How FG’s tax on carbonated drinks will affect manufacturers, consumers & economy

The year 2021 despite its challenges, will seem like a walk in the park for manufacturers who are starting the year with an additional tax burden, following a directive from the Federal Government.

Despite numerous objections and pleas by manufacturers and the organized private sector (OPS), the FG through Zainab Ahmed, Minister of Finance on Wednesday ordered that an excise duty of N10 per litre be imposed on all non-alcoholic, carbonated and sweetened beverages.

This she said will discourage excessive consumption of sugar in beverages which contributes to several health conditions and in addition, raise revenues for health-related issues and other critical expenditures.

The manufacturers’ CEOs Confidence Index (MCCI) report for the second quarter of 2021 shows that the second major problem of manufacturers is taxation and its multiplicity by government agencies.

This was affirmed by 380 chief executives of manufacturing firms (95 percent of respondents) who stated that multiple taxes and levies charged by government agencies have a depressing effect on manufacturing production.

“Apart from the approved list of taxes and levies to be charged to companies as compiled by the Joint Tax Board (JTB), there are a large number of outside taxes, levies and fees that are charged to manufacturers by the revenue-generating agencies of the government,” the report states.

Hence, the directive is dealing a huge blow to players in a sector that is currently bedevilled with numerous unending challenges and is yet to fully recover from the adverse impact of the pandemic despite its resilience, huge contribution to GDP and employment.

According to experts, Nigeria’s justification to impose excise duties on carbonated drinks makers, given the same practices in other countries, ignores the peculiarity of her economic operating environment amid inflationary pressure, dwindling income growth, weak naira, and struggling economic growth, among others, which makes the survival of companies and households threatened. Hence, the timing of such a policy is considered a bad one.

Segun Ajayi-Kadir, Director-General, Manufacturers Association of Nigeria (MAN) said introducing excise duty on non-alcoholic beverages 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 as activities and players in the affected sub-sector are bruised.

“Excise duty begets high production costs which in turn adversely affect production levels and intimately result in dwindling profits which impact sector players,” he explained.

Consequently, rather than the estimated revenue increase of N4.8 trillion, he said 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, this will not be sufficient to compensate the corresponding government’s revenue losses in other taxes from the Group,” he said.

The National Bureau of Statistics (NBS) in its Company Income Tax by sectors report for the first quarter of 2021 showed that Breweries, Bottling and Beverages generated the highest amount of CIT with N23.26 billion.

In addition to this, sector players have managed to keep the Pay As You Earn (PAYE) tax in a relatively constant position as it manages to retain employees despite challenges.

The DG warned that the over N196 billion obtained from the sub-sector through Value Added Tax (VAT) and Company Income Tax (CIT) will be affected as additional taxation will set the industry back, thereby negatively impacting businesses from a continuity standpoint.

Highlighting possible ripple effects of the directive, Ajayi-Kadir said that companies will pursue cost-cutting measures to reduce the effect of diminishing revenue and profits by reducing employee salaries or retrenching workers.

“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, will worsen the unemployment position in the country increasing social vices and poverty level,” he said.

The DG noted that the directive will also have an impact on investments as manufacturers struggle to meet investor commitments. He added that this could also hinder potential investments as the country is perceived to be a hostile business environment where private sector investments cannot thrive.

Fred Chiazo, chairman, Fruit Juice Manufacturing Group of MAN, said that introducing the Excise duty would be counterproductive to the Federal Government’s Sugar Master Plan adding that the sugar industry would be hard hit when volumes plummet as a result of the policy.

“Enforcing payment of Excise duty will significantly increase prices of the products, which will lead to an upsurge in illicit trade and counterfeiting due to substitution effect,” he said.

He urged that the current tough economic situation in the nation should see the government introduce fiscal palliatives and tax rebates instead of introducing Excise Duty collections.

In 2021, manufacturers recorded a 21 percent increase in production cost, this was evident in the rising cost of inputs and products across the board. During the year, the price of carbonated soft drinks moved from N100 to N120 and by the end of the year was N150 per bottle.

Similarly, Muda Yusuf, chief executive officer (CEO), Centre for the Promotion of Private Enterprise (CPPE) said that the directive is ill-timed and most inappropriate given the prevailing harsh economic and business conditions.

Yusuf said that Nigerian manufacturing companies, as well as investors, already stressed grappling with serious macro-economic challenges and structural constraints which are affecting sales, turnover, profitability, shareholder value, and sustainability of investment.

Read also: Nigeria’s $1.4bn soft drink market to slow on Excise Tax

“This directive has a potential negative impact on the supply chain, Millions of micro-enterprises in the soft drinks’ fruit juice distribution chain will be adversely impacted by the imposition of the excise tax,” he said.

Yusuf recommended that manufacturers, across all product segments, need a respite, especially in light of the unprecedented escalation of production and operating costs.

Speaking about the consumers, Ajayi-Kadir said in a bid to offset tax contributions and maintain profit, manufacturers will raise prices of their products to higher rates thus shifting tax incidents to consumers.

Unfortunately over the years, consumers have remained sensitive to price movement as poverty levels keep rising due to the rise in unemployment and declining household income. According to the World Bank in its November 2021 Nigeria Development Update report, 8 million Nigerians were pushed into poverty between 2020 and 2021.

Ajayi-Kadir said although Nigeria is the 6th highest consumer of soft drinks, many times, non-alcoholic beverages serve as a quick source of carbohydrates and nutrients in the absence of actual food for the average low-income earner.

“An introduction of excise could lead to an increase in price putting this food alternative out of the reach of the poor segments,” he said.

Chinyere Almona, DG, Lagos Chamber of Commerce and Industry (LCCI) said obliging to the government’s directive is unavoidable, however, to alleviate the impact of this policy, there is a need to protect local producers from unfair competition by enforcing the prohibition of imported drinks.

“We, however, recommend that the realized revenue from these levies be channelled into improving the country’s grossly inadequate health infrastructure, also the allocation to the health sector in the 2022 Federal Budget of N463bn should be reviewed upward to the region of a trillion naira invested into the sector in the next ten years,” she advised.