tax net, the government must also ensure they are not simultaneously subjected to informal levies that often cost more than formal taxes,” Oladele said. “For many small businesses, the problem is not taxation itself, but double extraction.”

He added that stronger coordination between tax authorities and law enforcement would be critical to improving trust and compliance.

“Clear coordination between tax authorities and law enforcement, and the criminalisation of illegal levy collection by non-authorised actors, would significantly improve trust and compliance,” Oladele said.

The risk…

Policymakers also acknowledge that most of the informal operators operate at the subsistence level and have limited capacity to absorb new tax burdens.

Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee, said more than 90 percent of informal sector participants are engaged in survival-level economic activity.

“Most people in the informal sector are just trying to survive,” Oyedele said, warning that aggressive taxation could push vulnerable businesses deeper into poverty.

Policymakers agree that the informal sector cannot be treated as a quick fix for government revenue. Presumptive tax can help bring more businesses into the system, but it will only work if there is trust, clear rules, and a gradual move toward formalisation.

For now, the push shows the government is serious about raising revenue. But millions of small businesses that survive on cash and operate in the shadows of the economy remain a tough challenge, one that cannot be solved by estimates alone.