Nigeria's push to overhaul its tax system could have an unintended consequence: shutting out the country's vast informal sector from lucrative corporate contracts.
Under the reforms currently being advanced by the Federal Inland Revenue Service and the Joint Tax Board, businesses seeking to supply goods or services to large corporations may soon face more stringent tax compliance prerequisites. These include mandatory Taxpayer Identification Numbers, up-to-date tax clearance certificates, and verified withholding tax remittance records.
The challenge is acute. An estimated 40 million micro and small enterprises operate in Nigeria, the overwhelming majority of which fall outside the formal tax net. Many lack basic registration with the Corporate Affairs Commission, let alone the documentation that corporate procurement departments increasingly demand.
For large firms, the calculus is straightforward. Engaging unregistered vendors exposes them to vicarious tax liabilities, particularly under withholding tax regulations that hold corporate buyers responsible for deducting and remitting taxes on payments to suppliers. As enforcement tightens, many procurement heads are opting to simply exclude non-compliant vendors rather than shoulder the risk.
Industry observers note that the trend mirrors developments seen in Kenya and South Africa, where tax digitisation drives initially disrupted informal supply chains before gradually absorbing compliant small businesses. Nigeria's journey may prove bumpier given the sheer scale of informality.
Small business associations have begun sounding the alarm. Informal traders supplying catering, cleaning, logistics, and light manufacturing services to corporate Nigeria stand to lose contracts worth billions of naira annually if they cannot navigate the compliance ladder quickly.
The government has acknowledged the tension. Recent statements from fiscal policy officials suggest phased implementation may be considered, with reduced-rate presumptive tax regimes offered to micro-enterprises willing to formalise. Yet the gap between policy intent and ground reality remains wide.
For now, informal business owners face an uncomfortable choice: invest in registration, bookkeeping, and tax compliance — costs many cannot easily bear — or watch formal competitors capture the corporate contracts that once sustained them.