The proposed 20% excise tax hotly debated by the tax authorities may signal the end of the carbonated soft drinks sub-sector, experts have argued.
Stakeholders, particularly those operating within the carbonated ’soft drinks’ sub-sector of the Manufacturers Association of Nigeria [MAN] hold the view and very strongly too that this proposed regime won’t bode well for the economy in the long run.
Specifically, the Federal Government’s proposed 20 percent Ad-Valorem Excise Tax on Non-Alcoholic beverage products which covers the widely consumed carbonated soft drinks [CSD] segment of that market.
This segment is an exclusive ‘consolatory preserve’ of the low-income consumers of the ‘bottom pyramid’’ of the Nigerian Socio-Economic Group [SEG] vulnerable to feel a sense of deprivation and alienation, likely to lead to depression and anger.
With over 190 million low-income citizens out of the official national population figure of 218 million, who are within the consumption bracket of the ‘fizzy drinks’, the demand for carbonated soft drinks among this target segment is phenomenally huge either as ‘supplements’ to augment daily food or simply for memorable occasions, as can be seen from the different brands, within the CSD segment that provides ample variants to choose from, from the stable of the various soft drink manufacturers.
Expectedly, there has been a chain of reactions since the news went abuzz that the tax authorities were planning to impose a tax on the sector.
According to analysts, the move will lead to a collapse of the soft drinks sector considering the perennial downward slide of the Nigerian economy already struggling with the pangs of the prevailing 10% of N10 per litre tax regime that is crippling the sector with its biting effects on their businesses.
Industry study already indicates that the tax imposition would affect companies like the Nigerian Bottling Company [a local subsidiary of Coca-Cola], 7-Up, Rite Foods [makers of Bigi drinks] and Nestle Nigeria Plc.
Firing the first salvo, investment and financial analyst, Mr. Olufemi Awoyemi, asserted that the new Ad-Valorem or percentage tax would put downward pressure on sales by an estimated -16% [the weighted industry average decline in volume as of the third quarter [Q3] 2022 was -10%] and increase inventories of finished goods and input costs.
For example, investigations show that the plastic raisins needed to produce PET bottles will have increased by 40% in 2022.
The proposed tax follows an earlier flat rate charge of N10 per litre of drinks produced [sold or unsold]. The tax’s impact has unsettled operators’ profit margins which have continued to be chiseled thin.
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“In one instance, one of the largest carbonated drink makers saw revenues dip to such an abysmal extent that it had to call in consultants to give an overview of the conglomerate’s books to assess the impact of the tax on business sustainability. The outcome was unflattering,” Awoyemi said.
Taxation is considered an economic measure used to generate revenue for the government. Collecting taxes and fees is a fundamental way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses. Taxation can also be used to influence or direct the consumption pattern of citizens.
In the business landscape, governments, the world over, impose excise tax on a legislated tax on specific goods or services at purchase such as fuel, tobacco, and alcohol-based drinks to generate revenue and also to control its consumption. It can be used to encourage or discourage investment in certain sectors of the economy. In this, the government can significantly reduce the number of ‘harmful’, ‘anti-social’ but not illegal economic activities, but when it is on the excess, it spells doom for businesses operating in a country, because of its burden to their operations.
While taxing to discourage consumption of certain products may be persuasive, doing so to carbonated soft drinks in Nigeria is considered off-the-mark. Soft drinks consumption in Nigeria does not constitute any threat as Nigerians’ sugar consumption rate is considered the lowest in the world and it is below the globally recommended.
Echoing similar sentiments, Matthew Shittu observed that “Nigeria is one of the lowest consumers of sugar on the planet. United Nation Development Planning approved 9.1 as the ideal [decent level]. Nigeria does 8, United Kingdom does 3.6 per person, United States of America does 40 per person respectively.’’
The excise tax is considered an indirect tax, meaning that the producer or seller who pays the levy to the government is expected to recover their loss by raising the price paid by the eventual buyer of the goods.
In the short run, an excise tax on any product increases its price and its burden is shared by both the producers and the consumers, but the exact effect depends on the elasticity of demand and supply for the commodity in view. It can also be ad-valorem, which means it has to be paid by percentage or specific cost charged by unit. But this has become worrisome because of its retarding effect on the companies being taxed, though it is favourable to the government, which sees these taxes as profitable. And this is really the all shade of wrong with this particular 20% Ad-Valorem Excise Tax in context.
Relatedly, in the analysis of Professor Martin Ike-Muonso, a professor in Economics with interest in sub-national governments Internally Generated Revenues [IGR] growth strategies, he asserted that modern public finance, the role of taxation is primarily four including revenue generation for the provision of public goods [infrastructure], facilitation of production efficiency and the handling of governments’ operational expenditures, the stabilisation of economic growth process, resources redistribution, and other non-economic objectives such as discouraging harmful goods consumption.
“Tax policy design and implementation always reflect policy-makers’ views and interests in achieving these four broad areas individually and interactively with other factors and that is why they are ideally concerned about policy effectiveness, even from design points,” he asserted.
In contrast, experience with governments in Nigeria has shown meager consideration of tax policy effectiveness during the design phases and, by extension, at their implementations. Accordingly, monitoring the magnitude and interactive chain of burden and relief impacts on variables central to revenue expansion efforts becomes less attractive and non-priority.
Also commenting on the prevailing N10 per litre excise tax on CSD, the Director-General, Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, affirmed that the new tax regime is likely to cause a 0.43 percent contraction in output and about a 40 percent drop in total industry revenues in the next five years.
He explained that rather than the estimated revenue increase of N4.8 trillion, the directive will cause the beverage sub-sector to lose up to N1.9 trillion in sales revenue between 2022 -2025.
“The government is estimated to generate an excise tax of N81 billion between 2022 and 2025 from the group, this will not be sufficient to compensate the corresponding government’s revenue losses in other taxes from the Group. “This will have an unpleasant impact on employment, households and consumers, a further cut in jobs for an industry that employs over 1.5 million people, directly and indirectly,” he said.
Globally governments are raising tax rates to cover their acts of exuberant spending at the height of the COVID-19 pandemic in 2020. With economies returning to a semblance of normalcy, governments including Nigeria, must reverse their earlier liberal spending and plug their budget holes.
In the assertion of Tilewa Adebajo, a foremost economic analyst, “Imagine that the Federal Government is borrowing to finance debts, not even recurrent or capital expenditure. It is such that the government cannot even access loans from international lenders including the World Bank and the International Monetary Fund whose conditions the government cannot meet. Hence, the new tax regimes seem to be the opportune window open to the government to generate revenue even when that is coming at huge burden to the companies been exorbitantly taxed.’’
The ‘balancing’ of the tax rise is precisely where the Nigerian government must restrain itself from large taxes across industries with thin margins and products with fairly elastic demand. Companies with elastic demands cannot share much of the tax increases with consumers without being punished by a heavy fall in demand volumes, revenues and profit.
Today, Nigeria, which used to boast of nearly 200 textile mills, does not have up to 20 mills that are still in operation. Moreover, the sector that used to employ 500, 000 workers across the nation in its heydays can no longer boast up to 20, 000 workers.
Interestingly, the manufacturing industry contributes 15% to the Gross Domestic Product [GDP] of the Nigerian economy, while the food and beverage sub-sector contributes 5%, and with a payment of N202 Billion to the government in Value Added Tax [VAT], and N207 Billion in Company Income Tax, an enormous amount that would be lost by the Federal Government if the sector is allowed to go the way of the textile, automobile, tyre and paper mills, which will have a multiplier effect on modern public finance, including infrastructural development, education, facilitation of production efficiency and the handling of governments’ operational expenditures.
In his own contribution to the on-going debate, an erudite Nigerian economist, Mr. Teslim Shitta-Bay, while analysing the effect of the proposed additional 20% Excise Tax on soft drinks during a business programme monitored on a local television asserted that in government policies, taxes are expected to stimulate growth and not do otherwise.
According to Shitta-Bay, “The position of government is understandable; the government has been in a tight situation in terms of its finances, so there’s rather a need for them to pursue other windows of revenue generation. However, this particular direction is primitive. Instead, what the government must do is to work on blocking the exorbitant holes in its current spending.
“By design and implementation, taxes are supposed to stimulate growth; a tax design is to instigate. You create an environment for expansion in consumption and productivity, so you need a tax that is not primitive,” he asserted.
Buttressing the current realities, the Multidimensional Poverty Index Report [MPI] released recently by the National Bureau of Statistics confirmed that 133 million Nigerians are poor. This suggests more than half of Nigerians are already deprived of health facilities, education and a daily intake of food and amenities. To be realistic, a bottle of soft drink sold above N150 is a big deal for the common man and right now it is even sold above that.