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Alcoholic beverage firms seen squeezed as FG doubles taxes

Alcoholic beverage firms seen squeezed as FG doubles taxes

The Federal Government’s newly revised excise duty rates (taxes) on alcoholic beverages and tobacco products have been described as an additional burden that will threaten the survival of firms in the sector.

BusinessDay analysis shows that the taxes to be paid by alcoholic beverage firms starting from June have more than doubled.

According to the 2023 Fiscal Policy Measures (FPM) document signed last month by Zainab Ahmed, minister of finance, budget and national planning, total specific rate for beer and stout, wines, spirits (per litre) is now N300, a 114.3 percent growth from N140 last year. Tobacco’s specific rate is N8.20 per stick, 95.3 percent increase from N4.2 per stick in 2022.

It is also 76.4 percent higher than the rates they were meant to pay this year before the review and 32.5 percent (N408.2) higher in 2024.

The total ad-valorem rate levied on alcoholic beverages and tobacco products rose by 40 percentage points to 110 percent in June from 70 percent in the same period of last year. The total ad-valorem rate for next year still stands at 110 percent.

Before the taxes were updated, the total ad-valorem rate was previously set to be 70 percent effective in June.

Experts say the fiscal policy is not industry-friendly at a time where cost of doing business, especially for manufacturers, has surged as a result of high inflationary pressures, which are at double digits and the highest level in 17 years.

The additional excise taxes represent further increases over and above the previously approved rates per the 2022-2024 roadmap approved via the 2022 FPM, according to Taiwo Oyedele, West Africa tax leader at PwC Nigeria, said.

He said: “It is policy inconsistency to approve tax rates for a period and then change the rules midway into the implementation without any compelling reasons or appropriate engagement with the affected industries especially at a time they have suffered significant sales decline due to the recent naira scarcity.

“What the industry needs from the government at this time is enabling policies, not additional tax burden.”

Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, said the volumes of alcohol and tobacco products will reduce “since they are not matters of absolute necessities for consumers”.

“We should also expect slimmer profits margins for the companies and returns to investments for shareholders are likely to reduce,” he said.

He said for smaller products or companies in the brewery industry, the combination of reduced consumption and lower profit margins may knock them out of business or struggle to survive, which could eventually lead to job losses.

“Ultimately, it will affect the supply chain from the people who supply the raw materials to those involved in the transportation and distribution of the products in the country, further causing a decline to the Gross Domestic Product,” he said.

But Idahosa believes that the negative impact would only last for the next quarter or two quarters till the new administration, which takes office in May, reviews the policy.

Excise duties are indirect levies placed on the manufacture of locally produced goods. Countries usually implement them to discourage the purchase of goods that may harm consumers or the environment and also serve as a source of additional revenue to cash-strapped governments.

In March 2018, the Nigerian government amended the excise regime by increasing the specific rate on tobacco and alcoholic beverages, which was N0.2 per centilitre (Cl) in 2017. The upward review, which went into effect in June that year to 2020, had no ad-valorem tax for alcoholic beverages except for tobacco.

A breakdown of the taxes from a 2018 PwC document show that beer and stout attracted N0.30 per Cl each in 2018 and N0.35 per Cl each in 2019 and 2020 while wine attracted N1.25 per Cl in 2018 and N1.5 per Cl in 2019 and 2020. Spirits had N1.00 per Cl in 2018, N1.75 per Cl in 2019 and N2.00 per Cl in 2020.

For tobacco, a specific rate of N1.00 is levied on each cigarette stick in 2018. The following year, the specific rate rose to N2 per stick and N2.90 per stick in 2020. No ad valorem rate was applicable for beer and stout in 2022 but in 2023, a 20 percent ad valorem rate was introduced and the specific rate increased to N75 per litre in 2023 from N40 per litre in 2022.

For wines and spirits, the 20 percent ad valorem rate rose to 30 percent. The specific rate for wines rose to N75 per litre from N50 per litre, while the rate for spirits increased to N150 from N50. Tobacco’s ad valorem rate was retained at 30 percent but the specific rate is N8.20 per stick from N4.2 per stick.

The revised excise duties might wipe out the brewery and other related sectors because they are already dealing with high cost of foreign exchange, high energy costs, transportation, and multiple taxation, Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said.

“The government has not been fair to the alcoholic industry. Many are struggling. And these new taxes might close their shops because they are already dealing with the problem of sales as a result of weak demand caused by the high inflation in the country,” he said.

Yusuf said the increased rates would reduce the industry’s revenues and profits, thereby affecting their ability to pay for other taxes like education, company income and value added tax. “You don’t increase revenue by killing the people who are giving it to you.”

Abiola Gbemisola, a consumer goods analyst at FBNQuest, said the brewers should create awareness on the tax increases to consumers.

“They will have no choice but to pass the cost to consumers. That is why they have to make noise or campaign about the tax increment to let people know that the government is taxing them massively. That is the only way they can pass cost without any negative impact on their business,” he said.

He added that even if they don’t increase prices in order to preserve market share or competition, it would lead to some sort of pressure on them.

According to AsokoInsight market data, beer is the most widely consumed alcoholic beverage with a 55 percent market share, followed by spirits (30 percent) and wine (15 percent). Spirits are gaining traction, with Guinness Nigeria Plc now focusing attention on the segment.

But top players in the alcoholic industry such as Nigerian Breweries Plc, International Breweries Plc and Guinness Nigeria, have been struggling since 2019 following the increment in excise duties in a challenging operating environment.

Between 2019 and 2021, they increased prices more than twice in response to the high excise duties.

Manufacturers were forced to increase prices due to the introduction of the excise tax regime, as well as strong depreciation of the local currency, which made imported raw materials much more expensive, according to analysts at Euromonitor International, a London-based strategic market research firm. “The average unit price for alcoholic drinks increased by almost 20 percent in 2021.”

From their financial reports, Nigerian Breweries, made a profit of N7.4 billion in 2020, a 54 percent decline from a profit of N16.1 billion in 2019, while its revenue grew by 4.3 percent to N337 billion in 2020 from N323 billion in 2019.

International Breweries made a loss of N12.3 billion in 2020 even though revenue grew by 3.3 percent to N136.7 billion in 2020. Guinness Nigeria posted a loss of N11.4 billion in 2020, compared to a profit of N4.12 billion in 2019. Revenue declined by 18 percent to N108 billion in 2020.

Nigerian Breweries’ revenue improved by 51 percent to N437.3 billion in 2021 from N337.1 billion in 2020; the revenue of Guinness rose by 30 percent to N109.1 billion while that of International Breweries grew by 29 percent to 206.8 billion.

Guinness saw its profit surge to N1.3 billion last year from a loss of N12.4 billion in 2020, Nigerian Breweries had a 71.9 percent increase in profit to N12.7 billion in 2021 from N7.4 billion in 2020. International Breweries reported a loss for the year of N21.6 billion, compared to N17.7 billion.

In 2022, Nigerian Breweries’ profit increased to N13.2 billion, up four percent from N12.7 billion. Its revenue rose by 26 percent to N550.6 billion. International Breweries reported a loss of N21.6 billion from N17.7 billion. Revenue grew to N218.7 billion from N182.3 billion indicating 20 percent growth.

For the first half of last year, Guinness recorded a 54.4 percent decline in its profit of N4.0 billion from N8.9 billion in the same period of 2021. Revenue grew to N118.5 billion from N109.1 billion.

Yusuf of CPPE recommends the government to review the taxes because this is not a time to be taxing those in production. “The brewery sector has a very good backward integration plan since most of their raw materials like maize and sorghum are from the North.”

Nigeria’s upward review of the excise duties may be from the World Bank recommendation in 2021 where it said that the country can generate more than N600 billion annually by increasing excise duties on tobacco and alcohol.

Read also: Trillion-naira tax incentives fail to lift FDI

“On alcohol and tobacco, Nigeria applies an ad valorem rate of 20 percent, which is less than half the median of its African peers,” Rajul Awasthi, senior tax specialist of World Bank, said. “To effectively tap into this revenue source, Nigeria could retain the current ad valorem excises but augment them with specific ones.”

According to the World Bank, Africa’s biggest economy has one of the lowest excise duty rates on tobacco and alcohol in the continent, and the duty rate on cigarettes is lower than the standard set by the Economic Community of West African States.

In a 2018 Global status report on alcohol and health by the World Health Organization (WHO), Nigeria had high total per capita alcohol consumption at 25.5 litres in 2016.

Movendi International, an independent global movement, said despite the growing harm of alcohol, the country lacks a comprehensive alcohol control policy.

“The government has not implemented many of the recommended restrictions and regulations in controlling the alcohol harm such as a legal age for alcohol use, sales restrictions or advertising bans,” it said in a recent article.

It added that the excise tax hike is a positive step by the government in preventing and reducing alcohol harm and that raising taxes is a WHO recommended best buy measure in reducing alcohol use.

“However, Nigeria needs to focus on formulating a strong alcohol control policy encompassing the key areas recommended by the WHO safer package, to reduce the growing alcohol harm in the country.”