Yesterday, the Federal Executive Council (FEC) approved a 44% increase in Value Added Tax (VAT) from 5.0% to 7.2%. The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, disclosed that the application of the new rate would be subject to amendment of the extant VAT law which could be sometime in 2020. She also noted that the increase was being proposed to help the states and local government get additional revenue to be able to meet the obligations of the new minimum wage.
The schedule of VAT is given in a 1997 document which is still in force. Generally, basic materials (though not cement) are exempted, as are basic foods, though most prepared foods and consumer products attract VAT. Professional services also attract VAT, which has negative cost implications for most companies. A criticism of the current VAT regime is that it functions more like a Sales Tax than VAT as understood in other jurisdictions, and therefore the re-claiming element is not well developed.
The FEC approval of the VAT increase did not come as a surprise to us as there have been discussions on the need for an increment as a way of bridging the huge fiscal deficit of the federal government, which has previously been financed with borrowings- a situation that has raised concerns on the nation’s debt sustainability. We recall that in mid-July 2019, the Chairman, Revenue Mobilisation Allocation and Fiscal Commission (RMFAC), Engr. Elias Mbiam called for an increment in Value Added Tax (VAT) from 5% to about 7.5% to shore up Nigeria’s revenue base which is heavily reliant on oil earnings (c.60%), with direct taxation, VAT and excise duties currently making up a small part.
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While we agree that there is the need for government to bridge its revenue gap, we think the proposed increase in VAT may further worsen the living conditions of consumers whose real income have been stifled over recent years. Looking at the performance of consumer goods companies over the past 18 months, one striking feature is the consistent decline in reported revenue, suggesting that consumer demand remains weak.
In our view, the plan by the Federal Government to finance the increment in the wage burden through tax increment would force companies to raise prices significantly, ultimately placing the incidence of the tax increment on the consumers. In effect, we see this as a fiscal policy designed to “rob Peter to pay Paul”. We also expect that the increase in minimum wage to be eroded by price increases of key household items, offsetting the expected improvement in purchasing power. The proposed tax policies will also pose a downside for foreign investments in the Nigerian industrial climate as well as growth of SMEs. We believe companies who are unable to raise prices might lay-off workers in a bid to manage costs, further impacting on the level of unemployment.
SpaceX says it’s pursuing necessary licenses to bring Starlink to Nigeria
Broadband penetration of 70% which covers 90% of the population is the FG’s target in its National Broadband Plan (NNBP), 2020-2025.
American private space exploration company founded by Elon Musk, SpaceX says it is working to pursue all necessary licenses needed to bring the Starlink Satellite internet services to Nigeria.
This was disclosed by Mr Ryan Goodnight, SpaceX’s Starlink Market Access Director for Africa in a meeting with NCC’s Executive Vice-Chairman (EVC), Prof. Umar Danbatta on Friday in Abuja.
What SpaceX is saying about Starlink in Nigeria
“SpaceX has been in discussion with NCC virtually over the past several months to begin the process of pursuing all necessary licences to bring Starlink, its satellite-based broadband services, to Nigeria.
Having made substantial progress in the discussion, the commission granted SpaceX’s request for a face-to-face discussion to gain better insights on the prospects,” they said.
The NCC stated that it has listened to SpaceX’s presentation and will review it vis-à-vis its regulatory direction of ensuring an effective and sustainable telecoms ecosystem where a licensee’s operational model does not dampen healthy competition among other licensees.
“As the regulator of a highly dynamic sector in Nigeria, the commission is conscious of the need to ensure that our regulatory actions are anchored on national interest,” they said.
NCC added that broadband penetration of 70% which covers 90% of the population is the FG’s target in its National Broadband Plan (NNBP), 2020-2025. This is also in line with its National Digital Economy Policy and Strategy (NDEPS), 2010-2030.
What you should know
Starlink is an internet service launched by SpaceX to improve internet coverage in rural and underserved areas globally. Starlink satellites are over 60 times closer to Earth than traditional satellites, resulting in lower latency and the ability to support services typically not possible with traditional satellite internet.
Nairametrics also reported this month that the Federal Government announced a deal with Microsoft through the Federal Ministry of Communications and Digital Economy for the development of high-speed internet infrastructure across the six regions in the country.
What FGN Free Meter Program means for the power sector
Without effective penalties for erring DisCos and consumers, progress may still remain very slow.
According to news reports, the Minister of Power, Mamman Saleh on Wednesday said the distribution of the four million free electricity prepaid meters pledged by the Central Bank of Nigeria would soon begin across the country.
According to him, the government is wrapping up the distribution of its initial one million meters, which he labelled phase zero, and would soon begin the distribution of the four million sponsored by CBN, which he tagged phase two. He also noted that the Federal Executive Council approved N3bn for the execution of six major electricity projects in the country to upgrade Nigeria’s electricity facilities and improve power supply across the country.
Ineffective metering remains a major drawback to the success of power sector reforms in Nigeria. While some consumers avoid paying for power consumed through meter bypass, some other consumers are made to pay for what they have not consumed through estimated billing by DisCos.
DisCos have been largely unsuccessful with metering their customers.
As far as inadequate metering is concerned, DisCos over time, have used this situation to their advantage via estimated billings. It appears that fully metering customers are currently being viewed as a disincentive, given that estimated bills can easily be manipulated.
According to a report by the Nigerian Electricity Regulatory Commission (NERC), only 4,234,759 (40.27%) of the total customer population of 10,516,090 were metered as of 30 June 2020. Clearly, this validates the widely held view that there are a wide number of customers on estimated billing which gives room for illegal connection to the networks and in turn corrupt practices. NERC further revealed that only three out of 11 Electricity Distribution Companies in the country had metered more than 50% of electricity customers under their coverage areas as of June 2020.
Effective metering in our view is one step ahead in solving the myriad of problems embattling the Nigerian power sector. Though supposed to be unpaid for, many customers in a bid to avoid the bureaucracy associated with getting meters have paid to get their own meters. We believe the provision of meters to all end-use customers will go a long way in ameliorating the liquidity squeeze in the power sector whilst also providing cashflow to the DisCos for investment in equipment needed to evacuate unused electricity to consumers nationwide.
We laud the FG’s efforts at distributing meters freely to end-users, but we note that without effective penalties for erring DisCos and consumers, progress may still remain very slow.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Nairametrics | Company Earnings
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