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Financial Literacy

How to obtain an Income Tax Clearance Certificate for your company

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Avoid paying taxes

In this article I am going to take you through a practical way of obtaining a tax clearance certificate from the Federal Inland Revenue Service. It’s not a one size fits all solution but large enough to help a Small Company.

Abc Ltd – I just applied to supply am equipment for a Government Agency. I was told to obtain bring a tax clearance certificate before I can be considered. I currently do not have one.

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Ugo: these days government agencies and companies requires a long list of documentation before you can be considered a supplier or contractor. Among them is a Tax Clearance Certificate.

Abc Ltd : so how can I get one

Ugo: the process of obtaining a tax clearance certificate can be different for several organizations. It all depends on the dynamics of your company. However, since your company just started business the following steps may be applicable and we will explain using some assumptions;

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Assumptions:1. Abc Ltd got a Certificate of Incorporation in December 2008
2. It started business in January 2010
3. Has a turnover of N1m
Step 1: If you are yet to do so, get in touch with FIRS and register your company. The FIRS usually maintain offices in almost every local government area. So, if your office is located in Surulere, you will have to register with the Integrated Office on Bode Thomas. After registration, your company will be given a Tax Identification Number (TIN). Your TIN will be used for every tax related transaction you do like vat and WHT. It is however not to be used for your state related taxes like the ones collected by the LIRS. This should be your last direct contact.

 

Step 2. Approach the tax office to get your company registered. It is often advisable not to approach a tax office without the company of a competent tax consultant.  However, the next steps guide you with what the processes will be.

Step 3. The tax consultant will ask you questions like when your company was incorporated and when it commenced business? A company may be incorporated but yet to commence business. Incorporation simply means you have registered your company with the corporate affairs commission. Commencement means the date you started using the company you registered for business. It doesn’t matter if the business is generating income or not. Once it has a bank account that shows inflow and outflow of money, it is typically considered to have started business by the tax man.

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Step 4: if your company commenced business in January 2010 like Abc Ltd and have never filed for tax then you will be asked by your consultant to provide an audited Financial Statement (FS) or Statement of Affairs. A Financial Statement is a document that contains the financial state and performance of your business for the period under consideration. It includes things like your Balance Sheet and Profit and loss account. I will address different scenarios

Started business in 2011 and Incorporated in 2011: if your company started business in 2011 then you are not yet due to pay tax. However, you will have to provide proof to the tax authorities. Proof will be your certificate of incorporation and your Memorandum of Association (MEMAT). At this point you will be registered with the FIRS and given your TIN. You will be given a tax clearance certificate. So it is important you register with the FIRS once you commence a business as you do not pay tax and will be given a tax clearance certificate.

Started business in 2011 but was incorporated years before: in this scenario you will have to prepare a report called Statement of Affairs. A statement of affairs is different from an audited financial statement. It is basically a statement that just shows the Assets and Liabilities your business has but still has to be signed by an external auditor. Every  incorporated company has one.

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For example, most people register companies with an authorized share capital of N1m. It simply means the nominal shares in your company is worth N1m on day one, in the eyes of the commission. It doesn’t mean you must provide that money as equity. As most incorporation typically cost N80k in Nigeria, your statement of affairs can simple be N80k in Cash in Bank (the asset) and N80k in your equity contribution (Liability).

As such you will provide Statement of Affairs for all the years that your business had not commenced operations. This too will be prepared by an accountant and signed by an external auditor. A Statement of Affairs is only accepted from companies that are yet to commence business or are within 18months of commencement of business (for example, commenced business in Jan 2010. You have between Jan 2010 to June 2011 to submit Statement of Affairs). You are likely to pay a “pre-operational” levy of N20k for this scenario

I started business years back and I am just filing in 2011. In this scenario, you will have to produce an audited financial statement for all the years you were in operation as well as a Statement of Affairs for the years you weren’t (may not be necessary). This is on the assumption that you have never obtained a tax clearance before. In this scenario though, be ready to face some penalties from the tax authority for late filing for all the years you did not obtain a tax clearance certificate. Penalties are presently about N5,000 for every month in the years you did not file returns (submit your Financial Statement).

Step 5: Once the Financial Statement is prepared and signed by the directors of the company and your external auditors, hand it over to your consultant. The Financial Statement for a company in operation also includes your estimated tax payable. Your estimated tax payable is the amount of tax you are telling the FIRS that you are liable to pay. However, this is not usually acceptable by the authorities as they often make their own computation. But you should do yours and make it as conservative as possible without evading tax. Make sure you read through and engage your tax consultant to ensure that all your allowances and available tax incentives were utilized in computing tax paid. Tell your accountant to provide you with a list of all allowances and go through it with them.

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Financial Statement may produce different scenarios in terms of whether you need to pay tax or not. Let us consider some

Scenario 1: Your company’s profit and loss shows that you made a loss for the period. In this scenario you may not pay tax for that year. If you have commenced business within a period of 4 years and made some losses, you may not need to pay tax for the years that you made the losses. However, you may pay minimum tax.

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Scenario 2. You only presented a Statement of Affairs. You will not pay tax. However, you will be charged a pre-operational level. It’s usually N20k as stated above

Scenario 3. Your business generated profit. You will pay tax on the profit it generates after deducting expenses that are allowed by the tax authorities. The tax authorities compute  profit chargeable to tax using a different format.

For a company that is already in operation, it is important that you provide your accountant with enough information. For example, if your customers regularly deduct withholding tax from your invoices and you have obtained a tax credit note for them, the aggregate sum can be used to reduce the final sum your company will pay to the tax man.

Step 6. Your consultant will give you several forms to fill. You will be guided as you fill the forms. However, it is important that you read through the forms as most of the information you reveal in it are confidential and so you will not want to give out something that might implicate you because it is wrong. You will also be told to provide copies of your letter head. These copies are used for correspondences with the tax authority which will typically include your application for tax clearance certificate. You will also need to give your consultant your Certificate of Incorporation and Memorandum and Articles of Association (often called MEMAT). You will also give the tax man a copy of the personal tax clearance certificate of your MD or/and any Director which you will obtain from the state inland revenue service. For example, in Lagos it is obtained from the LIRS.

Step 7: Your tax consultant will then submit your documents with the FIRS. The role of the tax consultant is very critical as their handling of your case with the authorities usually determines if the tax man will accept your figures and give you a certificate on time. In a situation where the account you prepared is not acceptable to the authorities they can by law use a Best of Judgement (BOJ) decision to compute the amount of tax you should pay. This is often a drastic and unfavourable scenario for the tax payer. However it can be minimized or all together avoided.

Step 8: You will be given a Tax Clearance Certificate that is signed by an Inspector of Taxes. The tax clearance certificate is usually for the 3 years preceding your application. So, for ABC Ltd, they will be given a certificate reflecting the years 2010, 2009, and 2008.

The cost of a tax consultant differ for small businesses. However, the can fall between N50k to N100k depending on the peculiarity of your case.

Note: “You” as used in the discourse above refers to your company. “Tax Man” refers to the Federal Inland Revenue Service.

I hope this helps

Patricia

Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

31 Comments

31 Comments

  1. Anonymous

    October 13, 2011 at 7:52 am

    Nice piece of work, Dre … I've just learnt something new today.Thanx.Cobie.

    • Marizu Godwin

      June 12, 2017 at 11:20 am

      Is hotel services subject to WHT?

      • Nairametrics

        June 12, 2017 at 2:49 pm

        How do you mean hotel services?

  2. chike ukoh

    October 13, 2011 at 2:23 pm

    Good work dre. Pls keep it up.

  3. RicDiZzLe

    October 14, 2011 at 9:56 am

    keep up the good work man!

  4. Ugodre

    October 14, 2011 at 9:58 am

    Thanks guys

  5. Anonymous

    October 18, 2011 at 10:13 am

    Hi Dre, how much will a statement of affairs cost? Company was registered over 5 years ago, i want to commence business with the name now. Thanks

  6. Ugodre

    October 18, 2011 at 11:12 am

    It can cost from N10k to N25k depending on who is doing it for you. Id bargain for N10k since you havent started at all

  7. Anonymous

    December 8, 2011 at 1:50 pm

    Wow! All i did was google "nigeria…how do small business owners pay tax". This is great. Neat, simple, straightforward… Thank you so much for taking time to explain.Still, i need to know how this works for very small business owners, e.g. with business name registration, not Registered Company.Thanks.PS Are you a tax consultant?

  8. Anonymous

    December 10, 2011 at 7:50 pm

    hello Ogudre,Please, can you send me your email to [email protected] regards

  9. Ugodre

    December 10, 2011 at 8:20 pm

    There can't be a company that is not registered. If you have a business it has to either be a sole proprietorship or a limited liability company. So if yours is a not a registered company then it's falls into the former till it is registered. In that case, the above does not apply to you. You will only pay personal income tax.

  10. Ugodre

    December 10, 2011 at 8:21 pm

    Hi Sesan, you can reach me on [email protected]. Cheers

  11. Shelze Consulting

    January 13, 2012 at 1:21 pm

    Shelze Consulting (Tax Consultants) 08084887912

  12. Anonymous

    February 23, 2012 at 2:56 pm

    THanks again. So sorry this is a late reply… this means mine is sole proprietorship…

  13. Shelze Consulting

    July 27, 2012 at 8:00 pm

    We can help you in all your tax matters. Right from registering your business with tax authorities to monthly VAT filings, Annual filings, Certificates of acceptances etcc cards.

  14. Tobi

    August 14, 2012 at 4:16 pm

    this is so helpful…amazing how something this basic can cause so much confusion in naija today with so many quacks posing as consultants….great article!

  15. kunle, ACA

    August 28, 2012 at 1:12 pm

    you are free to contact us for all your tax matters: Parsonal Income Tax with PAYE deduction, Company Income Tax, Audited Financial Statements and Statement of Affiars (SOA), Audit and Investigation, Representation in both FIRS and SIRS etc.

    We are Firm of Chartered Accountants, certified by ICAN.

    Send your enquiries to [email protected] or call 08139008077

    Our fees are bearable and negotiable

    Thanks for your time in reading this

  16. Anonymous

    September 26, 2012 at 6:56 pm

    sir i register my company last three years ago, and i wantet to travel, so i went to embassy and they demanded tax clearance, sir how can i get it.

  17. Olu

    December 22, 2012 at 12:19 pm

    Registered my company in 1991, been away all this while and now i want to start operating,how much will it cost to get a statement of affairs and tax clearance and how long does it take

  18. Oseghale Ibhawoh

    January 2, 2016 at 1:59 pm

    Nice job! Very educative

  19. ericblogs

    July 18, 2016 at 8:38 pm

    Impressive article, concise and informative…

  20. Sunday

    October 4, 2016 at 12:38 am

    Thanks for your help, mine is just a business name registration (Enterprise ) and I pay my VAT with FIRS please I want to know how to get my tax clearance certificates for embassy purpose thanks

    • seca

      November 5, 2016 at 11:11 am

      Hi Sunday……i am in exactly the same situation as yours. Pls did you find a way out. Been searching through google but not straight forward answer. Pls let me know how you did it and how long it took

  21. Isa Sani

    October 19, 2016 at 2:44 pm

    Avery nice and educative write up. We in LAUSILLA & Co [based in Abuja & Jos] are and Accounting firm that can handle and provide excellent tax services as well as preparing your Financial Statements. You can reach us 08096393464 or email [email protected]. Kudos to the presenter of this write up.

  22. Maimuna Abubakar

    May 17, 2017 at 8:48 pm

    Hello Ugo! Kindly explain how a business name can apply and pay the personal income tax. What is the process to be followed?

  23. Mr. Mamus

    October 19, 2017 at 8:10 am

    Thank you so much for this very educative write up. Very precise and informative.
    Job well done, keep it up

  24. Nony Jay

    December 13, 2018 at 11:28 am

    nice article. pls my question is for a registered business name , is it FIRS or state revenue service that will be responsible for issuing tax clearance ?

    • Alfred Akuki

      December 13, 2018 at 1:56 pm

      FIRS

  25. Adedeji Sijuwade

    August 10, 2019 at 10:16 am

    I have this scenario,a company was incorporated in August 30 2018 and commenced business November 2018,needing a tax clearance January 2019 we approached an Auditor who advised us to prepare Financial statement which he prepared covering Six month to April 2019.This is a firm located in Osopy plaza in ikeja .So having prepared the account he went ahead and even compute Company income and Education tax which we paid ,He then did annual filing.But approaching FIRS for tax clearance they still asked for statement of affairs and this same auditor still want to charge for statement of affairs when he has collected money for the fulk up job he did initially. Please what can i do to bring this man to book ?

  26. Bola

    November 9, 2019 at 3:48 pm

    Hello,
    Please how does one go about getting a Tax Clearance Certificate for a Sole Proprietorship business in Nigeria.

    Thanks to revert.

  27. jpboladunia

    February 5, 2020 at 12:41 pm

    Magnificent goods from you, man. I’ve keep in mind your stuff prior to and you’re simply extremely excellent.
    I really like what you have acquired right here, certainly like what you’re saying and the best way wherein you are saying
    it. You make it entertaining and you still care for to keep it smart.

    I can’t wait to read far more from you. That is actually a great site.

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Personal Finance

Emergency Fund: Can you raise N50,000 cash tomorrow?

Focus on building up your emergency funds before building a portfolio of assets.

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Emergency Fund

Can you raise N50,000 cash tomorrow? Yes cash, without selling any asset of yours; Can you? This is a very important question you need to ask yourself. One generally accepted lesson from the 2020 economic downturn for both corporations and individuals is to always have an emergency fund (EF). So, what is an Emergency Fund? How is it set up? How is it used? Let us explore.

What is Emergency Fund

An EF is a savings account set up to pool and hold a minimum of three months of calculated Non-Discretionary Income (NDI). The EF is advised as the first activity any investors should undertake. Specifically, before even investing a cent, set up and maintain an EF because this fund acts as an “insurance” or stop-gap for your income or investment portfolio.

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How is an Emergency Fund set up?

An EF captures a minimum of three months of Non-Discretionary Income (NDI). What is NDI? These are expenses incurred that must be settled irrespective of income. For instance, rent must be paid, groceries must be paid, we cannot simply stop paying utility bills because we lost our job and thus income.

Once we decide on an investment plan, the first thing to do is to list out all expenses we will incur and attach a cost to them per month or annual basis but corresponding to the period of payment. We do this to identify the necessary expenses which we refer to as the NDE.

List of expenses

  • Rent N1,500
  • School fees N500
  • Camping/Holiday N300
  • Go to Movies N100
  • Groceries N400
  • Cable TV N200
  • Gas for cars N200
  • Phone Bill N300
  • Eating out Dinner N200

Total expenses for the month are 3,500

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Next, decide which of the expenses listed above are Non-Discretionary. In other words, which of these expenses must be settled irrespective of income? Let us assume our client chooses the following as NDE:

  • Rent N1,500
  • School fees N500
  • Groceries N400
  • Gas for car N200
  • Phone bills N300

These expenses above come to a monthly NDE of 2,900, with a three months minimum of 8,700. This minimum sum means that should the client lose his job or suffer any other income interruption, these necessary expenses will be paid from the emergency fund, without the need to sell down investment assets at fire-sale prices just to raise income.

How is it used?

The Emergency Fund is simply a piggy bank. Once it is set up, you can increase the minimum saving from 3 to 4 and as high as you want to go. What is does is insulate your investment portfolio from losing any compounding or dissipation in principal because you must sell.  So, if there is income interruption due to job loss or you simply want to take a long holiday and write a book, you can do so and still meet your expenses from these savings.

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An EF is not only for downturns, as it is also good for opportunities. A friend of mine bought an almost brand new car from a work colleague that was emigrating abroad because he could pay cash immediately in short notice. Cash is always king when you are in a tight negotiation with a seller.

Your Emergency Fund should be kept in cash or near cash investments. Return on investment for the EF is secondary to access to those savings. Also, you want your EF in an investment class with fixed income with no variation in returns. this means in practical terms do not invest your EF portfolio in equities that pay a variable return or even any asset which may need documentation and visits before you can access your funds. I am also wary of a commodity like gold, which does hold value, but cannot easily be converted to cash. The recommended asset classes to invest your EF are:

  1. Call or Fixed Deposit in Banks
  2. Sovereign Treasury bills, they are easily discounted and converted to cash
  3. Certificates of Deposit with bank

If the asset call cannot be converted to cash in one activity should be avoided. Also, ask the institution if they charge fees for early withdrawal and what those fees are.

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What can I do tomorrow?

  1. Start an emergency fund immediately. Do the expense exercise, determine your Non-Distortionary Expenses, start to build up a savings pot.
  2. Focus on building up your emergency funds before building a portfolio of assets.

Patricia
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Investment Tips

What bad stocks have in common with bitter relationships 

The feeling you get from marrying the wrong partner is similar to that felt after buying the wrong stocks.

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I have always argued that stocks cannot be summarised into one statement for a newbie, until recently when a friend told me that it could.  

“Simply put, buying stocks can be likened to relationships, he said.  

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did not immediately agreebut over the next few minutes, he explained to me what he meant, and drew several analogies to back his claims.  

While he is no expert, I understand that he has drawn his conclusion from his experience buying stocks for himself over the past 5 years, so I took his points seriously. These points have been summarised in this article. 

READ MORE: Cocoa prices melt lower as COVID-19 weakens demand 

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When it crashes, there is no telling how far it can go  

My friend mentioned of some company’s stock he bought in 2016 in the hope of selling short-term. At the time he bought, there was a dip and he expected things to pick up within some months so he could sell-off.  

Two years later, the stock price had plummeted 50% down from the price at which he bought. Without saying, he became a long-term investor because he was not ready to sell off at a loss.  

 

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How does this liken to being in a bad relationship?

As the value plummets, you keep hoping it will rise again and then before you know it you are stuck for the long haul. Same thing can happen with a wrong partner. You remain there hoping things will be better but it gets worse. 

It could happen sometimes that a company’s stock market price comes crashing and it never goes back to where it was againThe factors which triggered its fall, may not even be able to return it to its starting price.  

 

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The stock price is not indicative of the company’s profitability 

For some reason, there are company stocks market prices that remain low year after year despite the billions declared in profits, and the dividends paid out to shareholders.  

Sometimes, the stock market price could still slump even when the company has positive records in its financials. Market experts are not always able to explain this, but it remains true. Some of the most profitable stocks are undervalued.  

 

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You can never take stocks at face value

That a stock has been on an upward trend in the last few months does not mean it will remain so. One must always consider several other factors before purchasing a stock.  

While it is important to look at past performance, there are other things that could point to the likely future of such stocks. 

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Say, for instance, the company has just announced a new board chairman who was implicated in some fraud cases in the past. It doesn’t matter how well the stocks have performed in the last 365 days, or the chairman’s competence, the stock prices are most likely to slump due to loss of investor confidence.  

There was a recent case where the CEO of an internet service provider company was alleged to have been involved in sexual harassment, and was eventually pressured by shareholders to resign. The pressure came not necessarily because they thought he was guilty, but because of the implications on the company.  

You have to probe to discover the real qualities.  

 

The most expensive stocks are not necessarily the best. 

If you ever heard a stock described as under-priced or over-valued, then you should understand that the price you pay is not necessarily suggestive of the value.  

Some great stocks, with good potentials, high liquidity, good company profile and adherence to corporate governance ethics, are not as expensive as they should be. While some other stocks are ridiculously overpriced, even when they do not have as much promise. Some of these overpriced stocks could still be basking in past glory or just positive media hype.  

This explains why investors must conduct due diligence before putting in their hard-earned money. Sometimes the media hype around a company’s stock might not be giving you all the information you need to make a decision, so you necessarily have to go the extra mile.  

Subscribe to newsletters from financial news websites if you need to, take courses if you have to, but ensure to learn all you can.  

Remember price is what you pay for the stock, but value is what it is really worth, and there is no law stating that one must justify the other.  

READ MORE: Global stocks records astronomical gains in Q2 2020

When you get the wrong stocks, you get stuck! 

You know that feeling when you are sure that you have made the wrong choice, but also know that there is no way out? That’s the feeling you get when you marry the wrong partner, as my friend said. And that’s the same feeling you get when you get the wrong stocks.  

You simply get stuck.  

No returns. No dividends. Probably, no way to sell either because no one else is interested in buying from you. And if you do succeed in selling off at this point, you would most likely be doing so at a loss.  

If you study trends in the stock market, you will see some dormant stocks that have remained stagnant for long periods of time. No rise in share price, no fall in share price, and no share is being traded either.  

READ ALSO: Best time to make money trading BTCs

It is not a nice position to be in, and that is why you want to be sure of the company, its management, and board members who take the decisions before you decide to buy or not, even more so when you are a long-term investor.  

And even then, with the wrong stocks, you could suddenly find that your proposed short term investment of 6 months will run into years because you keep waiting for things to pick up before you sell.  

Patricia
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MSME

130 farmers to receive seed funding of N100,000 each

The target of the programme is to adopt farmers in 774 LGAs across the country.

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The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receiv, e seed funding of N100,000Border Closure: Nigerian rice farmers are struggling to feed a rice-hungry nation. CBN to give Niger Delta rice farmers single-digit loan 

The National Information Technology Development Agency has kick-started a job and wealth creation programme where 130 farmers will each receive seed funding of N100,000. The programme will be supervised by the Federal Ministry of Communication and Digital Economy.

According to a statement from the agency, the National Adopted Village for Smart Agriculture (NAVSA) programme is in line with the government’s drive to lift 100 million Nigerians out of poverty, and it will start with 130 farmers in Jigawa state.

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The target of the programme is to adopt farmers in 774 LGAs across the country, open the platform to all agriculture ecosystem players with access to information, facilitate and improve productivity, reduce the cost of production, and facilitate access to local and international markets.

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READ MORE: President Buhari directs Ministries of Power, Finance, BPE to seal Siemens deal

With all of this in place, it is expected that the farmers will be able to build sustainable business models and digital business opportunities that will create not less than 6 million well-paying jobs in the next 10 years.

“NAVSA Platform is aimed at digitalising agriculture to drive Digital Economy, as part of President Buhari’s agenda to leverage on technology and innovation to revolutionise the agriculture value chain,” the statement read.

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Among other things, the farmers will be empowered with a digital platform, smart devices (tablets), connectivity for data and calls, Digital agripreneurship skills, and enrolment with telecom operators and the National Identity Management Commission (NIMC) for identification.

All of these will be given to them at the end of the programme, which will last from July 1 to July 13, 2020.

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Patricia
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