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TAX COMPLIANCE AND REVENUE GENERATION AMONG SMES: A STUDY OF VAT REMITTANCE IN LAGOS STATE (2022-2025)

ABSTRACT

This study examines the complex relationship between tax compliance and revenue generation among Small and Medium Enterprises (SMEs) in Nigeria, focusing specifically on Value Added Tax (VAT) remittance practices in Lagos State from 2022 to 2025. SMEs constitute a vital component of the Nigerian economy, accounting for over 96% of businesses, generating substantial employment, and contributing significantly to GDP growth. However, they face persistent challenges in VAT processes, including registration, accurate charging on supplies, timely filing of returns, and consistent remittance, which contribute to notable revenue shortfalls and fiscal inefficiencies. Using a mixed-methods approach, the study incorporates primary data collected through structured surveys and questionnaires administered to a representative sample of registered and unregistered SMEs operating in key sectors (trade, manufacturing, and services) within Lagos State, alongside secondary data sourced from Federal Inland Revenue Service (FIRS) reports, National Bureau of Statistics (NBS) publications, and financial records spanning the study period. Analytical techniques include descriptive statistics, correlation analysis, and regression modeling to assess relationships and test hypotheses, while thematic analysis is employed to interpret qualitative insights into barriers and behavioral influences. Key findings indicate moderate VAT compliance levels among Lagos SMEs, with improvements in registration and remittance rates following digital reforms (such as enhanced e-filing platforms), though challenges persist due to high compliance costs and knowledge gaps. While SME remittances increased during national VAT surges (exceeding ₦4 trillion in early 2025), their contributions remain disproportionately low relative to economic activity, highlighting revenue leakages exacerbated by informality. Perceived fairness and digital tools positively influence compliance, whereas administrative burdens have negative effects, and economic volatility between 2022 and 2025 intensified existing challenges. Recommendations propose streamlined digital processes, including phased mandatory e-invoicing from 2026 to support SMEs, comprehensive awareness campaigns targeted at SME owners, incentives like expanded input VAT credits and reduced penalties for voluntary compliance, and balanced enforcement measures coupled with taxpayer support to enhance trust and formalization. In conclusion, improving VAT compliance among Lagos SMEs holds significant potential for revenue mobilization, supporting Nigeria’s economic diversification, raising the tax-to-GDP ratio (which reached approximately 13.5% by late 2024), and fostering sustainable development through a fairer and more efficient fiscal system that benefits businesses, government, and society at large.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Taxation serves as a fundamental pillar of economic development worldwide, generating critical revenue that governments utilize to finance public infrastructure (such as roads, ports, and electricity), essential services (including education and healthcare), and comprehensive welfare programs aimed at reducing poverty and inequality. In developing economies like Nigeria, effective taxation is particularly vital for achieving sustainable growth, as it reduces dependence on volatile external borrowing and commodity exports.

Nigeria’s historical over-reliance on oil revenues, often accounting for over 70-80% of federal earnings in peak years, has exposed the economy to global price fluctuations, leading to fiscal crises during downturns. This vulnerability has driven a strategic shift toward non-oil revenue sources, with Value Added Tax (VAT) emerging as a cornerstone. Introduced in 1993 through the Value Added Tax Act and currently administered by the Federal Inland Revenue Service (FIRS), VAT is a broad-based consumption tax levied at 7.5% (unchanged as of December 2025, despite earlier proposals for increases that were ultimately rejected or refuted). Designed as an indirect tax on the value added at each stage of production and distribution, VAT aims to widen the tax base, minimize evasion through self-policing mechanisms (input credit claims), and provide a more stable revenue stream resilient to economic cycles.

Small and Medium Enterprises (SMEs) are indispensable to Nigeria’s economic fabric, comprising approximately 96% of all businesses, contributing around 48% to national Gross Domestic Product (GDP), and providing 84% of employment opportunities. These enterprises span diverse sectors, fostering innovation, local value addition, and inclusive growth, particularly in informal and rural economies. Lagos State, Nigeria’s undisputed commercial hub with a population exceeding 20 million and hosting major ports, markets, and industries, features the highest concentration of SMEs in trade, manufacturing, retail, and services. This density positions Lagos as the foremost contributor to national VAT revenue, generating approximately ₦2.75 trillion in 2024 alone, representing nearly half of the country’s total VAT collections of ₦6.72 trillion that year, a remarkable 84.62% surge from 2023 figures driven by enhanced compliance and economic activity.

Despite these strengths, VAT compliance among SMEs remains a persistent challenge. Issues such as low registration rates (mandatory for businesses with annual turnover exceeding ₦25 million), inaccurate charging of VAT on invoices, underreporting of transactions, delayed monthly filings, and outright non-remittance are commonplace (Ojo & Shittu, 2023). A common malpractice involves SMEs retaining collected VAT as part of operational income rather than treating it as a trust liability owed to the government, triggering penalties, interest, and potential legal action while creating significant revenue shortfalls.

Deterrents to effective remittance include elevated compliance costs (e.g., accounting and filing expenses disproportionate for small operations), procedural complexity in navigating FIRS portals, limited tax education and awareness, perceptions of systemic unfairness (e.g., multiple taxation or unequal enforcement), and gaps in monitoring and penalties (Salawu et al., 2024; Philips et al., 2025). These barriers are compounded by the informal nature of many SME operations, cash-dominant transactions, and restricted access to digital tools.

The 2022–2025 period holds particular analytical significance, encompassing the protracted post-COVID-19 economic recovery phase, the rollout of digital enhancements such as the TaxPro Max platform for streamlined e-filing, and landmark tax reforms culminating in the signing of four new Tax Reform Acts in June 2025 (including the Nigeria Tax Act, which retains the 7.5% VAT rate while expanding input recovery, zero-rating essentials, and introducing mandatory e-invoicing and fiscalisation). Amid global uncertainties like inflation and currency volatility, national VAT collections have shown robust growth, underscoring efforts to bolster non-oil revenue. Investigating VAT remittance compliance in Lagos State, a region of intense economic activity, during this transformative timeframe yields profound insights into behavioral patterns, revenue impacts, and the efficacy of reforms in bridging compliance gaps among SMEs. This focus not only highlights opportunities for revenue optimization but also informs strategies to support SME formalization, fair competition, and broader fiscal sustainability in Nigeria.

1.2 Statement of the Problem

Despite Value Added Tax (VAT)’s established role in providing a stable and broad-based source of government revenue, evidenced by national collections surging to ₦6.72 trillion in 2024, an 84.62% increase from ₦3.64 trillion in 2023, compliance levels among Small and Medium Enterprises (SMEs) in Lagos State remain inadequate. This shortfall manifests in widespread unregistered operations, particularly among businesses below or hovering around the ₦25 million turnover threshold, inaccurate charging of VAT on invoices, persistent delays in monthly filings, and frequent non-remittance of collected VAT. These issues are often rooted in deep-seated problems such as prohibitive administrative burdens, disproportionate compliance costs relative to business scale, knowledge deficits among owners and staff, perceptions of systemic inequities, including multiple overlapping taxes, and inconsistent enforcement mechanisms (Atawodi & Ojeka, 2012; Anonymous, 2025).

These compliance failures culminate in substantial revenue losses for the government. SMEs, despite their dominant economic presence, contribute disproportionately less to the VAT pool than their transactional volume and market share would suggest. This creates distorted competition, where compliant firms bear higher effective costs compared to evaders, and fosters an environment of unfair market advantages that stifles formal sector growth and innovation.

Lagos State unequivocally leads national VAT generation, contributing approximately ₦2.75 trillion in 2024, representing nearly half of the country’s total VAT collections and over 50% of non-import VAT. This is driven by its status as Nigeria’s commercial epicenter with intense consumer spending and business activity. Yet, SME-specific challenges persist and are often amplified by the prevalence of informal operations, cash-based transactions that evade digital tracking, and limited access to reliable internet or digital tax platforms, particularly in suburban or low-income areas. These factors exacerbate compliance gaps even as overall collections rise due to contributions from larger entities and improved enforcement on imports and foreign supplies.

Non-compliance directly undermines the government’s capacity to fund critical development initiatives, including infrastructure upgrades, healthcare expansion, education, and social safety nets. These are areas where fiscal shortfalls are acutely felt amid economic pressures. Moreover, it perpetuates Nigeria’s historically low tax-to-GDP ratio, which, despite notable improvements through recent reforms, reached around 13.5% by the end of 2024, up from lower single-digit figures in prior years. This still lags behind regional peers and limits fiscal space for diversification away from oil dependency.

Empirical studies specifically examining SME VAT remittance patterns and their revenue implications during the transformative 2022–2025 period remain scarce. This period was marked by post-pandemic recovery, digitalization efforts, and the landmark 2025 tax reforms, which retained the 7.5% VAT rate while enhancing input recovery and e-invoicing. This research gap hinders the development of targeted, evidence-based policy interventions aimed at addressing root causes, boosting voluntary compliance, and maximizing revenue mobilization from this vital sector (Ojo & Shittu, 2023; Philips et al., 2025). Bridging this void is essential for informing strategies that balance enforcement with support, ultimately fostering a more equitable and efficient tax ecosystem in Lagos and Nigeria at large.

1.3 Objectives of the Study

The main objective is to investigate the linkage between tax compliance and revenue generation among SMEs through VAT remittance in Lagos State (2022–2025).

Specific objectives are:

1. To evaluate VAT compliance levels (registration, charging, filing, remittance) among SMEs in Lagos State.
2. To determine the contribution of SME VAT remittances to revenue in Lagos State over 2022–2025.
3. To identify determinants of VAT compliance behavior in SMEs.
4. To analyze remittance challenges and recommend enhancement strategies.

1.4 Research Questions

1. What are the prevailing levels of VAT compliance among SMEs in Lagos State?
2. To what extent do SME VAT remittances impact revenue generation in Lagos State during 2022–2025?
3. Which factors significantly influence VAT compliance among SMEs?
4. What barriers impede VAT remittance, and what measures can address them?

1.5 Research Hypotheses

1. H₀: No significant relationship exists between VAT compliance and revenue generation among SMEs in Lagos State.
2. H₀: Compliance costs and tax knowledge have no significant effect on SME VAT remittance.
3. H₀: SME VAT remittances do not significantly influence overall revenue in Lagos State (2022–2025).

1.6 Significance of the Study

 

This research provides significant value by delivering actionable insights and empirical evidence that directly benefit various stakeholders within Nigeria’s fiscal and economic environment. Tax authorities such as the Federal Inland Revenue Service (FIRS) and the Lagos Internal Revenue Service (LIRS) gain robust, data-driven foundations for refining VAT policies, strengthening enforcement mechanisms, and developing targeted interventions for Small and Medium Enterprises (SMEs). Findings on compliance barriers and effective digital tools can inform expanded training programs, awareness campaigns, and procedural simplifications, including further enhancements to e-filing platforms and grace periods for new registrants, ultimately increasing voluntary compliance rates and reducing administrative costs for both taxpayers and collectors (Salawu et al., 2024).

For academics and researchers in fields like public finance, economics, and taxation, the study contributes valuable insights into tax compliance behaviors in developing economies, particularly during periods of reform and digital transformation. Its focus on the 2022–2025 timeframe encompassing post-pandemic recovery and landmark tax reforms—offers a contemporary case study that enhances theoretical frameworks, supports comparative analyses with other emerging markets, and opens avenues for future research on technology adoption, taxpayer perceptions, and fiscal outcomes.

On a macroeconomic level, the Nigerian economy stands to benefit through strengthened non-oil revenue streams, reducing oil dependency, enhancing funding for infrastructure and public services, and accelerating sustainable growth. Improved VAT remittances from SMEs help close revenue gaps, elevate the tax-to-GDP ratio, and create fiscal space for investments in education, healthcare, and economic empowerment programs. This fosters equitable development, reduces inequality, and builds resilience against global economic shocks, aligning with national priorities for inclusive progress. Overall, the research acts as a catalyst for collaborative efforts among government, businesses, and scholars to cultivate a more efficient, fair, and productive tax ecosystem.

1.7 Scope of the Study

The study is deliberately delimited to focus on Value Added Tax (VAT) remittance compliance among both registered and unregistered Small and Medium Enterprises (SMEs) operating in major economic sectors within Lagos State, spanning the period from 2022 to 2025. This geographical and sectoral concentration on Lagos, Nigeria’s undisputed commercial powerhouse, which alone contributed approximately ₦2.75 trillion to national non-import VAT in 2024 (over 50% of the total) and continued to lead with figures like ₦819.62 billion in Q1 2025, allows for an in-depth examination of compliance dynamics in a region characterized by high transactional volume, diverse SME activity in trade, manufacturing, services, and retail, and significant exposure to recent tax reforms. By including unregistered SMEs alongside registered ones, the research captures the realities of informality prevalent in the Nigerian business landscape, providing a more comprehensive view of remittance behaviors and revenue leakages.

1.8 Limitations of the Study

As with most empirical research in social sciences, particularly studies examining taxpayer behavior in emerging economies, this study faces several limitations that may affect the depth, accuracy, and generalizability of its findings. A key issue is the potential for self-reported bias in primary data collection, where SME respondents through surveys or questionnaires might underreport non-compliance, exaggerate remittance adherence, or provide socially desirable answers due to concerns about scrutiny from tax authorities, despite assurances of anonymity and adherence to ethical protocols. This bias is particularly pronounced in contexts like Nigeria, where low trust in government institutions and prevalence of informal operations foster cautious disclosures.

1.9 Definition of Terms

• VAT Remittance: The timely submission of net VAT collected (output less input) to authorities.
• Tax Compliance: Adherence to registration, invoicing, filing, and payment obligations.
• SMEs: Businesses meeting Nigerian thresholds for turnover and employment.

REFERENCES

Anonymous. (2025). Factors influencing tax compliance among small and medium enterprises (SMEs) in Lagos State, Nigeria. ResearchGate. https://www.researchgate.net/publication/392373742

Atawodi, O. W., & Ojeka, S. (2012). Factors that affect tax compliance among small and medium enterprises (SMEs) in north central Nigeria. International Journal of Business and Management, 7(12), 87–96.

Ojo, A. O., & Shittu, S. A. (2023). Value Added Tax compliance, and Small and Medium Enterprises (SMEs): Analysis of influential factors in Nigeria. Cogent Business & Management, 10(2), Article 2228553. https://doi.org/10.1080/23311975.2023.2228553

Philips, O., Monisola, A., & Olayinka, I. (2025). Tax justice, tax administration and tax compliance of small and medium enterprises in Lagos State. International Journal of Accounting, Finance and Risk Management, 10(1), 72–85. https://doi.org/10.11648/j.ijafrm.20251001.15

Salawu, M. K., Adigun, O. A., Lawal, Q. A., & Olaleye, J. A. (2024). Electronic tax filing system and compliance among small and medium-sized enterprises in Lagos State, Nigeria. International Journal of Economics and Financial Issues, 15(1), 32–41. https://doi.org/10.32479/ijefi.17309