Sweetened beverages production dips on Nigeria’s excise tax policy
BY ONOME AMUGE
Staggering from the blows of a dwindling revenue that has weakened its ability to meet its obligations, the Nigerian government has in recent times turned frantic and employed desperate measures to shore up revenue, including raising excise duties levied on the production of sugar-sweetened beverages and tobacco.
The federal government raised specific taxes on cigarettes by 203 percent in 2018, and further to 100 percent in 2019, according to Valuefronteira, a financial analysis and economic consulting firm. The government further increased the excise tax by 50 percent in 2022, the firm noted in a recent publication.
In a similar trend, the government, which generates N414 billion annually from excise duties imposed on alcoholic drinks and tobacco alone, according to Dennis Ituma, chief superintendent of Customs, Department of Excise, Free Trade Zone and Industrial Incentives, commenced implementation of the N10 taxation per litre on sugar-sweetened beverages (SSB), which was part of the Finance Bill signed into law in 2021. An additional 20 percent excise tax on non-alcoholic drinks was further proposed for implementation by the government but that is yet to take effect.
Justifying the policy, the government said the implementation of the taxation, aside from helping it to generate additional revenue to fund investments and projects, is aimed at reducing the incidences of non-communicable diseases such as diabetes and obesity.
Manufacturing companies in the sector have, however, cried out against the continuous upward review of tax impositions in this regard. They argue that the policy has become a targeted attempt at milking them off significant revenue and plunging them into production setbacks amid challenging economic conditions.
Arguing against the imposition of taxes on soft drinks, the Manufacturers Association of Nigeria (MAN) warned that excise duty would lead to 0.43 percent contraction in output and 40 percent drop in industry revenues in the next five years.
Segun Ajayi-Kadir, director-general of MAN, disclosed that sweetened beverages accounted for 38 percent of the manufacturing sector contribution to the country’s gross domestic product (GDP), 22.5 percent of manufacturing, and generate over 1.5 million jobs.
Ajayi-Kadir said previous analyses on the impact of excise duty on the companies producing these products showed that it affects production outputs, revenues and profits. This, he said, forces companies to pursue cost-cutting measures to reduce the effect of diminishing revenue and profits by reducing employee salaries or retrenchment.
He said the tax estimated to generate N81 billion between 2022-2025 would not be enough to compensate for the government’s revenue losses in other areas.
The MAN director-general also pointed out that the payment of N202 billion value-added tax (VAT) to the government and N207 billion in company income tax would be at risk of forfeiture if the sector is allowed to collapse as a result of increasing excise duty, which will have a multiplier effect on infrastructural development and growth of the already troubled economy.
Ekuma Eze, corporate affairs and sustainability director, Nigerian Bottling Company (NBC), said since the introduction of the N10 per litre excise tax, businesses in the sector have been experiencing a worrisome decline.
Eze, who spoke on behalf of the Soft Drinks Manufacturers sub-sector of the Manufacturers Association of Nigeria, also noted that the average loss in volume and revenue was below 10 per cent between June and September 2022, and it is estimated that the decline will further worsen to -25 per cent by December 2022.
The long-run impact of government excise tax policy decisions on manufacturing generally and, more specifically, on the production of sugar, tobacco and soft drinks will likely extinguish them over time, according to Valuefronteira.
Citing regression results based on Nigerian official data from 2000, the consulting firm noted that a 1 per cent increase in customs and excise duty receipts, a proxy for excise tax, would result in a 59 percent decline in real output (Real GDP).
Holding other factors constant, Valuefronteira observed that a 1 percent increase in excise taxes would result in a decline of around 68.8 per cent in the manufacturing sector’s output. Similarly, it projected that a 1 percent increase in excise tax would cause an approximately 2.7 percent decrease in the employment rate in the long run and still lead to short-term declines in the employment rate.
In the short run, the consulting firm noted that any increase in customs and excise taxes on tobacco decreases its output, while any increase in the taxes will cause a drop in soft drinks production.
On the impact of excise tax on soft drinks production, the Valuefronteira publication noted that every 1 percent increase would lead to a decline of approximately 2.9 billion bottles.
It pointed out that the interaction between excise taxes and tobacco output presents another interesting confirmation of these effects as a rise in excise taxes will result in a drop in the unemployment rate of approximately 0.08 per cent.
It further noted that when there is a decrease in the production of tobacco products as a result of an increase in customs and excise duties, the unemployment rate would climb by 6.32 percent.
“The informal economy and tax evasion are prevalent in developing countries like Nigeria, making it difficult for many tobacco companies to shift the tax burden entirely to the consumer. In other words, the producers end up internalising the effects. These effects result in higher production costs and an adverse impact on employment,” Valuefronteira stated.
Excise tax, it added, heightens production costs, reduces the capability to expand output, and causes low production by transferring the high-cost burden to other manufacturers. Consequently, such policies are considered harmful to employment generation amid worsening unemployment in Nigeria.
Also, the policy has proven to have a negative long-run effect on manufacturing output of intermediate commodities, such as sugar, sometimes used to produce other items.
In its assessment of Nigeria’s excise tax policy and economic performance in comparison to other developing economies, Valuefronteira found that although value-added and excise taxes are higher in most countries, there are significant differences in macro economic management and built-in incentives to power their economies.
“The lesson from the benchmark of other countries is that Nigeria needs to prioritise policies that would expand employment opportunities and consequently bring down the embarrassing poverty rate before reconsidering additional excise taxes,” it said.
Furthermore, the consulting firm said the imposition of more excise taxes would further worsen the manufacturing output per capita, employment prospects and poverty levels in the country.
Rather than additional excise taxes, it advised the government to fully explore the nontax approaches to controlling tobacco, soft drinks and sugar consumption which have a less catastrophic impact on the economy.
For tobacco and smoking, Valuefronteira suggested that strengthening the anti-tobacco campaigns such as the bans on advertising and promoting tobacco, mass media counter-advertising, prominent health warning labels, and publication and dissemination of research findings on the health consequences of smoking, and restrictions on smoking at schools, work sites, and public places should receive priority attention.
In addition, crop substitution was considered a helpful way to reduce the tobacco supply. Crop substitution, Valuefronteira explained, is a valuable strategy for aiding the poorest tobacco farmers to transition to other livelihoods as part of a broader diversification programme.
It added that tobacco and sugar manufacturers can lead the pack in Nigeria’s agricultural revolution by incentivising farmers with the technology and financing to cultivate other items beyond tobacco leaves and sugarcane.