Taxing Nigeria’s subnational economies to oblivion

11th May 2022

Nigeria is mired in a crisis where high inflation, sluggish economic growth and high unemployment have firmly anchored its economy in stagflationary territory. Despite historically high oil prices and a favourable price environment for commodities, debt is rising, public fiscal health is stretched and the country is recovering from its second recession in a half-decade. A critical part of driving economic recovery is decoupling government income from oil receipts – which account for 75-85% of earnings in a typical year. The current administration has rightly determined that increasing tax receipts is a path forward to a more sustainable fiscal future and has encouraged the country’s 36 states to follow suit.

State governments in Nigeria, over the past decade, have been dealing with the perennial problem of financial solvency, as most of the states overwhelmingly depend on federal allocations that come majorly from oil revenues for their sustenance. For the full year, 2020, only two of the 36 states are able to generate internal revenues that surpassed their federal allocations.

This means that when these oil revenues fall, it puts them in precarious situations, leaving them unable to meet their basic obligations such as paying salaries, wages and pensions not to mention providing social services and infrastructure. This scenario has taken place twice in the last five years, requiring the Federal Government to bail out the states in 2017 and 2021.

This has increased the urgency of states to increase their internally generated revenue in order to reduce their exposure to volatile and unreliable federal allocations. Indeed, states have intensified their efforts to increase revenues by introducing new taxes and levies on companies within their domains. However, due to a limited number of taxable businesses in the states, many state governments end up focusing their efforts on the same businesses that are already paying their fair share of taxes. In the end, this has the unintended effect of creating a harsh business environment for all and in some cases, forcing businesses to close due to overtaxation and/ or harassment. .

One industry which seems to suffer disproportionately from this overtaxation is the telecommunications industry. This is not surprising considering the astronomical growth that Nigeria’s telecommunications industry has undergone in the last 20 years.

At the federal level, telecommunications companies are expected to pay taxes such as Companies Income Tax, the Capital Gains Tax, Withholding Taxes, Stamp Duty, National Industrial Training Fund (NITF), Employees Compensation Scheme, The Tertiary Education Trust Fund (TETFUND), National Housing Fund contributions, Contributory Pension Schemes, and Customs Duties. These taxes are applicable to all incorporated companies in Nigeria.

There are also sector-specific taxes and levies such as the Annual Operating Levy paid to the Nigerian Communications Commission (NCC) by all holders of licences issued by the regulator, the National Cybersecurity Fund, the National Information Technology Development Fund (NITDF) Levy and Right of Way charges.

However, the real challenge is with states who rely on laws such as the Taxes and Levies (Approved List for Collection) Act 1998 Act No. 21, Cap T2 Laws of Federation 2004 and the Nigerian Communications Act 2003 which recognises that operators may require state and or local government approvals in erecting or maintaining network facilities to impose various levies and taxes on telecommunications companies.

For example, in Kogi State, telecommunications companies are made to pay up to 41 levies by the state government, including levies such as annual right of way renewal; social services contribution; employee economic development levy; mast site premises renewal; fire service yearly renewal; payment of environmental levy; failure to submit an environmental impact assessment report; failure to register industry; failure to submit environmental audit report every two years; storage of petroleum products and radioactive materials without written permission from the Kogi State Environmental Protection Board; failure to comply with setbacks to roads, power lines, and rivers/streams; and dumping of toxic or hazardous substances or hazardous substances or harmful waste without Kogi State Environmental Protection Board approval.

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