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Communication Service Tax: A Tax Burden Nigeria Could Do Without (Part 2)

Why the CST is a bad idea

At first glance, the introduction of this tax appears to be in line with the objectives of the National Tax Policy to shift from direct to indirect taxes. This shift is to be achieved by increasing the incidence of indirect taxes and reducing direct taxes. However, while the proposed introduction of CST is in line with the former, there is no corresponding attempt at reducing direct income tax rates. The imposition of this tax, in addition to the 5% VAT that consumers already pay for communication services, simply increases the tax burden on businesses and individuals. This increase would adversely impact lower income consumers the most, who are already struggling with a headline Consumer Price Index (CPI) of 16.5% as at June 2016 and for whom affordable access to information and communication technology is critical to their social and economic inclusion.

The Bill does not provide a mechanism for the recovery of input CST on ECS suffered along the value chain. Consequently, CST borne by a middleman will be passed on to the final consumer, by way of a higher fee for the service. The final consumer will in turn pay CST on this higher fee. This has the potential of putting the business of the middlemen at risk, as any consumer, who can, would rather contract directly with the primary service provider, as a way of reducing cost. This is not a positive development for the overall growth of this sector of the economy.
The introduction of the CST is one more tax added to the pool of multiple taxes already existing in Nigeria. A recent study revealed that a typical company in Nigeria makes about 59 different tax payments in a year, compared to 33 in Ghana, 30 in Kenya and Angola, 44 in Cameroon and 7 in South Africa.

The study further discovered that Nigeria is the third most difficult country (only ahead of Brazil and Bolivia) out of 189 countries in terms of time needed for a company to meet its compliance obligations – 908 hours per annum . This is a damning indication of the state of the Nigerian tax system that can do without the needless addition of more taxes. Although the CST is borne by the users of the ECS, the Bill imposes significant additional compliance burden and reporting obligations on the service providers which translate to increased operational costs. In addition to this, the constraints of multiple level of taxes in the information and telecommunications industry set by federal, state and local authorities – as well as levies payable to the NCC and the high costs of rights of way – are likely to further weaken the country’s Ease of Doing Business ranking, which is currently 169 out of 189 economies. This will obviously have an adverse effect on further investment in the industry and on the country’s push for the adoption of mobile telecommunication services.

The Bill’s proposal to compel service providers to grant Government-appointed agents access to its network might pose security concerns to the providers’ operations and customer information. The Bill does little to guarantee the professional conduct of these monitoring agents and safeguard service providers against abuse and data protection violations. One would be justified to be weary of the monitoring agents as from past experiences, the Government’s use of agents in tax monitoring/collection has not been without some level of unprofessionalism. In some occasions, the agents are solely motivated by the commission for work done. Furthermore, the provisions relating to objection to the Government’s request to be granted access to a provider’s network are unfairly skewed against the service provider, as the Bill still deems the provider’s objection and appeal to the court as a refusal to grant access and imposes the penalty of 5% of annual revenue after the FHC upholds the Government’s request. This simply discourages objections altogether. Even the timeframe allowed for a provider to object to the Government’s request (within 7 days of receipt) is hardly sufficient to build credible enough case. The Bill therefore gives the impression that the service provider is doomed to fail in any attempt to object to the introduction of monitoring equipment into its network.

The Bill appears to have been derived from Ghana’s Communication Services Tax Act, 2013 (as amended), which was perhaps directly copied, as the Bill makes reference to a National Health Insurance Levy in its definition of “charge of electronic communication service usage”. While this levy exists in Ghana, Nigeria has no such levy. In addition, in its definition of “service provider” the Senate version of the Bill makes reference to persons authorized to provide ECS by the Electronic Communications Act, 2008 and Electronic Communications Regulations, 2011 both of which are Ghanaian legislation. While this is a rather unfortunate drafting error, the greater concern is that the bill may have been appropriated from Ghana without consideration for its impact on the development of Nigeria’s telecommunications industry as well as the impact of the timing of its introduction to Nigeria’s populace.

The telecommunications industry in Nigeria has made remarkable progress since its liberalization in 2001 and is currently one of the fastest growing telecommunications markets in Africa. However, a comparative analysis of the telecommunications industry of both countries shows that Ghana has a market penetration rate for mobile telephone subscription of 131% compared to Nigeria’s 79.5% as at March 2016. Furthermore, the penetration rate of Ghana’s mobile data subscription is estimated to be 68.2% while the rate in Nigeria was about 49%, also as at March 2016 . The industry in Nigeria still has much room to grow and requires forward-looking policies and strategies that would drive further investment and growth in the industry, rather than those that, although geared towards government revenue generation, are counter-productive in the long run for the industry.


There does not appear to be a justifiable reason for the introduction of this tax, other than to raise additional revenue for government. While this is a noble intention, it should not be to the detriment of the development of a strategic industry. It is therefore not surprising that the Bill has received condemnation from telecommunication operators, subscribers and other industry stakeholders.
In what could be construed as a response to the widespread rejection of this Bill, the Senate introduced a new bill seeking to establish an Unemployed Youth, Elderly and Indigent Sustainability Allowance Trust Fund to be financed by the proposed CST. The Unemployed Youth, Elderly and Indigent Sustainability Allowance Trust Fund Bill, 2016 seeks to use 30% of the money accruing from the CST to provide stipends for unemployed youths, elderly and indigent persons and subsidize drugs for infants, hypertension and diabetes among other related needs. It is surprising that the irony is lost on the promoters of both bills, given that the classes of persons that the Trust Fund Bill seeks to assist are the same as those that will be greatly impacted by the introduction of the CST in the first place!

The Federal Government has consistently maintained that its current focus is on increasing tax compliance and collection by widening the tax base, rather than increasing tax rates (such as the VAT rate). We therefore expect the Executive arm of the Government to take necessary steps to ensure the non-passage of the CST Bill, as it is without doubt an additional tax burden we could all do without.

You can access part 1 of this article here
– Written By Ibeneme Ebenezer, Manager, and Temitope Obademi, Senior Tax, Regulatory and People Services, KPMG Nigeria
David Okwara

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