Inadequate power, multiple taxations: What hope for SMEs?


Over the years, the twin challenges of power and taxation have continued to scuttle the chances of small and medium scale enterprises (SMEs) to grow. In this report, BENJAMIN UMUTEME takes a look at the issues.

A recurring decimal in the Nigerian business environment plagued by the challenge of lack of infrastructure is the problem of lack of steady power supply and multiple taxations. This poses a great threat to the growth of the main drivers of the economy – the SMEs.

While it has become a known fact that SMEs constitute about 90 per cent of business in Nigeria and they employ a vast number of those that are considered employed in the country, yet they are being hamstringed by the inability of the government to provide the enabling environment for them to thrive.

Nigeria is one of the world’s leading business locations on the African continent, but when it comes to doing business several problems confront the typical Nigerian business man or woman.

Micro, small and medium enterprises (MSMEs) require special entrepreneurship development intervention at the bottom of the pyramid in order to graduate informal enterprises into the formal sector, create employment and provide a platform for sustainable economic growth and development in the country.

The MSMEs sub-sector remained critical in the Nigerian enterprise development space, accounting for the highest number of jobs created in the economy.

The majority of them operate at an informal level and are populated by people at the bottom of the pyramid,

In World Bank’s Ease of Doing Business 2019 Report, Nigeria dropped a spot. In the 2017 edition of the report, Nigeria moved 24 places from its 2016 spot of 169 to 145. In the 2018 edition, Nigeria ranked 146 with Mali taking Nigeria’s place at 145.

Most times, new businesses and start-ups in the country fail within the first three years.

Starting a business generally comes with its own risk that may hamper the growth of such business, but in Nigeria there are challenges that are peculiar to all businesses.

The power challenge

In Nigeria, getting access to constant power supply is a major concern for business. As of June 2018, an average household in the country only had access to six hours uninterrupted power supply out of the 24 hours that exist in a given day. This is why the use of generators as an alternative power source has come to stay.

In Lagos, it is not a joke that nine out of every ten houses have at least one power generator as an alternative source of power. Over the past decades, successive governments have unsuccessfully endeavoured to tackle Nigeria’s energy deficit without sufficient financial investments in the power sector.

Alas, this continues to impact negatively on businesses that most times depend on electricity to operate. The implication is that small businesses who cannot afford to get alternative source of energy to continue their business are left at the mercy of the ‘hope.’

A pretty trader that resides at Jikwoyi Phase 4 in the Federal Capital Territory (FCT), fondly called mama Ifeanyi by her customers, said she has continued to loss patronage as most times her customers have had to go elsewhere to buy ‘pure water’(sachet water) because her own is not cold enough.

According to her, the frequent power outage does not allow her freezer to cool water properly.

“You know that the dry season people prefer to drink cold water, so when they come and I can’t give them cold one they move to my neighbours who most times have cold drives.

Before I used to sell up to eight bags of water, but for the past one week, I now sell five. I can’t blame them people need cold water. I can’t afford to buy a generator that can ‘carry’ my freezer,” she said.

Mama Ifeanyi’s is one of a long line of small businesses that are struggling to survive due to what many call “the wickedness of NEPA.” Across the country, many industries have closed down due to epileptic power supply in their area of operation as the erratic electricity normally eats into manufacturers’ profits and growth is stunted.

Analysts say the cost of running businesses on generators definitely eats into profits and does not allow them to expand. This may, at times, affect prompt payment of workers’ salaries.

The Manufacturers Association of Nigeria (MAN) states that: “The major  rawback to business growth is inadequate supply and exorbitant cost of generating electricity. Energy cost constitutes about 40 per cent of production cost. This is the reason Nigerian products are not competitive.

“These are major constraints that impede competitiveness and exert overbearing pressure on the bottom-line of manufacturing concerns.”

Multiple taxations

Multiple taxations is not only a major challenge to SMEs, it is also a cog in the wheel of their growth. While many start with very little capital the burden of multiple taxations most times tends to erode the small profit they make at the end of the day.

The burden of multiple taxes, which include levies, have been an enduring issue that has apparently not been tackled with the urgency and sincerity it deserves, given its negative impact on efforts at creating a conducive operating business environment in the country.

According to industry sources, some business sectors attract as many as about 80 different taxes.

Experts say multiple taxations and levies kill 95 per cent of small and medium scale businesses in Nigeria.

While they say five per cent of small businesses survived after one year, they also note that multiple business regulations, multiple taxations and inconsistent government policies that SMEs’ competitiveness and their ability to attract capital.

However, in spite of the issues of multiple taxations, Nigeria remains the lowest in the world with 10 per cent tax contribution to gross domestic product (GDP).

Founder of Heirs Holdings Tony Elumelu said: “It seems we have a big problem, because, with high taxation and multiple levies, it is expected we should have very high tax revenue.

 “Government doesn’t create jobs; it is the right enabling environment for SMEs that create jobs.”

Even the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) admits that the major challenge small businesses have in Nigeria is the issue of multiple taxations.

The challenges confronting the MSMEs are actually the same globally, but because of the country’s peculiarities, multiple taxations and multiple levies from local governments, states and the federal government continue to encumber businesses.

As it is in Nigeria, businessmen have to battle with providing their own water, their own security, their own power, and these inadequacies have further been compounded with a multiple tax regime, all of which have combined to make the cost and ease of doing business in Nigeria a very difficult venture.

While it taxes are a veritable source of revenue for the three tiers of government – federal, state and local, the administration of such taxes have become an albatross on business.

According to the director of research and advocacy at LCCI, Dr. Vincent Nwani, multiple taxations and infrastructure deficit harm the nation’s economy with mostly small businesses bearing the brunt.

“Multiplicity of regulations, taxes and reforms are issues. There are some sectors we count up to about 80 different types of taxes, especially in oil and gas and manufacturing and this is why a lot of businesses are moving from formal to businesses that are invisible,” he said.

Last line

Despite the public outcry, the burden on SMEs from multiple taxations is not about to lessen as the government device new ways of increasing its revenue, especially as it continues to beat the drums of diversification of revenue sources.

With Nigeria’s economy still showing signs that it has not fully exited recession, the time for the federal government to lead the process toward achieving a streamlined  tax regime that will eliminate the choke of businesses that multiple taxation become.

Experts have warned that except the three tiers of government come together to streamline the collection of taxes so as to ease the burden on SMEs, the desired economic growth may just be a pipe dream.

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