Digital Tax Policies and The Tax Gap in The Informal Sector in Southwest, Nigeria

Globally, the tax gap remains a pressing challenge for many economies, particularly within the ‎informal sector, where compliance levels are traditionally low and monitoring is difficult. ‎Considering this, this study examined the effect of digital tax policies on the tax gap within the ‎informal sector of Southwest Nigeria, focusing on three key constructs: digital tax reporting, ‎electronic tax systems, and Tax ProMax. The study adopted a survey research design targeting ‎‎3,145 Federal Inland Revenue Service (FIRS) tax officers across the South-West states of ‎Nigeria and 200 micro and small business operators in Lagos, given their central role in tax ‎administration and informal sector compliance. A sample of 342 tax officers was proportionately ‎selected across states using the Krejcie and Morgan formula, while 200 questionnaires were ‎purposively distributed to informal operators, yielding 146 valid responses and bringing the total ‎sample to 488. Data were collected through a structured questionnaire. Using partial least squares ‎structural equation modelling, the findings revealed that both digital tax reporting and Tax ‎ProMax had significant positive effects on reducing the tax gap, while the electronic tax system ‎had a positive but insignificant impact. The results showed that technologies that enhance ‎monitoring, enforcement, and transparency are more effective in addressing compliance issues ‎within the informal sector. The study concluded that digital tax policies are critical instruments ‎for addressing the persistent tax gap in Nigeria’s informal sector. Based on these findings, this ‎study recommends that policymakers should strengthen the adoption of digital tax reporting ‎platforms by enhancing accessibility, reliability, and security‎.