Tax Risk and Tax Revenue Generation in the Informal Sector of South-West Nigeria

This study examined tax risk and tax revenue generation in the informal sector of South-West Nigeria, focusing specifically on tax leakages risk, tax planning risk and tax non-compliance risk. The broad objective was to investigate how these dimensions of tax risk affect the capacity of State Internal Revenue Services (SIRS) to generate tax revenue from informal sector operators. Specifically, the study examined the effect of tax leakages risk on tax revenue generation, investigated the effect of tax planning risk on tax revenue generation, and assessed the effect of tax non-compliance risk on tax revenue generation.
The study was anchored on the Economic Deterrence Theory, complemented by the Benefit Received Theory and the Planning Behaviour Theory. A survey research design was adopted, relying on primary data obtained through a structured questionnaire administered to tax officers in the informal sector departments of the SIRS across the six South-Western states of Nigeria. The study population comprised 5,193 staff of the SIRS in Lagos, Ogun, Oyo, Ondo, Osun and Ekiti States. A sample of 371 respondents was determined using the Taro Yamane (1967) formula and allocated proportionately across the states using a stratified sampling technique; 368 valid responses were retrieved and analysed. Data were analysed using descriptive statistics (mean and standard deviation) and simple linear regression at the 5% level of significance.
Tax leakages risk had a positive and statistically significant effect on tax revenue generation (β = 0.748, R² = 0.560, p = 0.000). Tax planning risk also exhibited a positive and statistically significant effect (β = 0.781, R² = 0.610, p = 0.000), while tax non-compliance risk recorded the strongest effect of the three (β = 0.823, R² = 0.678, p = 0.000). Consequently, all three null hypotheses were rejected.
The study recommends that State Internal Revenue Services strengthen digital monitoring and internal control mechanisms, simplify tax regulations and intensify taxpayer education, enforce tax laws and penalties consistently, and promote transparency alongside an integrated tax database. The study concludes that effective management of tax leakages, tax planning and non-compliance risks is fundamental to broadening the tax base and improving tax revenue generation from the informal sector in South-West Nigeria.

Tax Risk, Tax Leakages, Tax Planning, Tax Non-Compliance, Tax Revenue Generation, Informal Sector.

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