Transforming the Informal Sector through Taxation

At the sixth national tax conference in Lagos  organised by Okwudili Ijezie & Co, a firm of chartered  accountants, experts spoke on how the informal sector of  the nation’s economy can be transformed through taxation,  using Artificial Intelligence  solutions, writes Oluchi Chibuzor

The informal sector accounts for a significant share of  Nigeria’s  economy and experts believe that  transforming that  sector holds the key to unlocking unprecedented growth and prosperity.
And of the best ways to achieve this transformation is through an efficient taxation strategy that will not only unlock the potential of the sector but that will also mutually benefit all stakeholders.

Committed to his advocacy of an efficient tax system and how that can be used to make the informal sector become more productive and contribute to the growth of the nation’s economy,    a tax expert, chartered accountant and  Founder/Managing Partner of  Okwudili Ijezie & Co,  Blakey  Ijezie,  decided to make the focus of  the 6th Blakey’s National Tax Conference on transforming the informal sector through taxation.
Over the years, Okwudili Ijezie & Co, has been organising national tax conference, where various topics are discussed by experts.
However, speaking in Lagos recently  at the 6th edition of the conference, in a paper titled: ‘The Future of Taxation, The Game Changer: Transforming the Informal Sector through Taxation,  Ijezie said Nigeria  must leverage Artificial Intelligence (AI) powered tax tools to attract operators in  the informal sector to boost revenue of the country.

According to him,  AI tools can enable real-time tax monitoring, empower tax authorities to make data-driven decisions and taxpayers to navigate the tax system with ease.
 Ijezie noted that because the informal sector is characterised by unregistered businesses and activities, lack of tax compliance, limited access to formal financial services, a vulnerable workforce with limited social protection, hence the use of AI-powered solutions can provide real-time tax monitoring and automated audits.
He also noted that embracing AI-powered solutions offers personalised tax advice and support, enable data-driven decision-making for tax authorities, while facilitating collaboration between tax authorities, taxpayers, and technology providers.
He said: “Today, we stand at the forefront of a revolution that will transform the fabric of taxation forever. A revolution that will harness the power of technology, innovation, and expertise to create a more inclusive and equitable tax system.

“Let us seize this moment. Let us harness the power of technology and innovation to transform the informal sector. Let us create a tax system that is fair, efficient, and inclusive. The future of tax is a game of innovation – and AI is the ultimate catalyst.”
“But to fully realise this vision, we must address a pressing challenge: transforming the informal sector through taxation. The informal sector accounts for a significant share of our economy, and its transformation holds the key to unlocking unprecedented growth and prosperity.

“Transitioning the informal sector to the formal economy offers numerous opportunities: increased tax revenue and fiscal space, improved economic growth and job creation, enhanced financial inclusion and access to credit, better social protection and labour standards and reduced poverty and income inequality.”
Ijezie  maintained that to entice informal sector executives to transition, “we must offer incentives: tax holidays or reduced tax rates, streamlined registration and licensing processes, subsidies for technology adoption and digitalisation and recognition and certification programmes for formalised businesses.”
However, he highlighted the benefits of formalisation for informal sector executives to include access to formal financial services and credit and increased market access and customer base.

“AI can assist in formalisation by simplifying tax compliance and registration processes, automated bookkeeping, accounting systems, access to digital payment systems and e-invoicing, data analytics for business insights and decision-making, virtual assistance for tax and regulatory compliance,” he said.
He said  AI will play a crucial role in boosting tax revenue, stressing that”AI can increase tax revenue by up to 20 per cent through improved compliance and reduced evasion.AI-powered tax systems can reduce administrative costs by up to 30 per cent. AI can help identify and address tax gaps, leading to increased revenue and improved fairness.”

Ijezie explained that examples from other jurisdictions demonstrate AI potential.
 “Kenya’s tax authority uses AI-powered systems to detect and prevent tax evasion, resulting in a 25 per cent increase in revenue. India’s GST system uses AI-powered analytics to identify and address tax gaps, resulting in a 15 per cent increase in revenue,” he stated.
Talking about  some of the latest tax technology like AI and Machine Learning (ML) applications, cloud-based tax software and digital platforms, Ijezie, observed that  these could  lead to potential job loss.

According to him, “Challenges of AI in taxation include: potential job displacement for some tax professionals and need for significant investment in technology and training. The impact of AI on taxation in Nigeria is multifaceted: AI can contribute to economic growth by promoting a more efficient and effective tax system.”
“Overall, AI has the potential to transform taxation in Nigeria, but careful planning, implementation, and addressing of challenges are essential to maximise benefits.
AI will revolutionise taxation in Nigeria by: automating compliance and reporting, enhancing data analysis for improved tax auditing and fraud detection and facilitating real-time tax calculations and payments,” he explained.

In his presentation,, “Transforming and Growing the Informal Sectors of MSMES through Appropriate Tax Regime, Anthony Chinwe said  that MSMES play important roles in the development of the Nigerian economy.
According to him, these businesses account for nearly 90 per cent of the jobs in the country and contribute over 45 per cent to the country’s GDP, with 98.8 per cent in the micro cadre.

However, Chinwe explained that  most of these business entities are not registered or captured by the regulatory authorities.
He also  gave some of the challenges facing this sector as lack of access to suitable finance, multiple taxes and levies, insecurity, limited access to justice, stifling business climate due to inappropriate government policies, legal and regulatory frameworks and poor record keeping.
But to make the informal sector tax compliant, Chinwe advocated the following: education and awareness, incentive and benefits, reviewing the constitution and tax laws, support infrastructure development, social dialogue and single tax authority.

Another speaker at the event,  who is the  Founder and Managing Partner of Modilim & Co, Dr. Patrick Modilim, who  spoke on:”Taxation in The Informal Economy,”  gave strategies for encouraging tax compliance in the informal sector.
The strategies, according to him are:”strengthening firms incentives, capacity and collective action and strengthening political and administrative commitment”
Modilim said   the slow progress in taxing the informal sector was due to the challenges of locating and taxing large numbers of small firms eager to evade the tax net and lack of commitment of political leaders and tax administrators with little incentive to focus resources on taxing the informal economy.
He stressed the need for revenue authorities to encourage the development of informal economy associations, negotiations, taxpayer education programmes and dialogue between the state and informal economy firms.