Nigeria Introduces 1% Presumptive Tax on Informal Businesses

Executive Summary

The Federal Government of Nigeria has introduced a 1% presumptive tax regime targeting businesses in the informal sector. The initiative is designed to simplify tax compliance for small businesses while expanding the country’s tax base.

Under the framework, eligible businesses will pay 1% of their annual turnover as tax, while nano and micro businesses with annual turnover below ₦12 million remain exempt. The policy forms part of broader fiscal reforms aimed at improving revenue generation and encouraging the gradual formalization of Nigeria’s large informal economy.

Background

Nigeria’s informal sector accounts for a significant share of economic activity, with millions of small traders, artisans, and service providers operating outside the formal tax system.

One of the main challenges tax authorities face in taxing this sector is the absence of proper accounting records and formal financial documentation. To address this, the government has adopted a presumptive tax system, which allows tax liabilities to be calculated using simplified methods such as turnover-based assessments.

The new framework is expected to improve compliance while reducing the complexity associated with traditional tax assessment methods.

Key Provisions of the Presumptive Tax Framework

1. 1% Turnover-Based Tax

Eligible informal businesses will be required to pay 1% of their annual turnover as tax under the presumptive regime.

2. Exemption for Micro Businesses

Businesses with annual turnover below ₦12 million are exempt from the presumptive tax in order to protect the smallest enterprises and support entrepreneurship.

3. Simplified Tax Compliance

The framework removes the requirement for detailed financial statements, making compliance easier for businesses that may not maintain formal accounting records.

4. Formalization of Informal Businesses

The policy encourages businesses to register with tax authorities and gradually transition into the formal sector.

5. Elimination of Informal Tax Collection

Authorities have also emphasized the need to eliminate illegal tax collection practices, including unauthorized roadside tax enforcement.

Implications for Businesses

Increased Tax Awareness

Businesses operating informally may need to become more aware of their tax obligations and ensure compliance with the new framework.

Record-Keeping Requirements

Although the system simplifies tax calculations, businesses may still need to maintain basic sales or turnover records.

Opportunities from Formalization

Formal registration could provide small businesses with access to:

• Bank loans and financial services
• Government grants and support programs
• Increased credibility with customers and suppliers

Potential Compliance Challenges

Despite the simplified framework, some businesses may initially face challenges understanding the new system, highlighting the need for awareness and taxpayer education.

Conclusion

The introduction of the 1% presumptive tax on informal businesses represents a significant step in Nigeria’s effort to modernize its tax system and broaden its revenue base. By simplifying tax compliance and exempting the smallest businesses, the policy aims to strike a balance between revenue generation and economic inclusion.

Successful implementation will depend on effective communication, taxpayer education, and a transparent tax administration process.

Our Commentary

However, our Advisory Unit is of the opinion that the circular by the Federal Ministry of Finance may need to provide more clarification as the Nigeria Tax Act and Nigeria Tax Administration Act 2025 exempts small companies from taxes with revenue below ₦100million and asset below ₦250million.

Also the informal sector are usually individuals who may not have formalized their enterprises with CAC – which forms a basis for taxation. These informal operators usually pay personal income tax on their income which is usually equivalent to their turnover e.g plumber, mechanic, artisan etc.

This new circular will therefore be an additional tax burden to players in the informal sector who will now have to pay 1% on their turnover as well as PIT on their respective income which is the same as their total revenue.

We believe that this approach will only bring about a positive action by dragging more informal players into the tax net as they will prefer to formalize their trade by registering with CAC in order to be categorize by NRS as a small company exempted from taxes in line with Nigeria Tax Act 2025

References

• Federal Ministry of Finance Nigeria. Presumptive Tax Regulations Framework.
• Premium Times Nigeria. FG Issues New Presumptive Tax Rules for MSMEs.
• BusinessDay Nigeria. Explainer: Presumptive Tax and Nigeria’s Informal Economy.
• The Guardian Nigeria. FG Rolls Out 1% Presumptive Tax on Informal Sector.
• Orbitax. Nigeria Introduces New Presumptive Tax Framework.