The Federal Government’s plan to increase taxes on luxury items to shore up its revenues might be fizzling out as a fragile economic state and weaker purchasing power are curbing consumer spending.
Since Nigeria entered recession in 2016, the volume of Champagne (the pricy French white wine) imported into the country has remained below pre-recession levels as consumers resort to taking cheap local spirits and sparkling wines to match their low-income stream.
Nigeria’s consumption of Champagne imported from France dropped by 24 percent compared to 2014 levels, according to data compiled by Comité Champagne, a trade association that tracks volume and value of Champagne exported from France.
The data showed that Nigerians swigged 582,243 bottles in 2018, a 24.2 percent fall from the 768,131 bottles consumed in 2014 before the recession, signifying a fall in consumer preference for luxury items.
Yinka Ademuwagun, equities analyst at United Capital, says although the term ‘luxury goods’ is quite broad, a decline in disposable income over the years has seen consumers look for value in cheaper alternatives.
In 2014, Nigeria made international headlines when Shoprite, the South African supermarket chain, said it sold more of the bubbly wine in its five outlets in Nigeria than it did in 600 outlets in South Africa.
However, with the economic recession that hit the country in 2016, consumers are beginning to realign their consumption pattern to fit into economic reality.
To effectively finance a 67 percent additional wage burden of N30,000, the Federal Government in collaboration with the Federal Inland Revenue Service (FIRS) is seeking to raise consumption tax (VAT), Company Income Tax (CIT) and Petroleum Profit Tax (PPT) by as much as 50 percent.
Going by the percentage increase, VAT will see an increase from its current level of 5 percent 7.25 percent. However, it is very unclear how CIT and PPT will be affected.
The plan to finance the increase in the wage burden through tax increment would invariably force companies to raise prices significantly, ultimately placing the incidence of the tax increment on the consumers, who are already struggling with a pocket squeeze, a fiscal policy that analysts say was designed to ”rob Peter to pay Paul”.
“From our initial estimates, we envisage that the proposed increment in various tax items would raise additional N1.0trn for the government. However, if our estimates on the tax base and taxable profits remain unchanged from 2018 figures, we don’t see the additional revenue enough to cater for the increased wage burden,” analysts at investment and advisory firm, CSL, said in a note.
Ademuwagun of United Capital, however, offered an alternative argument that despite the waning patronage of luxury goods, the government should go ahead with the proposed hike in taxes on ostentatious goods and ensure a progressive tax system that would abate revenue generation woes.
Data from the National Bureau of Statistics (NBS) on Gross Domestic Product (GDP) by Income and Expenditure approach at 2010 purchaser’s values show that consumption expenditure of households has been declining at varying pace since it rose by 1.5 percent in 2015.
Final consumption of households has declined by 8 percent from N43.1 trillion in 2014 to N39.66 trillion in 2018. Although the figures provided for 2018 by the state-funded data agency was limited to Q2 2018, BusinessDay arrived at a full year estimated on an annualised basis.
Year on Year, household spending rose 1.45 percent to N43.7 trillion in 2015 but as Nigeria entered its first recession in more than two decades, household spending fell 5.74 percent to N41 trillion in 2016. While the rate of decline slowed in 2017 as households spent N40.78 trillion, the estimates for 2018 suggest a plunge of up to 2.75 percent for 2018.
BusinessDay proceeded in engaging with retail outlets and grocery stores that are close to the consumers that purchase these brands, many of which have complained about a fall in sales.
“It is quite an expensive choice,” Amaka Chinonso, a sales representative at ShopRite, told BusinessDay.
“Patronage has been low because not everyone can spend so much for a drink.”
The champagne brands are at the higher end of consumer lifestyle with the prices of its lowest brand averaging around N25,000, since they are majorly imported from France. Products like Bollinger Rose, Champagne Laurent-Perrier S.A.S, and Veuve Clicquot cost as much as a full month salary for workers who would be receiving the new minimum wage of N30,000.
Chinonso, however, explained that the improvements in the Naira against the United States dollars have improved the affordability of champagne more recently.
Blessing Joseph, another sales representative at the retail outlet, explained that people occasionally purchased champagne for parties and ceremonies but the sparkling wine products sold much faster than champagnes.
BusinessDay findings confirmed that sparkling wines sold at an average of N5,000 per bottle were up to five times cheaper than champagne products, making consumers switch to the brand.
Sparkling wine brand in display at the shopping mall amongst others include Sparkling Mateus, Joven Sparkling Wine and Martini Rose.
MICHAEL ANI & SEGUN ADAMS
