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Tax on beverages:Worries for operators as inflation undermines capacity to pass costs

By Femi Adekoya
23 November 2022   |   4:37 am
Though the Federal Government is unrelenting to introduce a percentage tax of 20 per cent on fizzy drink products, operators are worried about the capacity to bear an additional cost in an environment where consumers struggle with rising inflation

(FILES) Beverage (Photo by Daniel LEAL / AFP)

Though the Federal Government is unrelenting to introduce a percentage tax of 20 per cent on fizzy drink products, operators are worried about the capacity to bear an additional cost in an environment where consumers struggle with rising inflation.

With preference continually in favour of basic food items, operators in the beverages segment are worried that additional costs will spell doom for their operations, considering that currency devaluation and access to foreign exchange remain a drain on their businesses.

The proposed tax follows an earlier flat rate charge of N10 per litre of drinks produced. The tax’s impact has unsettled operators as profit margins become extremely thin, amid sustainability concerns.

Indeed, the carbonated soft drinks sub-sector of the Manufacturers Association of Nigeria knocked the Federal Government over the proposed 20 per cent ad-valorem excise tax on non-alcoholic beverages which covers the widely consumed carbonated soft drinks segment.

The sectoral group in a meeting in Lagos, noted that such a move would spell doom for the sector as the effect of the prevailing N10 per litre tax regime was already disabling the industry with its biting effects on businesses.

An Industry study on the impact of the prevailing N10 per litre excise tax effect between June and August 2022 showed an eight per cent revenue decline as a direct result of excise tax implementation. It is projected that the decline will hit –25 per cent by December 2022 if not reviewed.

In a statement, MAN said the study excluded the cost of write-offs of products manufactured, which were excised but not sold.

With the proposed 20 per cent ad-valorem tax introduction, the collapse of the soft drink market was imminent, said the group. MAN further said this would be catastrophic as thousands of jobs could be affected and the ultimate aim of the government in collecting revenue completely defeated.

“Most certainly, the additional 20 per cent will not only kill the sector but result in the loss of revenue by the Federal Government, and a consequential phenomenal loss of jobs by various layers of the Nigerian workforce.’’

The statement added that the sectoral position was laid bare on November 17th by the Soft Drinks Manufacturers Sub-sector of MAN, which accounts for 33 per cent of the entire manufacturing sector in Nigeria.

In the concluding statement of the International Monetary Fund’s (IMF’s) 2022 Article IV Mission, the global financial institution noted that “Public finance is under stress with elevated fiscal deficits, high debt servicing costs and public debt projected to increase over the medium term. Urgent revenue mobilization and fuel subsidy reforms are critical to creating much-needed fiscal space. Successful revenue mobilization episodes in SSA highlight the need for comprehensive fiscal reforms supported by high-level political commitment”.

One of the recommendations of the mission, estimated to create fiscal savings of close to 6 percentage points of GDP during 2023-27 while also making room for higher social spending, included advice to the authorities to consider adjusting tax rates to levels comparable to the average in Economic Community of West African States (ECOWAS) as compliance improves.

This includes further increasing the VAT rate to 15 percent by 2027 in steps while streamlining numerous VAT exemptions based on systematic reviews, increasing excise rates on alcoholic and tobacco products while broadening the base, and rationalizing tax incentives by streamlining tax expenditures based on comprehensive periodic reviews.

For operators, such advice did not put into consideration the prevailing challenges in the sector and the dwindling purchasing power of consumers as well as the implications for the economy.