Analysts react as Bill to pay for SMS, data usage emerges

Analysts at Afrinvest say the new Communication Service Tax (CST) is another misadventure by government, saying it would overburden consumers.

The Communication Service Tax Bill is back from the dead but now repurposed. The 2016 version was meant to help boost government revenues from non-oil taxes in the wake of the collapse in oil prices between 2014 and 2016. The 2019 version of the bill passed the first reading in the Senate this week and it proposes a 9.0 per cent Communication Service Tax (CST) to replace the planned increase in VAT from 5.0 per cent to 7.5 per cent by the FG. The CST when passed into law will be levied on the consumers of voice calls, MMS, SMS, data usage and Pay per View TV services provided by mobile telecommunication and internet service providers. As the companies must provide the government access to network nodes, non-compliant service providers could suffer penalties including 5.0 per cent of gross annual revenue from the last audited financial statements or a revocation of their licence.

Failure to file returns by due date will attract N50,000 as well as 10,000 per day until compliance while non-remittance of the tax by the due date will attract a monthly interest on the unpaid tax at 150.0 per cent of the average of prevailing lending rates by commercial banks.

“In our opinion, the CST would overburden consumers who already bear 5.0 per cent Value Added Tax (VAT) on telecommunications services. As Nigeria plans to boost digital connectivity and derive the attendant benefits, this could slow progress as consumers readjust spending patterns given the level of poverty in the country”, said analysts at Afrinvest.

For the telecommunications sector, the proposed CST worsens the issue of tax multiplicity. In addition to existing taxes, companies would bear increased costs of compliance and lower patronage as consumers react negatively to new taxes. With the sector contributing 1.2% to the real GDP growth of 1.9 per cent in second quarter of2019, there is the prospect for even slower economic growth. Similarly, considering that the penetration of telecommunications services is lagging in rural areas, the planned tax would slow progress towards expanding national coverage. This could have negative implications for financial inclusion which is expected to be driven by mobile money services.

“We do not expect the CST to generate as much as the proposed VAT of 7.5 per cent which we conservatively estimate to bring in additional N545.1billion as VAT revenue. Looking at data on the sectoral distribution of VAT collections, we discover that VAT from professional services, which includes collections from the telecommunications sector, was N86.3billion in 2018. Revenues from the CST of 9.0 per cent would clearly fall short of the FG’s expected increase in VAT, even without considering the changes to consumer demand and growth in the sector.

Its analysis of the 2019 budget performance in half year shows that the FG’s deficit continues to rise given the slow increase in revenue. Between January and June 2019, the FG incurred a deficit of N1.3tn, which is 63.5 per cent of its proposed budget deficit (N2.1trillion). The actual revenue collected has been weak at N2.0 trillion or 29.2 per cent of total proposed revenue (N6.9trillion) for 2019, meanwhile government’s expenditure was N3.4 trillion or 37.2 per cent of total planned spending.

The recent raft of aggressive initiatives to boost tax collection is motivated by government’s unsustainable fiscal position. This is becoming increasingly fragile in the face of large spending on subsidies and weaker for longer oil prices as well as production.

“However, we believe the strategies to boost revenues should be better coordinated and should be part of a comprehensive reform package that harmonises taxes, widens the tax net, reins in recurrent spending, reduce costs of compliance and eliminates spending on petrol subsidies. We believe the FG’s approach towards taxes could affect economic growth and dampen the investment climate, with negative implications for tax collections”, said Afrinvest.

Leave a Reply