The COVID-19 pandemic has continued to ravage the world with its attendant impact on all sectors of the global economy. The Nigerian power sector (“the Sector”) has not been immune from the challenges caused by the pandemic. KPMG had discussed some of these challenges in our COVID-19 newsletter issued in April 2020.
However, there have been some developments in the Sector since then and these are discussed below:
Impact of Finance Act on the Power Sector
The Finance Act, 2019 (“the FA” or “the Act”), which was signed into law by the President on 13 January 2020, amends specific provisions of some existing tax laws in Nigeria. One of such amendments introduced by the FA is the change in the minimum tax (MT) rules. Every company in Nigeria, other than those in the agricultural sector or within their first 4 calendar years of operation, is expected to pay a minimum amount of income tax annually, irrespective of their financial performance. The computation of MT used to be complex. The primary intention of the amendment was to simplify the process by making it a percentage (0.5%) of gross turnover.
This simplification may have an immense impact on the power sector especially distribution companies (DISCOs). DISCOs report significant revenues even though they are mostly unprofitable. The DISCO is the collecting agency for the entire sector and, therefore, consolidates the sector’s revenue in its books. Furthermore, in 2019, the DISCOs were beneficiaries of tariff shortfall “payments” for 2015 to 2019 from Government. These receipts would also have increased their gross revenue for the year. Based on the new rule, the DISCOs may be liable to significant MT for that year and going forward. The Sector continues to struggle with liquidity and it will be unfair to use cash that may be better applied towards infrastructure development for payment of
taxes, especially by companies with significant losses carried forward from years of unprofitability. It is, therefore, important that the industry and Government come together to address this challenge as quickly as possible.
There are other issues from the FA which may negatively impact the power sector and it may be necessary to conduct a wholistic review of the FA, identify these issues and put together a plan to proactively engage the Government.
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