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As government ‘auctions’ few available jobs for hike in excise tax

By Geoff Iyatse (Assistant Business Editor)
13 December 2021   |   4:18 am
The economics of taxes goes beyond public revenues. Taxes serve as important economic policy tools and growth drivers. Economic literature is fraught with case studies of countries that have leveraged taxation to stimulate consumption and grow local industries.

Mrs. Zainab Ahmed, Honourable Minister of Finance, Budget and National Planning

The economics of taxes goes beyond public revenues. Taxes serve as important economic policy tools and growth drivers. Economic literature is fraught with case studies of countries that have leveraged taxation to stimulate consumption and grow local industries.

Countries tend to reduce taxes during economic lull but increase the same during a boom. And there is often a trade-off between a higher tax burden and economic growth. Indeed, the questions relating to these decisions are not often as straightforward as they seem. Sometimes, such decisions could be as complicated as the devil’s choice; the alternative could, indeed, present themselves as the proverbial devil and the deep blue sea. Indeed, Nigeria is currently standing between the devil and the deep blue sea.

Presently, the country’s documented sovereign debt has ballooned to about N35.5 trillion, with the Federal Government alone looking at borrowing close to half of the figure in the next three years as captured in the 2022-2024 Medium-term Expenditure Framework and Fiscal Stability Paper (MTEF/FSP). Thus, the country should, as suggested by the World Bank as well as the International Monetary Fund (IMF), look inward for resource mobilisation and think urgent tax reform as an important route to achieving this. The impact of such reforms in the form of additional burden however spells doom for existing tax payers.

Yes, the fear of continuous debt accumulation could be the devil. But more taxes, of course, weaken the purchasing power of individuals and stifle consumption, with attendant consequences for social cohesion. Already, many Nigerians think the tax burden is already unbearable especially with the rising implicit component (the unnecessary cost inflicted on households because of neglect of social responsibilities of government), which the President of the African Development Bank (AfDB), Akinwumi Adesina, said has huge socio-economic impacts on households.

In February 2020, the government adjusted the value-added tax (VAT) upward by 50 per cent through the Finance Act 2020 and argued that it would not have much impact on the poor as essential consumption was exempted pted. About two years later, Nigerians know better the implication of the increase. Inflation increased to a crisis level, pushing many companies into desperate cost-cutting options, including layoff and many consumers’ household incomes weakened.

Last year also, the government expanded the band of excise duty, a category of tax originally known as sin tax (a name rooted in its prohibitive rather revenue-generating role). It was extended to the telecommunication sector. For a country whose unemployment, especially among the youth, has reached a crisis level, a contemplation of more taxes on businesses is like adding fuel to fire. At 33.3 per cent unemployment rate according to data from the National Bureau of Statistics (NBS), the country is in the league of five countries with the worst unemployment rates globally. Hence, some economists advocated the use of fiscal incentives as opposed to taxes to encourage the private sector to create the much-needed jobs.

Earlier, excise duty was imposed on alcoholic beverages in defiance of the impact on the industry, which is known for its high labour factor intensity. And now, the non-alcoholic beverage is awaiting ‘sugar tax’ as contemplated in the Finance Bill 2022. Unfortunately, the beverage has had to bear the brunt of cut-throat indirect taxes as there is a limit to how much tax burden a manufacturer can pass to the consumer when the underlying commodity or service is reasonably elastic.

With competition from cheaper brands and sachet alcoholic drinks, brewing firms in the country are groaning under the burden of excise duty as they struggle to manage costs that would have hitherto been passed to consumers.

Already, consumer purchasing power has continued to drop with preference for cheaper commodities taking the centre stage in many of such purchases.

But the obsession for tax financing could worsen the already bad situation. For instance, the Federal Government had introduced a new excise regime in 2018 to address shortfalls in revenues; the new regime led to an increase of at least N30 per litre of alcohol consumed in the country.

Another increase to N35 per litre was implemented in June 2019. With another adjustment imminent, operators are already concerned about their survival, especially as inflation continues to take of chunk of individuals’ real incomes, limiting household spending.

Industry sources estimate the new excise on alcoholic beverage to hover at N50 per litre, representing over 40 per cent increase. At N50 per litre, the proposed increment is expected to impose an additional tax burden of between N10 billion to N30 billion in excise on companies that are already in loss position.

“You can see the elasticity curve. And beyond a certain price point, consumers switch to local products. That is why I sometimes say it is important that we are not overtaxed, because what you can get with excise increase etcetera, is that there is more and more a gap between ourselves and the locals. And actually, the government might get less tax income because simply the elasticity curve will move consumers to the local brews,” the immediate past Managing Director of Nigerian Breweries PLC, Jordi Borrut Bel, had said at a yearly general meeting.

Indeed, as every other industry, Nigerian brewers compete with a potpourri of local and, sometimes, unsafe brands smuggled into the country through the porous borders. Already, the assorted local mixtures from the neighbouring countries have siezed the Nigerian market by the jugular, selling in sachets, bottles, and other packages at the motor parks. This is the challenge: an overpriced bottle of beer in Nigeria is like selling the available jobs to neighbouring West African countries where the local brews are imported.

But this is, perhaps, the most damaging aspect of unaffordable excise duty on beer beverages – there is a high positive correlation between the tax and the growth of the illicit market. African countries are known for weak implementation of fiscal policies including taxes. While the formal corporate organisations that create jobs and grow the economy are ‘held hostage’ by such policies, the government inadvertently hands over the market to smugglers and illicit traders.

Kenya, South Africa, Zambia, and many other African countries have had their fair, unsavoury taste of how misapplied exercise duties could create an illicit market and weaken the formal sector.

The Kenyan drive to reduce alcohol consumption through prohibitive excise duty in the 1990s and Diageo’s Senator Keg campaign is a classic case in branding and marketing. With the increase in excise duty, young Kenyans could only substitute popular beers, which turned out to have health consequences. Diageo decided to introduce an affordable beer (Senator Keg) to penetrate the illicit market. Diageo was able to introduce the product at 15-20 Kenyan shillings per glass with a 100 per cent excise remission.

Senator Keg’s price was marginally higher than illicit alcohol; thus, it reduced the size of the illicit market to about 50 per cent by 2013. However, tax remissions were reduced to 50 per cent in 2013, and that led to an 86 per cent decline in Senator Keg’s volumes, 48 per cent reduction in outlets and thousands of job losses to farmers. But the government had to quickly intervene to save the industry and the value chain. About six years ago, it raised tax cutbacks back to 90 per cent, paving the way for a gradual recovery of the industry and jobs.

In 2014, Zambia’s illicit alcoholic market stood at 40 per cent amid disjointed tax policies, weak enforcement and a rising misery index. Zambia has had high excise duties on alcohol, historically, and this has led to a large gap between legal and illicit prices. In 2001, there was an 85 per cent excise on clear beer, 125 per cent excise on wine and spirits and 35 per cent excise on opaque beer.

The government had raised excise duty on clear beer to 60 per cent of its 2014 budget to check the social ills of alcohol abuse. Sadly, data from Euromonitor International shows that instead of a decline in cases of abuse, the reverse has been the reality. Zambia’s illicit alcohol market grew from 39 per cent in 2014 and it is currently 69.5 per cent. The excise rate was subsequently reduced, but Zambia is still battling the consequences.

In any case, the government could be milking over-starved cows in its obsession with more taxes. Last year was particularly harsh for businesses. In the beer sector being targeted for more taxes, the books were generally red last year for obvious reasons. For instance, Nigerian Breweries’ profit after tax (PAT) fell by over 53 per cent to N7.5 billion while its key competitor, Guinness Nigeria Plc posted a N17.07 billion loss. International Breweries, on its part, closed the year with a loss of N12.4 billion. In 2019, it recorded a loss of over N27 billion.

Still, the companies play their roles as responsible corporate citizens, paying their taxes and other collectibles, in billions yearly, while shouldering virtually the responsibilities of government in their host communities. In the face of daunting challenges last year, for instance, Nigerian Breweries, still remitted N4.2 billion in taxes, while International Breweries paid N12.5 billion.

Last year alone, the government generated N112.84 billion in company income tax (CIT) and VAT from the brewery, bottling and beverage sector. That was about four per cent of the entire CIT/VAT income for the year. While there is no credible and verifiable data on the contribution of the sector in terms of jobs, many experts believe it is one of the leading employers of labour. In recent years, the leading players have embarked on aggressive backward integration, which has expanded the value chain and increased their relevance to rural areas.

Hence, some members of the organised private sector (OPS) have urged the National Assembly and the Federal Ministry of Finance to suspend plans to impose excise duty on any segment of the Nigerian manufacturing sector. They have raised concerns about knock-on effect of re-introducing excise duty on the production of soft drinks in the country and the additional burden on beer beverages manufacturers.

According to them, the adjustment in excise duty is not unconnected to the upward review of revenue target for the Nigerian Customs Service (NCS) in the 2021 budget year from N1.465 trillion to N1.679 trillion and advocacy for ‘sin’ tax by the NCS, Colonel Hameed Ali (rtd.) during at an interactive session on the 2022-2024 MTEF.

Economist and private sector advocate, Dr. Muda Yusuf, had stated that the proposed excercise duty was a negation of the economic recovery and job creation objectives of the federal government and detrimental to the job creation and poverty reduction commitments of President Muhammadu Buhari.

Yusuf, a former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), described the move as ill-timed, inappropriate and detrimental to the growth of the manufacturing sector.

According to him, Nigerian manufacturing companies and most investors are going through tremendous stress now, with many currently grappling with serious macro-economic challenges and structural constraints impacting on capacity utilisation, productivity, and competitiveness.

He added that the implication of the challenges is affecting sales, turnover, profitability, shareholder value and the sustainability of investments, noting that the norm globally at this time, is to provide incentives for industries to aid their recovery from the shocks of the pandemic and escalating costs.

On its part, the Chairman of Fruit Juice Producers branch of MAN, Fred Chiazor, stated that manufacturers are currently recording as much as 39.5 per cent loss due to imposition of various taxes with concomitant impact on jobs and supply chain businesses.

MAN, therefore, called for the suspension of the fiscal policy, even as it noted that the proposed excise duty collection would shrink the sector’s contribution to gross domestic products (GDP), which currently stands 35 per cent.

He argued that the tough economic situation in the nation presently should see the government introduce fiscal palliatives and tax rebate instead of introducing excise duty collection.

A member of the Nigerian Economic Summit Group (NESG), Dr. Ikenna Nwosu advised that the initiative be shelved for a minimum of one year to allow for robust discourse with industry stakeholders on the possible gains and shortcomings of the policy.

Nwosu posited that the one-year waiting period would also enable the nation’s economy, especially its manufacturers, to recover from the debilitating effects of the COVID-19 pandemic.

He argued that most global economic bodies including the International Monetary Fund (IMF) and World Trade Organisation (WTO) have been advising governments to suspend taxes for one year as part of efforts to support their businesses amid the global fiscal challenges.

Rising from the ruins of COVID-19, countries have created several bounce-back schemes to help organisations survive the impacts of the pandemic. From Europe, Asia, America to Africa, companies are getting a helping hand in the form of grants and single interest loans to keep jobs and save the economy from the cliff. It may be understandable why the government cannot do much now to help struggling businesses cope with existing challenges and the new income crunch that comes with COVID-19. But, perhaps, the least the government could do now is to resist the temptation to impose more taxes on businesses. That will be as good as auctioning the few available jobs.