Tobacco Consumption: Why Taxation Over-taxation Could be Counter-productive

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Raheem Akingbolu writes on the need by government to seek alternative revenue generating avenues; but focusing on tobacco, a lifestyle consumable, could be counter-productive

Nigeria is in recession and uncertainties continue to dogg the country as government desperately seeks ways to pull the nation out of its economic difficulties. The price of oil, which accounts for 70 percent of government revenues and 95 percent of foreign exchange earnings, has been on a downward spiral since 2015 with inflation reaching new heights. In addition to the Gross Domestic Product (GDP) declining to 2.3 per cent in 2016 from 5.4 per cent in 2013, one of the lowest in the sub-region, the nation’s foreign reserves, though rose marginally in December 2016, is still below the reserve adequacy threshold. Moreover, the capacity of oil export to generate the needed foreign exchange for the country was further weakened by attacks on the nation’s oil facilities by the militants in 2016, which saw daily production drop to 1.1 million barrels, at some point from a projected 2.2million barrels per day.

There are other ways by which Nigeria gets its supply of foreign exchange such as non-oil exports, capital receipts including draw-down on loans, invisible receipts by the private sector, foreign tourists’ expenditure in Nigeria and repatriation of capital by Nigerians resident abroad. Over-reliance on oil has made contributions to foreign exchange by these other sources somewhat insignificant; a reason government is aggressively pushing for the diversification of the economy. Nigeria exports only primary goods which, in terms of value, cannot match imported manufactured goods.

In a bid to put the economy back on the path of growth, the Federal Government took drastic measures to conserve its foreign exchange and revive an ailing naira. Rather than succumb to pressure to devalue the naira last year, government, through the Central Bank of Nigeria (CBN), adopted stringent foreign exchange rules. It announced that it would halt dollar sales to bureau de change operators and ensure commercial banks accept dollar deposits. The apex bank also effectively banned dollar access for the purchase of 41 items to reduce the pressure on the naira. Other measures that government is pushing to mitigate the situation include promotion of import substitution, which it thought would help strengthen the naira.

Government’s decision to raise duties on luxury goods as well as food items such as rice, salt, sugarcane and beverages that have local alternatives was hailed as a step in the right direction. This is expected to protect and stimulate the local industry to growth and help government achieve its import substitution policy, which is one of the measures it hopes will increase exports and forex thereby resuscitating the economy. This new fiscal policy will see duties on luxury items such as luxury cars, yachts, sport cars, among others, rise from 20 percent to 70 percent. Also duties on food items like sugar cane and salt will rise from 10 per cent to 70 per cent; alcoholic spirit, beverages and tobacco from 20 per cent to 60 per cent; and rice from 10 per cent to 60 per cent. The measure, which is meant to incentivise the local industry, will see duties on essential accessories used in the industrial sector of the economy such as industrial oil, bolt, and other equipment cut down.

However, one item that sticks out among the list of consumables is tobacco. The reason is not farfetched. There are serious concerns often raised by health experts and civil society groups about tobacco due to health consequences for consumers. In this regard, an anti-tobacco group, Environmental Rights Action/and Friends of the Earth, ERA/FoEN, feels that the fiscal measure recently taken by government is not enough to rein in tobacco firms and ensure public wellbeing. It urged government to “immediately impose a minimum of 150 percent special levies on all tobacco products with a view to raising revenue while also reducing the consumption and the health risks that tobacco consumption poses.”

Interestingly, ERA/FoEN’s position echoes a report by the World Health Organisation, WHO, which states that “policies to control tobacco use, including tobacco tax and price increases, can generate significant government revenues for health and development work.”

High taxes on tobacco with a view to attracting higher revenue could be viewed as a low hanging fruit of government’s quest to increase its income from taxes. 

However, it can quickly become counterproductive.

Imposition of a 150 percent hike in the tax paid by tobacco companies while imports attract only 60 percent implies that imported tobacco will be more affordable than those produced in Nigeria. 

If government heeds ERA/FoEN’s call, the implications for the country are multifarious and altogether unpleasant. Any consumable, be it rice, salt, palm oil or tobacco, which is cheaper to import than produce, means then it will make no business sense to set up factories or farms to produce them. Rather, all the resources will be devoted to importation of the item. There will be an immediate impact on government revenue, and the longer term impact of factory closure and job losses will make an already bad situation worse.

The tobacco industry, just like every other industry in the manufacturing sector, is important to the nation’s economic recovery and growth. The experience of foremost tyre manufacturers, Dunlop and Michelin, and many other multinationals that have relocated to neighbouring African countries due to stifling business environment in the country is still fresh. If government fails to achieve the balance between importation and local production, via policies, not the type activated by ERA/FoEN, the country suffers.

Another point worthy of note is that there is a limit to the extent that taxes can be raised on some consumer products. Tobacco being a lifestyle product, even with incremental tax hikes on the product may do very little or nothing to dissuade people from smoking. In New Zealand, for example, where tobacco taxes have been on the increase since 2010, an anti-smoking campaigner, Marewa Glover, observed that rather than discouraging smoking, price hikes on tobacco could be having the opposite effect. She argued that there is no proof that the tobacco tax is reducing smoking in New Zealand but rather having a harmful effect on smokers and poverty in the country.

 “Tax was increasing stress on people already facing financial hardship; that could lead to more people smoking as a stress relief mechanism,” she said. Studies have shown that 80 percent of people who smoke cigarettes are low and middle income earners.

Perhaps, the greatest drawback that excessive tax on tobacco poses is that it makes smokers who cannot afford expensive, overtaxed cigarettes resort to illicit cigarettes, which are usually smuggled into the country. These products, which are often unregulated and counterfeited, rob government of its much-needed tax and attract criminal elements into local communities. Illicit activities undermine sustainability and support a range of illegitimate activities, since proceeds from illegitimate trade is often ploughed back into other criminal undertakings.

In recent years, Turkey and Ghana grappled with the menace of illicit trade in tobacco, textiles and other consumables which has eaten deep into its revenue.

For Nigeria to diversify its economy via policies such as import substitution and increased production, it makes no sense whatsoever to encourage a policy that will make imports cheaper than their local substitutes, no matter the product, be it rice, sugar, or tobacco.