Power, regardless of its source, remains a critical factor for economic and industrial development in any country. Unfortunately, the Nigerian power sector is yet to deliver on its mandate of supplying uninterrupted power to Nigerians and Nigerian businesses despite government's investments in the sector over the years. In its efforts to improve service delivery in the sector, the Federal Government of Nigeria decided to unbundle and privatize the Power Holding Company of Nigeria (PHCN). This process was completed in November 2013.

The objectives of the exercise were to foster competition, increase power supply efficiency and boost the amount of investments coming into the sector. Nonetheless, there remains significant roadblocks in the path to uninterrupted power supply despite government efforts to push the sector forward.

However, the fundamental problems of the sector are not insurmountable; neither do they lack pragmatic and sustainable solutions. While some of the issues within the sector are regulatory in nature, some of the critical issues faced by companies within the sector stem from faulty due diligence and feasibility studies carried out during the acquisition. In addition, tax which was not necessarily an issue for the government-owned entity turned out to be part of the quagmires to resolve post-privatization.

Indeed, there are arguments for using tax to change the narrative by creating tax perks to spur investments in the sector. Thus, this article highlights some of the key tax issues, possible resolutions and potential tax considerations that could facilitate rapid growth of the sector.

General Problems of the Nigerian Power Sector

Distribution companies in the power sector have not been relieved of challenges such as energy theft, dilapidated distribution infrastructure, collection losses, and huge debts which was further exacerbated by the devaluation of the Naira in 2016 and has led to an astronomical increase in the balance of foreign currency denominated loans.

Although the Transmission Company (TransCo) was strategically left in the hands of the government, it has been reported that it has limited capacity to transmit power supplied by the generation companies (GenCos) who are sometimes able to produce beyond the TransCo's capacity. The GenCos are not left out of the challenges as their performances are also closely hinged on the success of the distribution segment of the sector.

Unfortunately, tax which could have been a veritable fiscal tool for engineering the success of the sector creates additional problems for companies operating in the sector. Whereas, the country has clear roadmaps with specific tax provisions for critical sectors such as mining, gas production and utilization, etc., there are currently no specific fiscal guidelines that could help clear the doubts of power companies or exempt them from general tax provisions that negatively impact their businesses. Thus, the subsisting tax issues in the power sector may not be unconnected to the fact that such specific fiscal policies are not available to guide operations within the sector.

Consequently, there is an urgent need to address the following tax issues amongst others, to ensure that the industry achieves its objective of delivering power to Nigerians.

(a). Minimum Tax: The minimum tax provision is one of the anti-avoidance strategies that applies to companies during years in which they do not declare taxable profits or where the tax payable is less than the minimum tax. Although, there are exceptions to the provision, most companies operating in the power sector are significantly affected by the minimum tax provision because they do not meet the requirements for exemption.

Thus, while many of the power companies are currently making huge losses, they are still liable to minimum tax because of their huge net assets and revenue. If properly monitored, the benefit obtained from the exemption from minimum tax paid by some Discos could be utilized in addressing metering gaps and other infrastructural challenges plaguing the sector.

(b). Value Added Tax in the Power Sector Value Chain: Gas constitutes a major supply for the gas-based power plants used in generating the bulk of electricity in Nigeria. Given that the Value Added Tax (VAT) Act does not exempt natural gas from VAT, generating companies currently incur VAT on the gas supplied by the gas producing companies. However, they are unable to charge output VAT on electricity supplied to the Distribution companies. Thus, they are unable to recover the input VAT paid to the gas suppliers and this is against the underlying VAT principle that the tax should be borne by the final consumers.

In 2018, a VAT Modification Order was drafted to address the above problem. Based on the draft Order, gas supplies to generation companies shall be exempted from VAT. In addition, the supply of electricity would not be liable to VAT along the value chain but for the last stroke of the chain between the distribution companies and customers. Although, the Order is yet to be signed, it appears that certain GenCos no longer pay input VAT on gas. Thus, there is a risk that the tax authority may take a different view during their reviews.

Providing Tax Perks to the Nigerian Power Sector

There is an urgent need to sign the VAT Modification Order into law to exempt gas supplies to GenCos from VAT. This would reduce the tax cost of doing business and potentially attract some investments into the Nigerian power sector. The Federal Government may also want to consider exempting companies operating in the power sector from minimum tax subject to satisfactory performance in line with the provisions of Section 23(2b) of the Companies Income Tax Act (CITA), as amended. The Section provides that "the President may exempt by order from tax all or any profits of any company or class of companies from any source, on any ground which appears to it sufficient".

While many of the power companies are currently making huge losses, they are still liable to minimum tax because of their huge net assets and revenue. If properly monitored, the benefit obtained from the exemption from minimum tax paid by some Discos could be utilized in addressing metering gaps and other infrastructural challenges plaguing the sector.

The Electric Power Sector Reform Act (EPSRA) can be amended to incorporate certain tax incentive provisions for the power sector as is the case with the Nigerian Minerals and Mining Act (NMMA), 2007 which details the tax incentives specific to companies operating in the mining sector. For instance, the NMMA provides some import duty exemptions as well as a special basis for the claim of capital allowances in the Mining Sector.

One power subsector that can benefit from consolidated and specific tax incentives, such as mining highlighted above, is the renewable energy subsector. The government, realizing that renewable energy projects typically involve huge capital outlay and have long gestation periods, recently included renewable projects as part of the industries that qualify for Pioneer Status Incentive (i.e. tax holiday) where the projects proposed are located in economically disadvantaged areas. In addition, certain solar equipment may be exempt from VAT and Custom Duties, depending on the Nigerian Customs Service HS-Code.

However, there may be a need to consolidate these incentives and expand the scope of such incentives to address the specific challenges of the subsector. For instance, some tax credits could be given to companies that utilise renewable energy sources rather than other power sources that result in environmental pollution and are dependent on imports. This could be achieved by granting concessions to encourage the fabrication and manufacturing of equipment required for renewable energy projects in Nigeria, rather than relying on imports.

Since mini-grids that run on renewable energy sources are flexible, easy to use and adaptable to local needs and conditions, incentivizing investments in this subsector should help address the inadequacy of diverse energy sources being encountered in the Nigerian power sector.


Although studies have shown that tax incentives are not usually the primary factor in making investment decisions, they remain very vital in ensuring that investments are productive and sustainable. Taxation should not be seen only from the prism of immediate government revenues but rather as a means to foster economic development through consolidated and specific tax provisions that would incentivize investments in the power sector.

While some perceive tax as one of the distressing plagues of the Nigerian power sector, the seeming plagues could be turned into perks by adopting some of the above recommendations. The existing incentives, though fragmented, should be consolidated and advertised to potential investors during roadshows. This way, the power sector can attract substantial investments, increased productivity and most importantly, begin the journey to generating enough power to satisfy Nigeria's teeming population and support the expected economic development.

The power sector is already awash with several operational inhibitors. Adverse or incoherent tax policies should not add to the burden for the companies that are trying to navigate the challenging business climate.

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