‘Why proposed 20% excise tax on non-alcoholic beverages, others is harsh, dangerous’

As controversy continues to trail the proposed 20 percent excise tax on non-alcoholic beverages by the Federal Government, stakeholders in the private sector of the nation’s economy have raised the alarm that the move was capable of endangering Carbonated Soft Drinks (CSD) sub-sector of the economy.

The stakeholders warned that the ad-valorem tax may not only lead to the collapse of the sector, but also lead to job losses and ultimately affect government revenues in the long run.
Speaking with some editors in Lagos recently, Olufemi Awoyemi, founder and chairman of Proshare Limited, raised the concern that the move by the Federal Government could mean a death knell on a struggling sector and also adversely affect the manufacturing sector.

Awoyemi said: “It is an ad-valorem tax, which means, it is a tax principle based on productivity of a sector that is thriving and productive. It is usually applied when you discover that in your economic recovery curve, you are doing well; you now take tax to extract from the increase in value,” but he pointed out that government was trying to extract from a decline in value.

“Look at what happened in UK in recent times; they lost two prime ministers because of wrong taxation; the third one came in and the areas where he taxed people; did anyone complain?

“In a country where inflation continues to grow so high, where the interest rate continues to grow so high, when the consumer’s purchasing power is declining, you then increase the cost of what is most affordable to them. It will turn out negative; so my own is not to defend so much of the industry, but to defend Nigeria because at the end of the day, that profit Nigeria is looking for in that proposed tax will only be a mirage,” he said.

According to him, “The manufacturing sector for which we have not invested things in, we have not made it easier for them to clear goods from customs at an efficient price; we have not made it easier for them to do distribution through transportation network; we have not made it easier for them to get forex; we have not made it easier for them to be able to compete to bring in equipment; and here we do not have power for our operations, it means there is an optimal limit to which you can tax this particular sector.”

Awoyemi further observed that in order to remain afloat, companies cannot possibly pass on all the taxes on the consumer, the result of which would be that such companies would begin to operate under distress condition.

“If consumers stop drinking their beverages or lower their rate of consumption, because of the increase in the product that they can no longer afford, what it means is that you are reducing total consumption in your country; the aggregate of this is that the gross national productivity drops! So, you will adjust. If a can of coke is now N500 for instance; what it means is that instead of buying two, you buy one; what happens to production? What happens to capacity to employ and capacity to increase your revenue, etc?

“There is also the morality angle to the tax increase. For instance, if I am not seeing what you are doing with the taxes you are collecting, why increase it and why must I pay? If I am not seeing what you are doing with the tax, why I am paying so much tax?”

Possibility of concoctions flooding markets

The Proshare chairman also pointed out that since people must eat to remain alive, “If you remove the things they can afford; bread and soft drinks that are within their economic reach, what does it result to? If you through taxation send the manufacturers out of business and making the products unaffordable, the products won’t disappear entirely; it will result in too many fake and substandard products flooding the market.

“Then the consumers will also begin to patronise such fake and substandard products to their own disadvantages in the long run. So you are going to see all manner of concoctions in the market that do not have official approval; they do not have any health standard, and people will take these things and damage their health. Who bears the burden of that health damage? In Nigeria we don’t have institutions that take care of such special cases as in the United Kingdom and the United States; but people will have to get treated; the cost of that treatment who does it fall on? Individuals. Now, these individuals can they bear the cost when you have an economy that is generally shrinking?”

Although he pointed out that the Federal Government, which had admitted that it was broke, could generate revenue through taxes, he advised that caution must be applied to avoid unintended consequences.

“Everywhere globally; if government wants to tax; they go to alcoholic beverages; tobacco industry because they consider alcohol, tobacco to be like it is a choice. So, the Nigerian government is not wrong to focus on that sector; it is not wrong to focus on taxation; where it is wrong is in the way they are approaching it. It is in the volume and value with which it is approaching it and it is in the manner also.

“It is not just that multiple taxations is wrong, because people are not seeing the effect. There is already N10 on every bottle of sugar sweetened beverage produced in your factory; it was smuggled into the Financial Bill; and government collects it under Excise Duty. Now, you are charging on consumption anytime you sell, you pay tax; meanwhile; most times, most of these people will have goods in your port that stay there for 45 to 50, 60 days. We are saying government wants to be smart.”

Investors now hedgy

Awoyemi disclosed that because of the plan to impose the tax, some individuals who wanted to invest in the sub-sector are now cautious.

“Why I am bothered about this problem is that those people who were planning to invest in this country have now suspended their investment in Nigeria; because they want to wait and see what happens,” he said.

Government has the right to use all manner of taxation to challenge those who do not abide by the number/quantity of sugar that should be used in soft drinks/alcohol, etc, to protect the consumers. But you cannot just wake up one morning and slam fresh taxes on an industry- you are killing that industry.

He summarised his submission by saying that although he supported the 20 percent excise tax, there is a single factor narrative that makes no sense, which is ad-valorem tax, which means you understand your economic recovery and should not be looked at as a component on its own.

He also said that the N10 per litre excise tax on non-alcoholic beverages which has been paid by soft drink companies is a tax on production and consumption, and that its adverse effect on the manufacturers trickles down to the consumers who find it difficult to cope with the price of the products.

“If the revenue of the manufacturing companies declines, with the -25 percent being experienced, there would be a layoff of workers, and it would lead to a drop in their standard of living,” Awoyemi he said.

According to him, “the proposed 20 percent ad-valorem tax on soft drinks will impact negatively on the government, manufacturing companies, and citizens. It should be done in a way that recognises the rate of economic recovery, that means you will tax them in relation to their ability to be more efficient.”

Read also:Proposed excise tax will collapse soft drinks sector, Manufacturers groan

Teslim Shitta-Bey, chief economist and managing editor at Proshare, who spoke in tandem also said that the proposed introduction of the 20percent tax was coming at a wrong time.

“The industry suffers a challenge of energy; of infrastructure; it suffers a challenge which is very critical on future prospects of growth in consumer demand. All these are very significant challenges,” he said.

It was his belief that if government had met its side of providing the necessary conducive business environment in the country, manufacturers would have been better off.

“The industry would likely grow better and faster if these challenges were not there; and would have been very competitive. With that competition we would be productive; with that productivity, we can generate more revenue. So, the problem is not about tax; the problem is the tax base; what are you taxing? The question is; can Nigeria widen its tax base? Sure. We can do so. Many individuals and companies in the country are not taxed. Can we therefore, identify those who are not captured in the tax net? We also must be a bit careful in our taxation. There is official tax and unofficial tax.”

Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PwC, PricewaterhouseCoopers, addressed the issue on Arise TV Programme ‘Xchange’, said: “We know government needs money because it does not have enough to fund critical infrastructure, overheads and the rest of them, and the best thing to do is to strike a balance. That delicate balance, as to what do you task, what rate of tax would be appropriate and when should impose that tax?”

Responding to government’s intentions to tax non-alcoholic beverages and other products, fiscal policy analyst said: “Personally, l was surprised because just this time last year, there was a back and forth movements when government said it would increase the excise tax and it did more than what the industry wanted and it was accepted. Government stated that a particular rate for 2022, 2023 and 2024, and a few months down the line, government said it wanted to increase it further, and if you look at the economic and business circle things have gotten worse than they were before, which means if you are talking of either reducing the rate or suspending them at best, you fix the rate without increasing them.”

A challenge for government

Oyedele said if government wants to increase taxes, it should “facilitate the business environment, remove the impediments so that people can do business and make more money.”

According to him, “Government has to bear in mind that the biggest gap we have today is coming from tax evasion and non-compliance. With these, we can actually raise more revenue by not introducing any new tax and increasing the rate of any existing tax, and making it more efficient on how we collect, by using technology and data to collect these taxes without them being evaded.

“The tax collected should be properly accounted for. I can tell you that many MDAs collecting these taxes have cost of collection as high as 10 percent and those are areas where the leakages are, and government needs to focus on how to address that.”

On excise tax soaring to 10 percent or above, he said: “It would be a wrong move because inflation is getting out of hand and that means more people are getting into poverty. If you tamper with VAT, it will have a direct impact on inflation, and it will be counter-productive, from the monetary side trying to control inflation and from the fiscal side, trying to increase inflation, it will be contradictory.”