Despite Tax Holidays, e-Commerce Firms Make Losses

Pioneering e-commerce firms excluded from Nigeria's Pioneer Status Initiative (PSI)

●Sub-sector cuts 800 jobs in two years ●Traffic to website down by 40%

Although the Federal Government granted pioneer status to operators in the country’s electronic commerce (e-commerce), investigations have shown that a majority of the players have been running at a loss for the past three years.

The Guardian Nigeria report continues:

The e-commerce is a sub-sector of the country’s Information and Communication Technology (ICT) sector. The woes of some of these players, especially the big ones like Jumia and Konga, might have been compounded by the declaration by the Nigeria Investment Promotion Council (NIPC) that some players that have existed for several years in a particular sector may not enjoy the pioneer status except they venture into a new line of business covered by the list of 27 new industries and products. The list now consists of 71 new industries and products.

A source at the NIPC told The Guardian that the special status actually applies to companies that are in the first year of operation, meaning that those older than one year will not benefit.

The Pioneer Status Initiative (PSI), according to the source, is targeted at attracting more people to invest in those sectors that have no investments to contribute to the growth of the economy. “It is only the people that have agreed to venture into those sectors that would enjoy the PSI and not those that have been there for more than a year,” he stated.

Going by this revelation, the early players in the e-commerce sector, an industry adjudged to be worth over US$10billion, may be affected except they delve into new lines of business.

The Chief Executive Officer (CEO) of Jumia, Juliet Anammah, told The Guardian that the inclusion of e-commerce as a pioneer industry would certainly encourage new entrants. She, however, lamented that e-commerce companies in Nigeria are currently running at a loss in spite of the fact that quite a few of them have been in business for at least three years. According to Anammah, these companies therefore can’t take advantage of any tax holidays while they are still making losses.

She said she was initially excited when the news of the PSI first broke. “We, however, found out with the clarification by the NIPC that Jumia was specifically excluded, along with other e-commerce companies that had been doing business for more than a year. We will meet NIPC to still deliberate on the exclusion.”

The Jumia boss told The Guardian that the firm had not applied for the special status before now “as the e-commerce sector was only just included in the list of PSI.” Lauding the government’s recognition of the potential of the e-commerce industry in turning around the Nigerian economy, she said: “If you consider the impact that the e-commerce industry has had in more developed economies, you will realize that e-commerce is the future. Furthermore, if you consider most of the recent efforts by the Federal Government in its ease of doing business initiatives, you will find that digitization plays a critical role.”

The Guardian learnt that in 2016 half year consolidated result, Jumia, a member of the Rocket Internet Group, recorded €35.4 million losses. When compared to its net loss recorded in the previous year, the company managed to reduce its loss by 19%. In the first half of 2015, it recorded €43.7 million losses.

Also on the topline, Jumia’s revenue fell by 56%. Within the first half of this year, net revenue was €33.0 million compared to last year when it recorded €75.8 million for the first half of 2015. Rocket Internet’s Chief Financial Officer, Peter Kimpel, after the loss, was quoted as saying that he saw Jumia breaking even by 2019.

It was learnt that between 2015 and now, over 800 jobs have been lost, due to the economic lull. It was also learnt that there has been a serious reduction of about 40% in their website traffic, even during promotional period. The Corporate Communications Manager, Yudala, Gideon Ayogu, confirmed the drop in sales for e-commerce players, stressing that with many people out of jobs, “there is no disposable income to spend.”

Ayogu, who is, however, optimistic that the economy will rebound and things will take shape, revealed that despite the lull some consumer goods like smartphones, cookers and microwave oven still recorded some appreciable level of sales on Yudala.

The Chief Executive Officer of Gloo.ng, Dr. Olumide Olusanya, confirmed Anammah’s revelation about operators still running at a loss. He urged players to be strategic and innovate to be able to weather the current storm.

An unconfirmed report revealed that so far, Konga has only been able to garner 184,000 active customers, which translates to approximately 1.1% of the Nigerian population, which according to telecoms expert, Kehinde Aluko, showed that the nation’s e-commerce sub-sector is still crawling and requires serious government support, even beyond the PSI.

On August 7, the Federal Executive Council through the NIPC approved the inclusion of new industries in the pioneer status list following its reform of the scheme, which had been on suspension since September 2015.The reform was initiated to boost transparency and process efficiency, improve the Federal Government’s ability to measure the impact of the incentives and bring the scheme in line with the current economic realities and the Economic Recovery and Growth Plan (ERGP).

Pioneer Status is an incentive granted pursuant to Industrial Development (Income Tax Relief) Act 2004 (the IDITRA) and is aimed at providing new businesses, which require huge capital outlay; a buffer to enable the timely recoupment of capital investments incurred at their start-up stages during the period of the grant (typically for a period of three years in the first instance).

Eligible companies operating in designated pioneer industries and pioneer products, which apply for and are granted pioneer status, are entitled to income tax holiday for up to five years, three years in the first instance, renewable for an additional maximum period of two years. In addition to income tax holiday, pioneer companies enjoy other benefits such as the exemption of dividends paid out of pioneer profits from withholding tax.

Over the years, significant domestic and foreign direct investments have been attracted to key sectors of the Nigerian economy through the grant of pioneer status. For instance, the telecommunications sector currently boasts of an investment of about US$68 billion.

The President of the Association of Telecommunications Companies of Nigeria (ATCON), Olusola Teniola, said the NIPC acknowledgement of the growth of commerce through digital channels such as social media and the promotion and recognition of software skills and the creation of Silicon Valley type start-ups is very welcome.

Teniola, an engineer said the industry also noted that any intervention by government in the form of tax holidays, among others, create the incentive for more initiatives and eventually an ecosystem to be developed, which creates more job opportunities for the teeming youth, who will then be employed paying tax as abiding citizens.

According to him, the ripple effect of the development on the economy will be a positive one in increasing ICT overall contribution to the country’s GDP in a sustainable manner.

To the President, Institute of Software Practitioners of Nigeria (ISPON), James Emadoye, the mention of software is important because it is the most crucial aspect of information technology today, and Nigeria with huge population of restive youth should be able to benefit from the employment potential of software manufacturing.