Experts flay new duties on alcohol

It is a time most businesses are facing tough choices in the midst of a biting economic crunch, the introduction of the new fiscal policy measures, especially the high increases in excise taxes on alcoholic beverages, tobacco, wines, and spirits, effective from 1st of June 2023, will not bode well for the economy, economic analysts have argued.

It may be recalled that the government introduced the new measures in a circular dated 20 April 2023, including excise tax rate increases ranging from 20% to 100% on previously approved rates for alcoholic beverages and tobacco. In the case of wines and spirits, the increase, in some instances, is up to 300%.

Speaking with a cross-section of experts, they have also described as hasty the planned implementation of the new policy regime on alcoholic beverages and other allied goods.

The Nigeria Employers’ Consultative Association (NECA) while expressing their concerns noted that would largely affect manufacturers as well as disrupt the entire value chain of the organized private sector (OPS).

Director-General of NECA, Adewale-Smatt Oyerinde, in a statement, decried the recent circular by the then Minister of Finance, Budget and National Planning, Zainab Ahmed, introducing the FPM, with increases ranging from 20 percent to 100 percent on previously-approved rates for alcoholic beverages, tobacco, wines, and spirits as well as the introduction of green tax (10 percent excise duty on single-use plastics.

He urged the government to maintain the status quo on the items involved.

According to him, the government should, as a matter of urgency and national importance, suspend the implementation of the Fiscal Policy Measure and Tariff Amendment as proposed and revert to the 2022 Fiscal Policy Measure roadmap.

Giving insights into organized businesses’ concerns, Oyerinde said the proposed increases would naturally spike the cost of production and reduce the competitiveness of Nigerian manufacturers in both local and international markets.

Linking it with the recent reports of the unemployment rate hovering around 40 percent, he said the nation’s economy would be further hard-pressed to withstand the likely loss of jobs that follow the increases.

Also, an operator who pleaded anonymity added that “the failure of the decision of the government not to afford industry the usual practice of 90-day window between announcement of changes and the effective date of any new rates negates the existing FGN Tax Policy of 2017 and also is against the principle of legitimate expectation. In essence, any new rates only ought to take effect 90 days after the publication of the gazette setting out the details of the increases.”

In the view of Johnson Chukwu, the CEO of Cowry Access Management Company, the new tariff regime, if implemented, would have far-reaching effects on businesses, especially the alcoholic beverage portfolios.

For instance, the negative impact of the government reneging on the established 2022-2024 Excise Duties Roadmap which had reasonable graduated increases on alcoholic beverages, particularly spirits and wines, is seen by industry players as a negation of government policy and another example of policy reversal that is unfriendly to businesses.

For Chukwu, the government should embark on policy measures like the tax increase sparingly because the astronomical increases introduced will mean that parallel trade from smuggling which deprives the government of legitimate tax revenues will increase while businesses that pay tax to the government will shrink in size and operation.

In its impact assessment of the new policy measures, KPMG, a global audit firm, said it may have more profound negative impacts on the beverages and tobacco manufacturing sectors. This will also inevitably extend to the sector’s expansive value chain of farmers, transporters, logistics services providers, entertainment and hospitality businesses, etc.

Further price rises may squeeze consumer demand and worsen already declining business margins such that the expected revenue expected by the government from the increases may be unrealized.

The inadvertent but inevitable consequence of the reduction in the absolute revenues accruing to the government could be in the potential reduction in Companies’ Income Tax, Education Tax, and PAYE that would result from the reduction in production and business activities in the sector.

Excise duty is essentially a tax levied directly on certain goods and services produced/imported but consumed within a country. Businesses may also have to incur additional costs in complying with excise duty regulations, such as maintaining records and filing tax returns. This can be a burden, especially for smaller businesses that may not have the resources to handle these requirements.

Thus, when excise duty is imposed on a particular product, the cost of producing that product or the consumer price of that product increases, depending on whether it is borne by the producer/importer or passed on to the consumers.

While acknowledging the fact that the government justified the policy to discourage excessive consumption of sugar, tobacco, and alcohol, analysts believe that the real intention is to generate revenue to plug the big and widening hole in the government’s deficit financing.

With FGN revenue to nominal GDP at about 3%, and a worsening budget deficit from about N1.1 trillion in 2013 to N6.3 trillion in 2022, Nigeria’s debt has risen from N10 trillion in 2013 to over N46 trillion by the end of 2022. This does not include another N23 trillion in Ways and Means advances from the Central Bank of Nigeria (CBN), which the National Assembly recently approved for it to be securitized.

This means national debt will rise above N70 trillion with a debt service ratio that might range between 100-150% of revenue. If nothing is done to increase revenues quickly, Nigeria will have to borrow not only to service its debt but also, to run government operations.

Already Nigerian manufacturing businesses are unable to compete favorably with other African countries and many other countries in the world, given the nation’s relatively higher costs of operations.

However, the urgent need to guarantee long-term FX availability and shore up foreign reserves, and stabilize the FX exchange rate is substantially tied to the ability to produce more competitively and export more as well as attract FDI. Yet, both may be hindered by added taxes.

“Accordingly, rather than place added burden on struggling consumer demand, business margins and profitability, and greater competition hurdles with other African countries in particular our recommendation would be to increase oil revenue and non-oil revenue via other measures that don’t create added challenges for consumers and businesses and to adopt more efficient government expenditure,” KPMG advised.

The manufacturing sector as a whole contributed 32.3% of the total local VAT in 2022, making it the sector with the biggest share of VAT for the year, followed by the Information and Communication sector (18.2% of the total local VAT), according to relative VAT data provided by the NBS in her Q4 2022 report. Regarding CIT, the Manufacturing industry also accounted for the greatest share of all local CIT in 2022, at 27.9%.

The average inflation rate on alcoholic beverages stood at 11.45% since 2015 and 12.53% since 2019.

Given that the alcohol sector, particularly wine, and spirit, have price inelastic demands for their products, the increase in the excise duties might force them to either bear most, if not all the higher costs from the duty, thereby negatively impacting their margins, or pass it on to their consumers and risk a drop in demand and earnings.

Declining profitability also creates risks of layoffs in that sector as businesses tend to focus first on staff cuts when faced with such cost and profitability challenges. At the same time, it might not necessarily discourage consumption or achieve its environmental goals substantially, since there are so many informal channels to supply the same and unregulated illicit substitutes that cause greater health challenges and environmental challenges.