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Excise duties hike: an inadvertent drive for revenue generation?

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In difficult economic situations, government and policy makers are faced with various policy options. These may include increasing taxes on luxury and lifestyle goods, while encouraging the local production of staples and other consumables, particularly those for which the country has comparative advantage. On the other hand, cheap imports could be allowed into the country to halt escalating prices of goods, in the interim, thereby destroying local jobs and compounding the economic woes. Another option could be to hike import tariffs or remove import incentives to protect local industries and jobs while ensuring the long-term growth and prosperity of the country.

Confronted with a similar scenario, when the nation was grappling with foreign exchange crisis, the Central Bank of Nigeria (CBN) in June 2015 listed 41 items, including toothpicks, cosmetics, plastic, rubber products vegetable oil and poultry products as ineligible for foreign exchange access. The reason given by the apex bank for the decision was to encourage the local manufacturing of goods as a way to boost foreign exchange earnings. Few other economic measures were also taken as the nation slid into recession in August 2016, notably the establishment of the investors’ and exporters’ forex window for investors, exporters and end-users in April 2017 to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.

The Director, Financial Policy and Regulation Department, of the CBN, Mr. Kevin Amugo, in a recent letter addressed to all banks, explained that the decision to restrict forex to the 41 items in 2015, resulted in employment generation and inclusive growth in the country as evident in massive investments and the establishment of cottage industries nationwide that now produce the 41 restricted items. In a related development, the CBN governor, Godwin Emefiele, at a recent public function, also stated that Nigeria’s monthly import bill has fallen significantly from $665.4 million in January 2015, to $160.4 million as of October 2018, representing a drop by 75.9 per cent and an implied savings of over $21 billion on food imports alone over that period.
It is not, however, the same story for a recent policy thrust which was primarily aimed at boosting revenue for government. In March 2018, the Federal Government approved increases in the excise rates on alcoholic beverages and tobacco products with effect from June 4, 2018. The decision followed the adoption of the recommendation of the Tariff Technical Committee of the Federal Government. This was borne out of government’s conviction that taxation would serve as a potent tool in regulating the consumption of the commodities while at the same time increase the revenues accruable to government.

Stakeholders have kicked against its implementation, citing various reasons, and in less than a year into the new excise regime, things seem to have come to a head.
At a public hearing organised by the Senate in July 2018, the Manufacturers Association of Nigeria (MAN) lamented that the increase would give more competitive advantage to foreign products and insulate them from the harsh effect of the increment.

Describing the increment, which it said stands at 500 per cent, as “outrageous”, MAN stated that “if the new rate is fully implemented after the three years incremental period, it is believed that a number of the local manufacturers will have no other option but to suspend operation.”
MAN suggested that 35 per cent increment at maximum should be implemented by the government, noting that it would guarantee the survival of the industry rather than 500 per cent increment, which it claimed would worsen the situation in the entire industry.

The Senate, therefore, intervened following the adoption of the report of the Senate Committee on Finance. The upper legislative house asked the Federal Government to suspend its plan to hike excise tariff on alcoholic beverages and tobacco products pending consultation with all critical stakeholders. It noted that affected companies not capable of coping with the new rate might be compelled to close shop and relocate to neighbouring countries with favourable taxation policies. The Senate rather adopted an increase of not more than 50 percent, citing the need to boost revenue generation and increase the import duties of foreign alcoholic beverages and tobacco products in a bid to protect indigenous companies.

It is noteworthy that the tobacco taxation policies across Africa, in recent years, have largely been uniform and robust. These policies have mostly been formulated both at national level and at the level of sub-regional economic blocs. ECOWAS member states took a decisive step in tobacco regulation in November 2017 when the ECOWAS Financial Council of Ministers in Abuja announced a plan to increase and harmonize excise duties on tobacco in a bid to boost revenue and reduce consumption of the product in the sub-region; and Nigeria has since endeavoured to align its tobacco policies to the plan.

Similar alcoholic beverage tax initiatives have been seen more at national levels among African countries. South Africa, for example, applies a transparent alcohol excise duty rate structure that differentiates between alcoholic beverages. Regulators in the country note that besides revenue raising objectives the rationale for excise taxes on alcoholic beverages is to reflect their harmful external cost.

However, experts reckon that considering the seemingly inelastic demand for these consumables excess taxation and annual tax increments will inadvertently fuel illicit trade as majority of the low-end consumers resort to the black market for cheaper, unregulated alcoholic drinks.
Cigarettes and alcoholic beverages are among the most smuggled and illicitly traded goods in the world. What this implies is that government loses more revenue due to illicit dealers in these commodities. Tariff hike invariably aggravate the problem of illicit trade, which is currently plaguing most economies on the continent and has been a constant source of worry for ECOWAS and other regional economic blocs in Africa.

In dealing with tobacco and alcoholic beverages, a careful balance between import tariff and excise duties is recommended. The World Customs Organisation 2014 report noted that the best policy that has the potential to minimise illicit trade is to make importation of these consumables unattractive, drive full enforcement of existing laws, prosecute offenders as well as collaborate with customs organizations in neighbouring countries. It is also imperative to engage in impactful mass communication.

It is hoped that this delicate balance will be achieved when the review of tariffs, as recommended by the Senate, is eventually effected.

 

 

Akinremi Sobowale
Sobowale sent his piece from Lagos

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