Excise Tax: One Tax Too Many for Manufacturers

Stakeholders in the Nigerian food, beverage and tobacco sub-sector of the Nigerian manufacturing sector have appealed to the government to stay its hand on the planned reintroduction of excise on non-alcoholic beverages in order to avert serious negative unintended consequences on the economy, writes Dike Onwuamaeze

The latest push for the re-introduction of excise tax on non-alcoholic beverages is sending the jitters down the spine of stakeholders in the food and beverage segment of the Nigerian manufacturing sectors.

It all began sometime in August 2021 when the Chairman of the House Committee on Finance, Mr. James Faleke, asked the Controller General of the Nigeria Customs Service (NCS), Colonel Hamidi Ali (rtd), why the NCS does not charge excise duty on non-alcoholic drinks.

Faleke asked the question during at an interactive session on the 2022-2024 Medium-Term Expenditure Framework (MTEF) that was organised by the House of Representatives’ committee on finance.
Ali, who seemed to have been waiting for this opportunity, seized every minute it offered to push for the re-introduction of the excise tax on non-alcoholic beverages, which was suspended in 2009 to soften the harsh effects of the global financial crisis.

He said: “On several cases, I have made submissions, Mr. Chairman is aware that I have been on this battle that we should re-excise the companies that were de-excised in 2009.

“What we have been fighting for is that if alcohol beverages and tobacco are injurious to our health that is why the government decided to tax them, the carbonated drinks are equally injurious to our health and they should be taxed. For us, we have been battling for it, and I hope that one day, we will start collecting.”

Ali brief comment won the support of the committee members who promised to add the excise tax in the Finance Act of 2021.

The committee chairman said that the lawmakers may consider amending the Finance Act so that excise duty would be charged on both carbonated and non-carbonated drinks.

THISDAY’s efforts to get the reactions of the Manufacturers Association of Nigeria (MAN) and other stakeholders in the food and beverage industry did not yield much information. The executive Secretary of the Association of Food, Beverage and Tobacco Employers, Mr. Adewale Jones, told THISDAY that the matter is not yet clear to him; therefore, he could not comment on it for now.

Similarly, the Director of Corporate Affairs of the Nigeria Breweries Plc, Mrs. Sade Morgan, also declined to comment while the Corporate Affairs and Sustainability Director of Nigerian Bottling Company Limited, Mr. Ekuma Eze, told THISDAY that it is too early to speak to the press on the matter. Eze said that he is hoping that there would be a dialogue between the stakeholders in the beverage sector and the federal government to consider the pros and cons of the excise tax and the way forward.

However, the Fiscal Policy Partner and Africa Tax Leader at PwC, Mr. Taiwo Oyedele, has warned that care must be taken to avoid imposing excessive burden on the beverage industry, which is a major contributor to the manufacturing sector with respect to the proposed reintroduction of excise tax.

Oyedele also challenged the proponents of the claim that the consumption of soft drinks is harmful to health to back it up with established evidence on whether Nigeria indeed has a sugar problem compared to other countries with such excise taxes given country’s relatively low sugar consumption.
He noted that the government’s argument that justified the tax on health ground is untenable because it did not provide free healthcare for its citizens.

“In effect, this is tantamount to paying taxes for healthcare and yet you have to foot your medical expenses in the event of a health challenge. Therefore any tax on soft drink is really for revenue generation, which raises questions as to whether the tax is desirable from a broader economic perspective and if so whether the timing is right,” Oyedele said.

However, an Economist and the Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, has described the proposal as ill-timed, insensitive and most inappropriate given the prevailing harsh economic and business conditions in Nigeria today.

Yusuf stated that the norm globally at this time is to provide incentives for industries to aid their recovery from the shocks of the COVID-19 pandemic and escalating costs. Therefore, Nigeria could not afford to be doing the exact opposite as manufacturers, across all product segments need a respite, especially in the light of the unprecedented escalation of production and operating costs.
Yusuf, who was the immediate past director general of the Lagos Chamber of Commerce and Industry (LCCI), claimed that the factors stated above were affecting sales, turnover, profitability, shareholder value and the sustainability of investments.

He also said that the proposal is a negation of the economic recovery and job creation aspirations of the federal government as many upcoming small businesses in the beverage sector would be hard hit by it.

He said: “The millions of micro enterprises in the soft drinks’ distribution chain will be adversely impacted by the imposition of the excise tax. This is detrimental to the job creation and poverty reduction commitment of President Muhammadu Buhari.

“Nigerian manufacturing companies, and indeed most investors, are going through tremendous stress at the moment. They are currently grappling with serious macro-economic challenges and structural constraints impacting on capacity utilisation, productivity and competitiveness.”

Yusuf contended that the manufacturing sector is currently constrained by multiple challenges and pontificated that the reintroduction of the excise duty should be put on hold.

He argued that Nigerian manufacturers are grappling with, according to him, include the dislocations inflicted by the pandemic and the recession that followed it; they are also contending with a serious crisis resulting from liquidity challenges in the foreign exchange market, which is impacting adversely on the cost of production; in addition, manufacturers are suffering from intense pressure on cost of production arising from numerous structural bottlenecks that are creating sustainability challenges for investors in the sector, especially those in the SME segment.

He also argued that manufacturers have experienced significant spikes in the cost of raw materials, cost of fund, high import duty, elevated energy cost, prohibitive cost of transportation and high cost of logistics. He, therefore, concluded that significant “proportion of these costs cannot be passed on to the consumers because of high consumer resistance.”

He said that “manufacturing contribution to GDP is still less than 10 percent and giving the strategic importance of manufacturing to the economy, what the sector needs at this time is more stimulus to ensure better contribution to the GDP.

“The economy is currently characterised by weak purchasing power, which is taking a huge toll on sales and turnover of many manufacturers, leading to high inventory of manufactured goods.

“In the light of the above challenges, the proposition to re-introduce excise duties on a segment of the food and beverage industry should be put on hold. The excise duty proposition is not consistent with the desire of Mr. President to create jobs and to lift hundred million people out of poverty in ten years. If anything, it is a negation of the President’s aspiration on job creation and alleviation of poverty. We implore the National Assembly and the Federal Ministry of Finance to put on hold any move to impose excise duty on any segment of the Nigerian manufacturing sector.”

“It is worthy of note that manufacturers (including soft drinks producers) are already paying numerous taxes and levies which put a lot of pressure on them. Some of the taxes and levies that are already being paid include: corporate income tax of 30 per cent, education levies of 2 per cent, VAT 7.5 per cent, withholding tax, land rent, environmental tax and numerous unofficial taxes. There are also multitude of fees and levies imposed by many other government agencies at the federal, state, and local government levels. The appeal is that the Nigeria Customs Service and the National Assembly should have a rethink on this matter.”

THISDAY’s investigation revealed that a study that was commissioned by concerned stakeholders in the Nigerian manufacturing sector on the implications of the re-introduction of the excise on non-alcoholic beverages said that both the government and the economy would lose more than they would gain.

The study stated categorically that the government will lose more revenue if the excise is introduced. It pointed out that the government could lose up to N197 billion in VAT and Company Income Tax (CIT) revenues occasioned by drop in industry performance in its bid to recieve projected revenue of N81 billion with the reintroduction of the excise tax. “This excise gain does not compensate for potential revenue losses from CIT, VAT and TET. Now is not the right time to introduce the proposed excise,” the stydy said.

It also projected that the food and beverage sector would lose up to N1.9 trillion in sales revenue between 2022 -2025 indicating a 39.5 per cent loss due to imposition of the new taxes with concomitant impact on jobs and supply chain businesses.

Moreover, re-introducing excise would be counter-productive to the federal government’s Sugar Master Plan as the “sugar industry would be hard hit when volumes plummet as a result of excise.”
The study warned that the plan to reintroduce excise on non-alcoholic beverages would likely cause a 0.43 per cent contraction in the country’s GDP and about 40 per cent drop in total industry revenues in the next five years.

It further warned that excise tax would lead to high production costs, which would adversely affect production levels and resulted in dwindling profits. “Introducing the excise will easily reduce production capacity causing manufacturers to struggle to meet investor commitments as well as cause investor to take investments to other countries. Introducing excise taxes will also have adverse impact on employment, households’ income and consumers’ purchasing power.

“As seen from previous impact analysis, excise affects production outputs, revenues and profits. This causes companies to pursue cost cutting measures to reduce the effect of diminishing revenue and profits by reducing employee salaries or retrenchment.”

It recommended the suspension of the planned re-introduction of excise on non-alcoholic beverages in 2022 and so that it would be reviewed in 2023 while working with the industry to carry out an in-depth impact assessment that would fashion out the best approach that drives value for all stakeholders.