New 1% turnover tax exposes risks for Nigeria’s informal sector

Nigeria’s plan to tax small businesses based on turnover rather than profit is raising concerns about whether small and informal enterprises can handle the shift, particularly in an economy where many operate on thin margins.

A turnover tax, which is charged on revenue rather than profit, may require businesses to pay tax regardless of their profitability, marking a significant shift in how small and informal enterprises experience taxation.

Under the new tax law, which empowers the finance minister to issue the framework, the regulations signed by Wale Edun outline how the system will work in practice. Businesses earning N12 million or less annually are exempt, while others in the informal sector will pay 1 percent of their turnover.

Analysts warn that the approach, designed to improve compliance and widen the tax net, may introduce new pressures for informal operators.

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Compliance may be easier but possibly burdensome for low-margin traders,” said Yvonne Afolabi, a tax consultant at Techpoint Finance Consults.
Because the tax is based on turnover rather than profit, businesses with thin margins could face obligations similar to those of more profitable firms, raising concerns about fairness and sustainability.

Strengthening institutions and harmonizing tax administration is essential to enhance effectiveness. The system applies a fixed percentage to business turnover rather than profit, simplifying tax assessment for small businesses that lack proper financial records.

Presumptive tax is not a reward; it is a fallback mechanism used when proper records are not available,” said Chukwuma Ubendu, managing partner at CUJ Consulting, noting that businesses should ideally transition to proper accounting systems over time.
In other words, the system is designed as a temporary solution for businesses that do not keep detailed financial records, which signals that such businesses are expected to gradually formalise their operations by maintaining proper accounts and moving into the standard tax system.

A major implementation challenge lies in accurately determining turnover for informal businesses, many of which operate largely in cash and do not keep formal records. This creates room for underreporting and weakens the reliability of the system.
A major implementation challenge lies in accurately determining turnover for informal businesses, many of which operate largely in cash and do not keep formal records. This creates room for underreporting and weakens the reliability of the system.

In a recent Andersen Digest titled ‘Understanding Nigeria’s presumptive tax regime 2026’, Olajide Olatunji and Aisha Abdullahi, tax experts at Andersen, explained that “the introduction of the framework is not without its risks and challenges,” warning that enforcement in a largely undocumented sector could prove difficult.

They added that turnover-based taxation may disproportionately affect low-margin businesses and could discourage compliance if perceived as unfair.

The Andersen analysts also pointed to experiences in countries such as Kenya and India, where presumptive tax regimes have helped broaden the tax base but required strong administrative systems, clear thresholds, and sustained taxpayer education to be effective.

Without these supporting structures, similar policies have faced compliance challenges and resistance from small businesses.

The continued existence of multiple taxes at the local level in Nigeria continues to raise concerns. Despite efforts to streamline collections, informal operators often face overlapping levies from local authorities, which may undermine trust in the new system.
Nneka Eze, who operates a beauty shop in Lagos, splits her tax and levy payments across various authorities.
“It’s a different levy,” she said.
She pays N1,500 monthly for waste collection services, N18,000 annually, and N10,000 yearly for local government permits.

Limited digital adoption also poses a barrier. While the regime encourages the use of electronic tools to improve visibility, many small businesses lack access to digital payment systems or the capacity to adopt them.

Weak taxpayer education and low trust in government institutions may further slow adoption, as informal operators may be reluctant to comply without clear and immediate benefits.
While Wale Edun has emphasised that formalising the informal sector is key to inclusive growth, analysts say the success of the turnover tax will depend on how well authorities align that goal with the realities of low-margin businesses and weak enforcement systems.

Without addressing these gaps, the policy risks placing additional strain on already fragile small businesses, raising questions about whether it will improve compliance or simply deepen resistance within the informal sector.