Nigeria: Tax Reforms As Catalyst for Telecom's Sector Growth

29 October 2020

Emma Okonji writes on the importance of a tax reform system in the telecommunications and technology sector in order to cushion the adverse effects of COVID-19 pandemic Since the outbreak of the COVID-19 pandemic, many economies around the world are faced with uncertain realities that are harmful to the growth and well-being of any nation. Besides the abrupt decline in real gross domestic product(GDP), rash household income decline, unstable business landscape, increased unemployment and underemployment, constrain fiscal space that weakened the international trade position in Nigeria, there also lies heightened domestic risks going forward. In light of the uncertain new realities endangered by the pandemic, concerns and questions are being raised regarding economic recovery and even more, fast-tracking the recovery.

Economic recovery

Discussions at a recent webinar themed: 'Fast-tracking Economic Recovery through Robust Tax Policies and Practices' and hosted by the Telecommunication and Technology Sustainability Working Group, points to tax reforms in the telecoms sectors as a way out of the current economic state. Present at the webinar were key stakeholders in the telecommunication and technology sector and government representatives who analysed the impact of the pandemic on the economy, the role the information and communications technology (ICT) sector amidst the crisis, and its potential in the new normal.

The Minister of Finance, Budget and Planning, Zainab Ahmed, in her presentation, said Nigeria's dependence on oil revenue and foreign exchange exasperated the impact of the pandemic and made economy vulnerable to recession relapse that successfully exited in 2017.

According to the minister, "Following a 13-quarter run of upward but low growth rates, reports from Nigeria's statistics bureau show that Nigeria's economy contracted by 6.1 per cent year-on-year in the second quarter of this year. Real GDP dropped to N15.9 trillion in the second quarter of 2020 from N16.9 trillion in the corresponding period last year. The unexpected situation exposed the deleterious nature the economy's heavy dependency on oil".

The Director of Tax Policies of the Federal Inland Revenue Service (FIRS), Matthew Gbonjubola, was of the opinion that besides exposing the dangers of high dependency on revenue oil commodities, the pandemic also shows how much the taxation system has not been optimised. He said because we had money coming in from these commodities, we sort of neglected taxation and unfortunately, even the state of our tax and the legal framework from our taxation is one outdated because for many years, we never bothered to review our tax legislation to bring them up to date with current realities.

Needless to say, that the pandemic negatively impacted government revenue, and endangered increased government spend on COVID-19 responses. And the question remains, where do these monies come from? This is what led to the heightened activities of the FIRS since the outbreak, in a bid to balance the books.

Stakeholders' position

Stakeholders in the telecommunication and technology sector, however, believe tax reform particularly in the sectors is the way to economic sustainability.

For many organisations, effective cash flow is endangered during this period as revenues fall, and potentially, debtors delay payments or become insolvent. Operations have been affected by trade restrictions, lockdowns, disrupted transport routes, import/export bans, foreign exchange, and more. Not to mention the harsh business environment which existed prior to the pandemic.

These unfavourable business climates coupled with unfriendly taxation polices have made it very difficult for those in the telecommunication and technology sector.

The President, Association of Telecommunications Company of Nigeria, Mr. Olusola Teniola, remarked: "Those costs like the running diesel generators and getting haulage of diesel to base stations have become part of our DNA. Over the almost 20 years that GSM operators and others have existed in Nigeria, what the government has to realize is that these costs that we are bearing, when compared to other environments and jurisdictions where we can operate off a grid that is reliable, are costs that we shouldn't be bearing in the first place."

Economic sustainability

The government under the Nigeria Economic Sustainability Plan (NESP) that will include fiscal policy measures, monetary policy measures, and real sector measures is determined to provide resources to support the private sector, through lending facilities especially because of the backward integration and value chain linkages that will help ease dependency on imports and foreign exchange constraints.

Besides, measures including digital initiatives such as creating digital identities that guarantee palliatives and resources are distributed equitably.

The plan developed by the Economic Sustainability Committee (ESC) set up by President Muhammadu Buhari on March 30, 2020, includes a fiscal stimulus package totalling N2.3 trillion was secured; N500 billion from special accounts, N1.1 billion from the Central Bank of Nigeria (CBN) on structured lending, N334 billion from bilateral multilateral loans, and N802 billion from other fonts.

While stakeholders laud the federal government for these efforts to propel the Nigerian economy, there are still underlining questions regarding the theme of the webinar - 'Fast-tracking Economic Recovery Leveraging Robust Tax Policies and Practices,' mainly in the telecommunications and technology sectors which contribute about nine per cent to 10 per cent, which is approximately N14 trillion of the GDP to the Nigerian economy as noted by the Chairman of the COVID-19 Intervention Committee for PWC west Africa and the Chairman PWC Nigerian Ethics Committee, Mr. Taiwo Oyedele.

Attendees at the webinar argued that for the reason that Nigeria's GDP contribution is based on income and consumption, it is clear as day that without the telecommunications and technology sector potential tens of millions of people are more to be in poverty owing that since the pandemic, the sector has been the economic driver, ensuring business continuity and productivity.

Tax reform

Looking at tax contribution, especially the tax-to-GDP ratio, Oyedele argued that Nigeria needed to take advantage of the opportunities amidst the crisis. He noted that tax policies are too focused on people at the lower end of the society and visible industries, thus, a lot of people get away without paying their fair share of taxes. Efforts should be geared at getting the right people to pay tax.

He believes the technology sector can be leveraged to raise the tax-to-GDP ratio without the introduction of new taxes. He pointed out that "Kaduna State introduced technology and was able to increase Internally Generated Revenue (IGR) of the state from N13 billion to over N44 billion in approximately two years without introducing any new tax."

Participants at the webinar urged that current tax policies that not only create problems for businesses but do not generate revenue for the government, should be revamped.

According to Teniola, "It is evident that the technology cum the digital economy is going to be a force to reckon with for economic growth. He remarked that the current government budget is N13 trillion, approximately $26 billion, while the sector has attracted investments worth around $70 billion. This transformation journey must be private sector-driven and private sector-led, a transformation that will require at least N130 billion by 2030 to sustain the increasing population growth.

Chairman of The Association of Licensed Telecommunications Operators of Nigeria (ALTON), Gbenga Adebayo, also highlighted the importance of the sector in navigating the pandemic outbreak.

"We were prepared to the extent that the industry had enough headroom to cope with the upside in traffic and we are glad that throughout the months of lockdown, we never had one day of national outage and I think that is significant because you could imagine people not being able to communicate. Even emergency and medical services would not have been able to communicate if we had one day of national breakdown of telecom infrastructure," he said.

Adebayo further said: "Stakeholders believe the multiple taxation policies such as the 39 tax levies and charges indiscriminately applied to the telecommunication sector are called to question. The sector cannot invest in capital expenditure programs that are highly capital intensive in terms of industry and economic needs because of the uncertainties in policy decisions. Stakeholders are calling for alignment with the government harmonize taxes paid at the federal level to be shared with the state and local government to help the industry optimise revenue and investments in infrastructure, youths, and the growing population insight of this digital transformation and economy."

One of the speakers at the webinar, Prof. Teju Somorin, pointed out the issue of complex tax policies and importance of tax simplification is one of the six canons of taxation as described by Adam Smith. Her concerns, however, lies with implementations of the many recommendations of the revised national tax policy to simplify taxes.

She said: "The stamp duty's act is the one that I can quickly remember. If you look how it is worded, some details are difficult for even the operators and the tax administrators, not to talk of taxpayers, to be able to understand what they are supposed to do about the stamp duties.

Also, there has been a recommendation, which is yet to be implemented and that is to establish an office of tax simplification. That responsibility falls on the Federal Minister of Finance. That has not been done so I am looking forward to the day it will be done."

The Director-General, Budget Office, Ben Akabueze, believes that the conversation should be far from multiple taxation and should rather focus on tax consolidation. He pointed out that Nigeria has one of the lowest tax-to-GDP ratios and it is misleading that the companies are more heavily taxed in Nigeria. He said: "Kenya, for instance, is another country that you know is actually way up at the top of the ladder in terms of the technology deployment, nutrition, GSM usage and the application of that technology. Consumer taxes on telecom services alone in Kenya aggregate to 21 per cent, apart from their Value Added Tax (VAT) rate, which is more than double even our higher rate. There is a 10 per cent flat charge on telecom services."

He also pointed out that the government was not looking at new taxes but ways to improve collection efficiency, focusing more on acts administration to make sure that people pay what is rightfully due. In line with this, Oyedele highlighted how the telecommunications and technology sector could be leveraged to generate data for efficient collection and planning.

It is safe to say that telecommunication and technology have fast become the most critical infrastructure to any economy, in that without telecommunication services, the world would have come to a complete halt. Owing to this, it is imperative that all stakeholders begin to see the critical nature of telecoms infrastructure and provide not just incentives, but also a regulatory framework and tax regime that will be favourable to the industry.

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