Fiscal Policy Measures (FPM) are important macroeconomic policy tools aimed at supporting the government in managing its finances and promoting economic growth. On 20th of April 2023, the Federal Government of Nigeria issued a circular introducing new taxes in the FPM for 2023.
Before its introduction, the Nigerian economy faced several challenges including but not limited to low oil output, inconsistency in revenue generation from NNPC amid crude oil theft, macroeconomic uncertainty, increasing public debt, worsening budget deficit, high inflation, and low economic growth.
The Federal government has spent a considerable amount of resources servicing debt from the revenues generated leaving significant shortfall in infrastructural gaps. As at 2022, the Nigerian government’s revenue to nominal GDP was about 3%, and its budget deficit stood at N6.3 trillion.
Also, NNPC made no FAAC remittance as subsidy payments rose to N3.3 trillion; the CBN way and means advances rose to 22.7 trillion Naira excluding the public debt which stood at N46 trillion Naira as of 2022, with inflation rate reaching an all-time high recently at 22.04% as of March 2023.
Amid this macroeconomic downturn, the FPM 2023 was introduced. The factors that necessitated the introduction of the FPM range from the need to diversify the economy, reduce dependence on crude oil revenue, generate more revenues, and address the infrastructure deficit in the country.
Meanwhile, before the newly introduced taxes in the FPM, previous attempts at implementing FPM in Nigeria such as the FPM 2022, and the Value Added Tax (VAT) have been successful in generating revenue for the government, but their impact on the economy has been limited.
The new taxes introduced in the FPM include Supplementary Protection Measures (SPM), revised excise duty rates, green taxes (10%), import Adjustment Tax (2-4%), and telecommunication tax (5%). Thus, on these newly introduced taxes, the SPM will influence the importation of goods such as rice, woven fabrics, ceramics tiles, and sinks, among others.
In addition, the revised excise duty rates will increase taxes on alcoholic beverages, tobacco, wines, and spirits. The green tax will introduce excise duty on Single Use Plastics (SUPs) while the import Adjustment Tax (IAT) levy will apply to motor vehicles. The telecommunication tax will be imposed on mobile, fixed telephone, and internet services.
Meanwhile, the benefits and drawbacks of these new taxes are significant. These new taxes are expected to generate revenue for the government to improve locally made goods, and raise the economy’s manufacturing productivity, achieve sustainable climate change-resilience, and promote local production. However, the new taxes are expected to have negative effects on the economy, particularly the MSME ecosystem.
The increase in taxes on imported goods, excise duties, and the introduction of new taxes will bring about an increase in the cost of production, resulting in a decline in competitiveness, especially in the international market. The increase in the cost of production may lead to a decline in demand, resulting in a reduction in revenue, job losses, and business closures.
Over the years, in comparison with taxes in other countries across the globe, several countries ranging from the United Kingdom (UK), India, Kenya and South Africa have enacted such fiscal policy measures. In the United Kingdom (UK), the country imposed an excise tax on alcohol based on its potency, while also prohibiting single-use plastics. In India, alcohol sales contribute an increasing amount to state tax collections.
Thus, India’s state excise taxes on alcohol have been increasing at a faster rate than other revenue sources. In Kenya, the government banned single-use plastics and increased excise duty for beer. In 2021, the excise duty for beer increased from 116.08 shillings per litre to 121.85 shillings per litre. In South Africa, the government also regulated the import of used vehicles to protect the local automobile industries.
However, there are concerns regarding the introduction of the Federal Policy on Taxation for 2023 (FPM 2023) in Nigeria. Stakeholders were not consulted before its approval, policy inconsistency exists on how green taxes would be enforced, and little impact assessment was conducted on the policy’s effects. Additionally, the FPM 2022 is still in the implementation phase.
Snapshot of the FPM 2022 and FPM 2023
The Fiscal Policy Measure of 2022 increased excise taxes on imported alcoholic drinks, cigarettes, wines, and spirits by 20% to 100%, and added excise duties of 5% on postpaid and prepaid telecommunication services. It also raised tobacco ad-valorem excise rate to 30% and added a fixed sum per stick that would grow annually from 2022 through 2024.
Additionally, excise taxes on beers, stouts, wines, and spirits were raised by a specified amount per litre that applies to each item annually from 2022 to 2024. Non-alcoholic, carbonated, and sweetened beverages were assigned a tax rate of N10 per litre.
Beer and stouts will be subject to an additional 20% excise duty throughout the period. Also, the FPM of 2022 prohibited the importation of certain products from non-ECOWAS countries and imposed the Import Adjusted Tax (IAT) on 172 tariff lines.
Furthermore, the FPM of 2023 introduces new taxes on various products, including Single Use Plastics (SUP), compressed or liquefied gas containers, and automobiles with engine displacements above 2000cc. The government also introduced a green tax on single-use plastics to mitigate environmental degradation.
New excise taxes on alcoholic beverages, cigarettes, wines, and spirits have been added as of 1st June 2023, with rates ranging from a 20% to a 100% increase. The excise duty on non-alcoholic beverages remains unchanged at N10 per litre.
The changes to the FPM of 2023 took effect on 1st May with a 90-day grace period for importers who had opened form M before that date. Cars with engines under 2000cc, buses used for public transportation, electric vehicles, and automobiles made locally are excluded from the new import adjustment tax.
Impact of FPM on the Nigerian economy
The FPM 2023 is expected to have a positive impact on the Nigerian economy, such as revenue generation for the government, promotion of local production and manufacturing, mitigation of climate change, and greater employment opportunities.
On the other hand, there are also potential negative impacts of the FPM, such as increased costs for businesses and consumers, and reduced competitiveness in international markets. Albeit the effectiveness of these new taxes in achieving these objectives is dependent on some essential factors such as the effective implementation of the new taxes and the efficient use of the additional revenue generated.
Moreover, it is evident that most of the fiscal policies and potential benefits take a long time to manifest. If all these factors were put into consideration before adopting these taxes, then it is likely that these benefits will be achieved.
However, there are controversies concerning the process of the adoption and the emergence of these taxes. Some key issues and matters arising from the Fiscal Policy Measures include the lack of a specific enactment to support the Green Taxes, policy inconsistency, lack of assessment, absence of stakeholder engagement, commencement and transition arrangements, hazy design of Green Taxes, and unclear compliance requirements.
Although the new taxes in Nigeria must have been introduced to serve as a great response to the country’s economic challenges and needs, it may have some initial challenges as individuals and businesses adjust to the new tax regime. Further to this, there has been some resistance to the new taxes, particularly from small business owners and consumers who are concerned about the impact on their bottom line.
Policy measures and recommendation
The introduction of new taxes in the FPM is expected to have a significant impact on the Nigerian economy. While there are potential benefits of the new taxes, there are also challenges that need to be addressed for the FPM to be effective.
The government should conduct further cost/benefit analysis before its implementation. This policy could have negative consequences for an economy already burdened with taxes that ultimately affect the average citizen with little to no gain in terms of public good/utility. While the FPM 2023 is aimed at addressing issues such as climate change and pollution, its implementation could lead to job losses, reduced consumption, and decreased tax revenue due to reduced importation.
The Federal government should also consider the effects of the FPM 2022, in other words conduct an appraisal of the initiative to determine how helpful or pernicious it has been to the welfare of the economy before introducing a new tax policy.
While the need for increased revenue is crucial, it should not come at the cost of damaging the economy. Given the challenges already faced by the Nigerian economy due to the Naira scarcity, incessant high inflation, unemployment rate and the Russian-Ukraine conflict, the government should exercise caution when implementing tax policies at this time.
Additionally, given that governance is a continuum it is apropo for the incoming administration to take up the challenge of evaluating the FPM 2022. While new taxes can generate revenue for the government, they may also increase tax burdens for households and MSMEs, reduce disposable income, raise production costs, limit credit access, and create policy uncertainty.
Thus, the government should ensure policy measures to provide support to sectors affected by negative effects, such as tax relief or forbearance, and other forms of assistance. In addition, it should collaborate with stakeholders, conduct impact assessments, and establish clear guidelines and regulations for tax administration.
Note: The views expressed herein are those of the authors and not necessarily those of the Development Bank of Nigeria.
Professor Nnanna is chief economist, Development Bank of Nigeria