Examining Lagos’ Digital Tax Trap

Since 2022, the Lagos State Internal Revenue Service fully transitioned to a digital tax filing system, with a stricter penalty for defaulters. Studies, however, show that a significant number of businesses powering the state’s informal sector lack digital skills, limiting their engagement with e-tax systems, reports Omolabake Fasogbon

Mr Waheed Adisa is a property link agent, a block moulder and a building material trader whose combined businesses fetch him more than N1 million monthly. He automatically exceeds the annual turnover threshold of N12 million, which is exempt from paying tax under the new presumptive tax regime.

Being taxable, Adisa is required to pay one per cent tax on his turnover and declare his total annual income from all sources, as mandated under Sections 13 and 14(3) of the Nigeria Tax Administration Act (NTAA) 2025.

The sections require every taxable individual to file annual income returns with the relevant tax authority on their own initiative, declaring income from all sources, while employees are also expected to file separately in addition to their employers’ PAYE returns.

The filing process, which involves submitting tax returns and related documents to tax authorities, is also mandatory for individuals earning below the specified threshold to ensure fairness and transparency, although their tax liability may be zero, according to Special Adviser to the Executive Chairman of LIRS, Abideen Akande.

But Adisa, who is not digitally literate, fears he lacks the capacity to navigate the LIRS-designated portal, the mandatory channel for tax filing by self-employed individuals, business owners, professionals and informal sector operators.

“I know my business and I am willing to do what the law requires, but all these online processes confuse me. I honestly don’t know where to start,” Adisa lamented. 

 Digitised filing leaves over 50% of Nigerians behind

 More than 50 per cent of Nigerians lack basic digital skills and are unable to use data services, according to a 2021 World Bank report in “Data for Better Lives”.

Yet, LIRS insists a designated online platform remains the only approved channel for filing tax returns. Many, like Adisa, remain vulnerable under the law and exposed to consequences. 

A primary school certificate holder, Adisa developed an early passion for business from his late father. While he uses a smartphone, he falls within the 68 per cent of Nigerians whom the World Bank says can only operate smartphones at a basic level.

Beyond making calls, receiving payments and exchanging WhatsApp messages, mostly with the help of trusted allies, his phone usage remains limited.

“Most times, it is even my children that help me use WhatsApp and carry out some bank transactions. I don’t really understand many of the phone features. I struggle with them a lot,” he said.

Adisa’s plight means he risks LIRS sanctions for defaults he didn’t intend, as available filing channels weren’t built for his skill level. 

Such defaults, which include failure to file returns or submitting incomplete or false information, attract a N100,000 fine in the first month and N50,000 for every subsequent month the violation continues.

He will likely avoid sanctions if LIRS finalises its USSD filing platform, said to be awaiting regulatory approval, which he considers easier to use. 

In April 2026, the LIRS instituted legal action against an undisclosed number of individuals and 45 firms over tax default, amid concern that digital illiteracy may be a contributing factor among affected individuals.

The Nigeria Labour Force Survey (NLFS) Q2 2024 report published by the National Bureau of Statistics (NBS) established a strong link between low education and informality, stating that workers with no formal education account for 99 percent of informal jobs in Nigeria, while 97.9 per cent have only primary education.

Mustapha et al., in a study titled “Integrated E-tax Filing Management System on Tax Compliance Behaviour in Nigeria”, identified digital literacy, access to technology and trust in e-filing systems as critical factors influencing tax compliance.

Still, a survey by Research ICT Africa under the “ After Access 2022–2023: Nigeria Project” found that 72percent of adults do not own smartphones.  The findings reinforce one message: low-tech filing channels remain essential for inclusive tax compliance

State Promises Inclusive Channels, Rollout Unclear

Acknowledging a digital skills gap exists, Special Adviser to the Executive Chairman of LIRS, Abideen Akande, told THISDAY in an interview that the state has begun developing a USSD-based filing platform awaiting the Nigerian Communications Commission (NCC)’s approval.  Deployed, this will fulfil the accessibility and inclusivity principle of DPI.

Filing enables both taxpayers and the tax authorities to reconcile income and with USSD, Akande said taxpayers will be able to generate a Taxpayer Identification Number(TIN), locate nearby tax offices, and access basic guidance on filing. 

DPI anchors on the foundational pillars of digital identity systems, digital payments and data exchange layers enabling government operations, including revenue collection. When integrated, these pillars streamline the government’s push to formalise the informal sector, leveraging the foundational National Identification Number (NIN) to assign tax identities and effectively widening tax net. 

 In the publication “How Digital Public Infrastructure Could Transform Tax Administration in Africa”, the International Centre for Tax and Development (ICTD) asserts DPI can strengthen digitised tax administration, drive compliance, inclusion, and revenue mobilisation, but warns that poor implementation can limit impact. 

It is against this background that LIRS said it opted for a USSD platform to align its digital shift with inclusivity. 

“The USSD platform is designed to make tax filing more inclusive by providing a simple, mobile-based option for taxpayers who lack smartphones, reliable internet or digital skills. It targets informal sector operators, artisans, traders, and other low-tech individual taxpayers. The goal is to remove access barriers, improve voluntary compliance, and broaden participation in the tax system”, he said.

While this initiative has been welcomed, the rollout date remains uncertain, leaving low-tech taxpayers in limbo.

Akande disclosed that deployment depends on regulatory approvals and telecom integration. “Because these processes involve external stakeholders, deployment will follow once all technical integrations are fully concluded,” he noted.

While he maintained physical centres exist to provide guidance and support through digital channels, studies, including the World Bank’s, corroborated by findings with players show many are deterred by queues, long distances, poor accessibility, and time burdens, all of which stifle compliance. 

Judith Monye and Oyintare Abang of KPMG in “Taxing the Informal Sector—Nigeria’s Missing Goldmine,” published in Bloomberg Tax, argued low tech channels like USSD are viable for non-digitally savvy taxpayers to meet their obligations wherever they are. 

“The USSD function can be enhanced to include chatbot and voice assistants in the taxpayer’s language to help them navigate the services and find information they need from the platforms”, the duo counselled. 

Informal, Yet Invaluable

The informal sector remains the nation’s goldmine, hence, intensified efforts to integrate it into the tax base, one which DPI is enabling. 

According to Moniepoint’s 2024 Informal Economy report, the sector accounts for over half of Nigeria’s economy and GDP as of 2024. Lagos leads the charge, hosting 16% of the national informal economy.

While Lagos contributes roughly 22 percent to the national GDP, the World Bank’s 2023 Lagos Diagnostic Study estimates the informal sector drives about one-third of the state’s economy.

 Experts are convinced that perfecting formalisation, leveraging digital payments and structured onboarding could improve Nigeria’s tax-to-GDP ratio, boost tax income and strengthen public finances.

With the one percent presumptive tax now addressing historical barriers like poor record-keeping, informal operators are left with little or no excuse for non-compliance.

Akande reiterated that compliance is vital, noting that failure to file annual returns weakens the tax database and obscures taxable income.

“It limits visibility over taxable income and contributes to revenue leakages and weak fiscal planning. This also makes it harder for the government to design fair interventions because large segments of economic activity remain undocumented”.

However, a 2025 study by Udefi et al. titled “Factors Influencing Tax Compliance among Small and Medium Enterprises (SMEs) in Lagos State” found that process complexity still discourages many, suggesting simplified technology to drive voluntary filing.

Cart before the horse

Development economist, Prof. Chiwuike Uba hailed tax digitisation as a significant administrative step but condemned penalising taxpayers before achieving full digital inclusion. He argued that compliance should be driven by fairness and trust rather than raw enforcement.

“When taxpayers must use inaccessible channels, enforcement feels coercive rather than legitimate. This shifts behavior from voluntary participation to reluctant reaction.”

In a diverse economy like Lagos, where many informal players lack digital literacy, Uba warned that premature enforcement could backfire, deepening distrust and encouraging resistance. He observed that comparable emerging economies pair digital platforms with assisted filing mechanisms from day one.

Beyond administration, Uba emphasised that tax filing provides vital economic intelligence. 

“Excluding segments of the population leads to inaccurate data, which then skews fiscal and budget planning”, he warned. 

He insisted that penalties are only justifiable when compliance is realistically accessible to all, calling for the immediate rollout of USSD channels.

Like Uba, the National President of the Association of Small Business Owners in Nigeria (ASBON), Femi Egbesola, remarked that the current approach prioritises penalties over equity. He noted that many small business owners are unable, not unwilling, to comply.

Conversely, tax expert, Dr Titilayo Fowokan, argued that penalties exist legally to prevent willful default. She asserted that the current regime has encouraged compliance, as taxpayers act to protect their earnings. While acknowledging that the law exempts most digitally excluded from taxation, she maintained that a lack of digital literacy is no excuse.

“There are various avenues for compliance, including hiring experts or visiting tax stations. With the current level of public enlightenment, ignorance is no longer a defence”, she stated. 

  Phased Enforcement Recommended

The Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, argued that the stance of the tax authority clashes with the harsh realities of the operating environment, just as ASBON’s President, Egbesola, called for phased enforcement of punitive measures.

Yusuf noted that despite the introduction of presumptive tax, a vast proportion of micro and small enterprises still struggle to understand tax filing. 

“Many do not maintain accounting records, lack audited accounts, and possess limited digital or financial literacy.

“Many are even stark illiterates,” he lamented.

He urged the government to suspend penalties and prioritise extensive public enlightenment and capacity building instead. 

The CPPE boss also advised a shift in strategy toward creative, flexible, and innovative methods to promote compliance.

“The objective should be to bring these enterprises gradually into the tax net in a manner that is practical, inclusive, and sensitive to their limitations,” he said.

He flayed early enforcement of penalties, noting that tax education, financial literacy and digital capability remain very low. 

He added that the current political climate demands even greater caution. “Many lack the technical support needed to comply with conventional tax procedures, and several cannot afford professional accounting services. These are the realities of our economy; tax policies must be calibrated to reflect them,” Yusuf admonished. 

Aligning with Yusuf, Egbesola urged the state to extend filing deadlines, acquaint players with digital channels, and reduce penalties to more reasonable figures.

 This report is produced under the DPI Africa Journalism Fellowship Programme of the Media Foundation for West Africa and Co-Develop.