International Journal of Business and Social Science Vol. 6, No. 10; October 2015 160 Taxing the Informal Economy in Nigeria: Issues, Challenges and Opportunities Joseph E. Udoh (ACTI) Department of Accounting Universit of Uyo Uyo, Nigeria 1.1 Introduction The recent global economic challenges as a result of the fall in oil prices and the weak value of the Naira in the global economic market have raised many critical issues and economic questions, as to how the three tiers of governments in Nigeria, will financed their budgets, in the coming years. The shortfall from oil revenue accruing to government in recent years, have negatively affected the economy with many implications as well as evoking the questions of whether taxing or not taxing the informal sector for revenue and for economic reasons should be undertaken. Three important issues have influenced this thinking. They are: (1) how to create additional sources for more revenue generation; (2) how to improve upon economic growth and (3) the quality of governance. Taxing the informal economy or Informal sector in recent times have received greater economic attention and occupies an important domain in revenue generation among developing economies. Informal economy or informal sector is that part of economic unit which is not officially registered and monitored by any form of government regulations (Calbreath 2010). The sector is made up primarily of self employed persons, small and microenterprises and other forms of economic activities. Incomes generated by the operators in the sector, in many cases, are not officially captured into the tax net of the States or Nation. The sector operates their businesses using the facilities provided by government from taxes paid by other taxpayers in earning income, without paying taxes. Informal sector forms a greater percentage of tax defaulters, increasing cases of tax evasions leading to leakages in government revenue. It is an economic unit for which statistical data are not easily obtained and are not fully captured into the tax net of the State. Informal economy is a concept originally introduced by the International Labour Organization in its Kenyan Mission study 1972, and has defined informality as ‘a way of doing things’ and characterized by seven drivers; (a) ease of entry; (b) reliance on indigenous resources; (c) family ownership; (d) small scale operations; (e) labour intensive and adaptive technologies; (f) unregulated and competitive markets. Carr and Chen (2001); ILO (2002) emphasized that; informal sector provides critical economic opportunities for the poor and has been expanding rapidly. Joshi, Prichard and Heady (2003) supported the idea expressed by the ILO and viewed informal sector as being businesses in subsistent economy. The Swedish International Development Cooperation Agency (SIDA) (2011) in another fact finding study listed six key drivers to the growth of informal sector and they include: (a)limited absorption of labour, particularly in countries with high rate of population or urbanization, (b) excessive cost and regulatory of entry into the formal economy, often motivated by corruptions; (c) weak institution, limiting education and training opportunities as well as infrastructure development (d) increasing demand for low-cost goods and services; (e)migration motivated by economic hardship and poverty; and (f) difficulties faced by women in gaining formal employment. Informal economy has been described in many other terms to refer to ; “black market”, “shadow economy”, ”the underground economy”, “under the table”. “off the books”, and working for cash”. It is also described as a grey market in labour. Over the past forty-three years or thereabout, many studies carried out by individuals, groups and organizations on informal economy including: (ILO 1972 & 2002); (Torgler 2003); (Terkper 2003); (Gerxhani 2004); (Schneider and Klinglmair 2004); (Schneider and Klinglmair 2004); (Hart 2005); (Kenyon 2007); (Schneider et al 2010); and others, have characterized this economic unit as one item occupying the most challenging domain in taxation. Various economic indicators are pointing to the direction of taxing the informal sector of the economy, for increased revenue, which had been neglected in the past years. Taxing the informal economy in most developing countries has enlisted greater attention reflecting the increased recognition of the potential benefits to the economy.