BusinessDay

Considering Nigeria’s soft drink sector at the verge of collapse

 

The collapse of the soft drink companies in Nigeria looms as the sector is faced with the devastating effect of the recent N10 per litre excise tax on non-alcoholic beverages.

The ugly situation has led to a decline in sales and revenue, as they grapple to thrive with the N10 per litre excise tax, which has led to an average loss in volume and revenue which is put at –10 percent between June and September 2022, and estimated to reach –25 percent by the end of the year. This development will eventually lead to workers layoff, possible plant shut down and a multiplier effect on the economy.

The suffocating effect of the excise tax and its devastating consequences prompted the emergency meeting of sectoral heads of the carbonated soft drinks sub-sector of the Manufacturers Association of Nigeria (MAN) on Thursday, November 17, 2022. The sectoral group asserts that since the introduction of the N10 per litre excise tax, manufacturers and players in the sector have had to contend with a serious decline in revenue.

At the meeting, the sectoral heads cried out over the harsh ad-valorem tax they are struggling with and the proposed 20 percent excise tax the Federal Government is planning to introduce.

This, they stated, spells doom for the sector as the prevailing N10 per litre excise tax on beverage drinks is biting hard on businesses, a situation that shows that an additional tax burden will lead to the total collapse of the industry.

They pointed out that if the N10 per litre excise tax on non-alcoholic beverages is already having debilitating effects on the industry, the proposed 20 percent excise tax will ultimately lead to a collapse of the sector.

At the meeting, Ekuma Eze, corporate affairs and sustainability director, Nigerian Bottling Company (NBC), said the proposed 20 percent excise tax would cripple the operations of companies in the non-alcoholic beverage industry, which has been saddled with the already 10 percent excise tax per litre of beverage drink produced.

On the prevailing N10 per litre excise tax on CSD, the director-general, MAN, 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, but 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.

Sadly, analysts believe that this is bad news for the sector that accounts for 33 percent of the entire manufacturing industry in the country, and contributes 15 percent to the GDP of the Nigerian economy, with an annual payment of N202 billion Value Added Tax to the government and N207 billion as Company Income Tax, an enormous amount that would be lost by the Federal Government if the sector collapses.

They posit that if the proposed 20 percent excise tax is allowed, there would be a huge loss of jobs as the Nigeria Bureau of Statistics (NBS), had on record that the sector has generated 1.5 million direct and indirect jobs in the past five years.

According to them, excise tax is a good source of revenue generation by the Federal Government but if on the high side, would have dire consequences on any sector of an emerging market economy, as it will lead to the eventual collapse of the industry, compared to developed economies with the enabling environment.

They avowed that it would lead to job loss because if the companies affected do not produce at full capacity, which may contribute to the high wave of crime in the society, as well as poor infrastructural development as revenue used for projects that are accrued from taxes would be lost.

In light of the aforementioned, these analysts affirmed that the World Bank’s advice on tax regimes to raise revenue by governments in developing countries would spell doom for manufacturers and that it should be discarded.

This issue of the proposed 20 percent excise tax on non-alcoholic beverages, which would lead to a hike in the price of the popular soft drinks consumed by Nigerians, especially the low-income earners who sees them as a source of meal supplement, has sparked comments from worthy Nigerians.

It led to the recent TV interviews of Olufemi Awoyemi, founder/chairman of Proshare Limited – Nigeria’s foremost Financial Information Hub, on Monday, 21 November, 2022, on Television Continental Business News, and Teslim Teslim Shitta-Bay, managing editor of Proshare Nigeria on Today’s Business programme on Silverbird Television.

Shitta-Bay stated that “a tax is designed to create an environment for expansion, consumption, and productivity, so you need a tax that is not primitive”.

He said “the scale of the tax in the carbonated soft drink sector is too high., that the proposed 20 ad-valorem tax on the value of the product plus a recent N10 per litre excise tax will create difficulties for manufacturers in the sector.

Teslim added that sugar consumption in Nigeria is one of the lowest consumers on the planet, with 8 kilogrammes per person, while the United Kingdom records 36 kilogrammes per person and the United States of America 40 kilogrammes per person.

On his part, Awoyemi remarked that the manufacturing industry has recorded a recovery from the coronavirus pandemic, foreign exchange challenges, high cost of raw materials, high cost of technology adoption and a look at the sector shows that there have been problems over the years and the government has reacted to it in various ways, through taxation.

He said while it is good for the government to generate revenue through its tax policy, there is need for a balance to create an environment for the manufacturing companies to thrive.

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

On excise tax, the economist said he supports it for the government to do, but that 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 said 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 averred.

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.”

The Proshare analysts asserted that the new ad-valorem or percentage tax of 20 percent on carbonated soft drink products could put some revenue gains on government coffers. Howbeit, its adverse impact on the economy would outweigh the gains.

The immediate pain points would include the high unit cost of products, fall in demand, decline in corporate revenues, lower foreign direct investment (FDI), and rising job losses.

Analysts believed the tax advocates had no social impact assessment before proposing the excise tax on carbonated drinks. The one-sided narrative that considered economic justification of taxes without social impact assessment has unintended consequences.

Not limited to the carbonated soft drink sector, the Federal Government has in recent times imposed various excise taxes on commodities and services which has had adverse implications on the manufacturers, service providers, and end-users.

As part of the new tax order, the Federal Government on the recommendation of the Tariff Technical Committee of the Ministry of Finance approved increased excise duties on tobacco and alcoholic beverages in June 2018.

On tobacco, in addition to the 20 percent ad-valorem rate, a specific rate of N1(One Naira) was added to each cigarette stick, amounting to N20 per pack of 20 sticks. In 2019, the rate was increased to N2 per stick (N40 per pack of 20 sticks), and N2.90k per stick (N58 per pack of 20 sticks) in 2020.

Beer and Stout in 2018, attracted N0.30k per centilitre (“Cl”), and N0.35k per Cl in both 2019 and 2020. Excise tax on wines was increased from N1.25k per Cl in 2018 and N1.50k per Cl for both 2019 and 2020. Spirits were N1.50k per Cl in 2018, N1.75k per Cl in 2019, and N2.00k per Cl in 2020.

On 31 December 2020, the Federal Government signed into law the Finance Bill 2020 (now Finance Act 2020) which introduced amendments to 14 tax and fiscal legislations, and one of them was the inclusion of telecoms services on the list of goods liable to excise duty.

This took effect on 1 January, 2020, but raised concerns from various stakeholders about the implementation, rates, and ultimately, its effect on the Nigerian economy taking into consideration the broad coverage of telecom services in the country.

Oni is a Lagos-based entrepreneur