One of the unique features of the second Finance Act 2020 (FA2 2020) which received Presidential assent on 31st December 2020 is that it ‘strangely’ introduced excise duties on telecommunications (telecoms) services. Section 37 FA2 2020 introduced a new (very brief, but portentous!) section 21(2) to the Customs & Excise Tariff, Etc (Consolidation) Act (CETCA): “Telecommunication services provided in Nigeria shall be charged with duties of excise at the rates specified under the duty column in the Schedule as the President may by Order prescribe pursuant to section 13 of this Act [CETCA].”
I discussed this fleetingly (by way of footnote reference) in an earlier piece, ‘Rendezvous’: Implications of Tax Provisions of Nigeria’s Finance Act (No.2) 2020 for Non-Residents, but the resulting multidimensional issues requires more detailed consideration, which is the purport of this article. I will start by excerpting from page 5 of my earlier article as follows:
“E. Customs & Excise Tariff, Etc (Consolidation) Act (CETCA)
- Imports Now Subject to Excise Duties: By virtue of the new section 21(1) CETCA (vide
- 37 FA2 2020), “goods imported” are now also subject to excise duties – alongside locally manufactured ones. Customarily, imports were only subject to customs (import) duty, and not excise. The provision is so drastic that one wonders if it is a draftsman’s error? This writer thinks not, because the new section 21(1) CETCA starts with ‘Goods imported and those manufactured in Nigeria’ …”
Discourse: Issues Arising
That the amendment seeks to implement a variant of the Telecommunications Tax Bill which was roundly condemned, and seemed to have been abandoned, is not in doubt. We will start by looking at this from “impact on the economy” point of view.
Increased Public Revenue/Operating Costs
Obviously, it is meant to generate more funds for the government by extracting excise duties from the entire telecoms value chain, and the first touch point is that such translate into higher costs by consumers, as the telecoms players will clearly pass on the excise duties to consumers by way of increased prices. Given the criticality of telecoms to other sectors, there would be spillover effects: higher operating expenses (which could impact taxable profits, because of higher deductible expenses, lower turnover or net margins), harsher operating environment for the medium and small scale enterprises (MSMEs), the informal sector, and start-ups, etc. These could potentially have a cumulative negative impact on Nigeria’s ease of doing business ratings (discussed further below).
Compliance Burden/Ease of Paying Taxes
Obviously, the requirement to pay excise duties increases the overall tax compliance burden of telecoms players. Telecoms industry players will need to, as part of their risk management, comply with the whole gamut of CETCA provisions relating to collection and remittance of excise duties. This will entail creating in-house compliance administrative capacity (employment/re-assignment of staff, making adjustment to systems and processes etc.), in order to ensure optimal compliance status. Also, there would be need for external support as necessary, for example engagement of consultants for advisory or compliance work, lawyers for litigation, etc. These entail increase in overheads as well.
There could now be enforcement issues and litigation pursuant to statutory dispute resolution provisions where telecoms operators disagree with acts and decisions of the Board of Customs and Excise in their administration of the excise duties. Clearly, measuring the compliance impact on the part of telecoms operators can only be done after the fact. However, it is not in doubt that cumulatively, these would further negatively impact Nigeria’s not so impressive standing on the Ease of Paying Taxes. Since this also impacts ratings on Ease of Doing Business, implementation will likely see Nigeria lose a few points on this score.
If implemented, section 21(2) adds another tax to the list of taxes and levies that the telecoms sector has to grapple with. Considering that there is already 7.5% VAT on telecoms services, it is an open issue whether the FG’s introduction of excise duties will not turn out to be counter-productive. Again, it is noteworthy that the telecoms sector already pays some taxes that are not applicable to many other sectors. According to the NCC Multiple Taxation Study (MTS), “multiplicity of taxes is one of the major problems facing the country, and corporate entities and individuals often complain of the ripple effects associated with it”, and “the Licensees and Businesses in the Telecoms Sector of the Nigerian Telecommunications industry complain of the problem of duplicate, arbitrary and multiple taxation.
Given these and many other views in the MTS, one wonders how much the NCC as the industry regulator was consulted by the FG, and/or the sort of input that NCC made to the proposal to subject telecoms services to excise duties, before same was enacted into law. It will of course be preposterous to imagine that if NCC opposes any FG policy, that such opposition will prevent the policy from coming to fruition, if the FG remains unpersuaded. And there is even the possibility that the NCC may not be opposed to the excise duties imposition.
Divergence from the National Tax Policy 2017 (NTP)
Para 2.2.6 NTP (Creating a Competitive Edge) provides:
“i. Reduction in the Number of Taxes
Taxes should be few in number, broad-based and high revenue-yielding. The administration of the taxes should also be simplified for ease of enforcement and compliance.
- Avoidance of Multiple Taxation
Taxes similar to those being collected by a level of Government should not be introduced by the same or another level of Government. The Federal, State and Local Governments shall ensure collaboration in harmonizing and eliminating multiple taxation.”
Can we really say that the extension of excise duties to a sector (telecoms) that was not previously subject to it, is consistent with the NTP? There must have been a reason why this was not the case initially? It is conceded that arguments that this is multiple taxation because VAT is already paid on telecoms services will be countered by views that after all, most local products subject to excise duty are also subject to VAT. Nonetheless, the point can still be made that this enacted proposal arguably does not, at least from an ‘optics’ perspective, pass the “sniff test”.
Cost Benefit Analysis
The big elephant in the room is whether a thorough cost-benefit analysis study/economic impact analysis was done prior to amending CETCA to impose excise duties on telecoms services? In these days of big data, it is to be expected that business and economy-impacting regulatory measures will only be taken after due consideration of potential effects; clearly, if there is no clear cost vs benefit advantage, then it is not worthwhile to implement such proposals. If for example, this will create massive inflation, the question has to be asked whether we are not gaining some value via one channel, but losing equivalent or more value through other means?
The FG probably conducted such analysis, but the fact of whether such was done is not in the public purview; meanwhile, such preparatory action will provide comfort to the business community particularly, and the public generally. A possible agency that would have done such survey is the National Bureau of Statistics (NBS) or the Ministry of Finance and Economic Planning itself, possibly working with consultants. So the question remains: was an economic impact analysis done, and subjected to rigorous testing?
Telecoms Sector Less Attractive?
Another noteworthy point is whether this additional cost will not make the Nigerian telecoms sector, which has recorded so many outstanding exploits, less attractive to investors? Returns may be impacted by lower net income, as consumers adjust for the excise duties component on their telecoms spend; ultimately this could arguably have a negative impact of the investment competitiveness of the Nigerian telecoms market. Whilst it is conceded that our impressive demographics, and increasing mobile penetration shows that the Nigerian telecoms market is far from maturing, the introduction of the section 21(2) CETCA excise duty will not altogether be without any effect.
Delay in Issuing the Order: Is the FG Having Second Thoughts?
As at the date of this article (in April 2021), the President has not yet issued the relevant Order. Is this delay indicative that the government is having second thoughts about the measure? This is particularly because the Hon. Minister of Finance wasted little time in issuing regulations to give effect to the FA1 2020. For example, the Minister issued the CIT (Significant Economic Presence) Order 2020 in February 2020, pursuant to enabling legislation (FA1 2020) enacted in January 2020. If the FG has a rethink and no longer intends to proceed, one good way to silently achieve the result is by the President omitting to issue the Order, since issuance is required to trigger the implementation of section 21(2) CETCA.
Whilst the delay could be a good omen, the flip side is that the uncertainty it symbolises could present significant unease to sector practitioners and investors. It is also noteworthy that post issuance of the Order, there may still be need for bespoke regulations to provide clarity on the mechanics or modalities of how the excise duty regime will be implemented. This could take additional time to conclude, belying the question: was it not that the FG in enacting section 21(2) CETCA, wanted to immediately start earning excise duties from telecoms services?
Regulatory Stability/Certainty Issues:
Finally, the sudden emergence of the excise duty (as it were out of the blues) means investors may continue to be apprehensive about drastic and unexpected regulatory changes, curtailing their ability to plan with fair amount of certainty or interfering midstream with well-considered business/investment plans on the basis of extant regulatory regime. One bane of the Nigerian investment environment has been regulatory policy flip flops, with prejudicial consequences for investors who had taken positions, based on underlying assumptions, which subsequently change without notice.
The FG’s deficit budgets exerts considerable pressure on it seek ways of increase collections to the public fisc. Enacting annual FAs provide opportunity and quickly capitalise on potential areas where collections could result in significant contributions of public revenue, based on government’s monitoring of the business landscape. With the FA1 2020 amendments and subsequent associated actions on stamp duties, the FG sent a signal that it intended to leverage stamp duties; the provisions of the Stamp Duties Act having previously been half- heartedly enforced. It appears that its gaze has now been turned on excise duties, but it is important to ensure that this initiative (which unfortunately cannot be challenged), yields more value than good.
The Nigerian telecoms story has shown how government’s supportive and pro-sector growth regulatory approach has helped to deliver a market boasting stellar performances that has exceeded all expectations at the onset of sector reforms. Furthermore, there is so much ICT- driven/related entrepreneurial energy in Nigeria, which with government support, will yield bountiful harvests, including tax contributions to the public fisc. This writer’s humble submission is that the FG is better off focusing on enabling Nigerians create new revenue streams (or optimizing existing streams) from which it will derive additional and increased tax collections than overtaxing sectors like telecoms as exemplified by the planned introduction of excise duties on telecoms services.
After all, we had no telecoms sector on this scale in 2000, neither did we have fintechs as now a decade ago; the horizon promises a lot more and the government should be in the vanguard of this optimism by deeds and words.