New Excise Duty on Alcohol and Looming Health Crisis from Ogogoro, Kai-kai Consumption

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Amadi Ndukwe

With dwindling revenue from oil, increase in government indebtedness and ballooning budget deficit at the federal level, it has become imperative for the government to look at other options for revenue generation.

One sector of the economy which the federal government has decided to tap into for additional income is the tobacco and alcoholic beverage sub-sector, which will have new excise duty rates with effect from June 4, 2018.

The new policy initiative was announced by the Minister of Finance, Mrs. Kemi Adeosun, in March.
She noted that the new rates were spread over a three-year period beginning from 2018 to 2020 in or¬der to moderate the impact on prices of the affected produc¬ts.

A breakdown of the new tariff indicates that under the newly approved rates for tobacc¬o, in addition to the 20 per cent ad-val¬orem rate, each stick of cigarette will attract a N1 (N20 per pack of 20 sticks) in 2018, N2 specif¬ic rate per stick (N40 per pack of 20 sticks) in 2019 and N2.90k specific rate per stick (N58 per pack of 20 sticks) in 2020.

The new rates for alcoholic beverages cut across beer and sto¬ut, wines and spirits for the three yea¬rs 2018 to 2020. Und¬er the new regime, beer and stout would at¬tract N0.30k per ce¬ntiliter (Cl) in 2018 and N0.35k per Cl each in 2019 and 2020.

Wines would attract N1.25k per Cl in 2018 and N1.50k per Cl each in 2019 and 20¬20, while N1.50k per Cl was approved for Spirits in 2018, N1.75k per Cl in 2019 and N2.00k per Cl in 2020.

This, to the ministe¬r, is another avenue for government to generate more revenue in order to run the country effectivel¬y. Since the announceme¬nt by the federal go¬vernment, mixed rea¬ctions have trailed the approval among operators, organised private sector and Nigerians.

Some are suppo¬rting the federal government for approv¬ing the new tariff rates, seeing it as an opportunity for consumers of these co¬mmodities to have a rethink as it would reduce their intake due to the health hazard effect.

Many stakeholders su¬ch as the organised private sector, lab¬our organisations am¬ong others have kick¬ed against the hike which is envisaged to impose untold har¬dship to the manufac¬turing sector in view of higher operati¬onal costs which wou¬ld crumble their bus-inesses thereby send¬ing many employees jobless.

Stakeholders are ala¬rmed that the planned upward review of excise duty on local¬ly produced alcoholic beverages and toba¬cco, would endanger 250, 000 jobs and an investment portfol¬io of about N420 bil¬lion.

As ominous as these risks are, a more da¬ngerous and life th¬reatening possibility is the loo-ming health crisis as a result of consum¬ers shifting their consumption to illic¬it and local gins po¬pularly called Ogororo, Kai-kai or Akpeteshi.

Recall the killer gi¬ns incidences in 201¬5? Over 100 persons reportedly died in various parts of the country following consumption of locally brewed Ogororo, Kai-kai or Akpeteshi.

A recent study by KP¬MG has shown that 78¬.6 per cent of cons¬umption in the spirits market consists of low priced value products and is domi¬nated by mass market and low-income cons¬umers.

Other findings from the KPMG study titled ‘Excise Duty Chan¬ges for Spirits and Wine in Nigeria’ ind¬icated that availabi¬lity of spirits in small packs and bott¬les has also driven growth amongst the low-income consumers and this low income segment is highly price sensitive and are likely to gravit¬ate towards cheaper illicit products fol¬lowing sudden income or product price rises

According to Euromon¬itor, in 2016, econo¬mic recession drove many low income con-sumers to switch to illicit products Pre¬mium/ imported spir¬its are mostly consu¬med by upper-middle and high-income cons¬umers and represent 9.8 per cent of the spirits segment and less th¬an one per cent of the overall alcoholic beverages industry.

The study also revea¬led a recent downward sh¬ift of premium consu¬mers to mid-priced products due to econ¬omic recession. In addition, consumption of premium spirits is considered a sta¬tus symbol by young middle class custome¬rs, who in periods of economic decline are also likely to switch from mid-priced and premium spiri¬ts to other spirits or relatively lower priced alcoholic dr¬inks

According to KPMG, spirits and wines are more price elastic than beer, therefore significant increa¬ses in excise duty rates may result in migration of consump¬tion to the illicit market. The spirits and wine price elast¬icity in Nigeria is indirectly extrapola¬ted to be -2.14 and -2.09 respectively.

Analysis of data from benchmark countries shows: that average beer-spirit price elasticity margin is -0.21 while average beer-wine price elasticity margin is -0.151.

Using the average pr¬ice elasticity data derived from benchm¬arks to extrapolate the elasticity of sp¬irits and wine in Nigeria using a beer price elasticity of -1.942 as the baseli-ne, KPMG noted that “A disproportionate excise change induced price hike may re¬sult in significant switching of consum¬ption to the illicit market.”

Accordingly, a change in excise from an estimated 613 kobo per cl to NGN 2 per cl will result in a 19 per cent increase in price while a 19 per cent increase in price will result in a 41 per cent decline in volume (b¬ased on the price el¬asticity of -2.14) and this is predomina¬nt in the low price segment (which repr¬esents 78.65 per cent of the total volume).

There is huge potent¬ial for increased illicit which has sig¬nificant health risks.

In the absence of re¬liable data on Niger¬ia, the prevalence of unrecorded alcohol consumption in com¬parative SSA countri¬es like Kenya (63 per cent) and Ghana (50 per cent) sug¬gest a high informal alcohol consumption potential in Niger¬ia

Furthermore, in rece¬nt years, Nigeria has shown a high susc¬eptibility to the impacts of unmitigated alcohol consumption. In 2016, there we¬re a number of health cases reported by the Nigerian Press attributed to illegal consumption, produ¬ction or bootlegging of spirits and wine products these included:

• 5 reported incidences across 4 states in the country.

• 81 fatalities, 3 inj¬uries and 77 deaths were directly attri¬buted to the consump¬tion of illicit gin.

• 4 deaths were also attributed to deadly fire accident relat¬ing to storage of il¬licit brewed gin.

Given the challenges of border control and the illicit mark¬et, price increase driven by higher exci¬se duty rates may re¬sult in loss of gov¬ernment revenue, inc¬rease in illicit alc-ohol consumption and significant health risks.

The challenges of bo¬rder control presents a potential risk of increase in smugg¬ling activities Nige¬ria’s border adminis¬tration ranking is one of the least dev¬eloped among peer co¬untries. Nigeria is ranked at 121, below Russia, Ghana, Ind¬onesia, Kenya, South Africa, Turkey etc. Excise duty rate on spirits and wine for border countries to Nigeria, ranges from 25 per cent in Chad to 45 per cent in Niger.

Price increase, aris¬ing from a number of factors including an increase in excise duty is a risk fac¬tor for higher rates of smuggling from neighbouring countri¬es.

• In Canada, high alco¬hol taxes has led to smuggling of alcoh¬olic beverages from the USA.

• In Zambia, a 60 per cent exc¬ise duty on alcohol made it profitable to smuggle from neig-hbouring countries. Revenue loss for leg¬al spirits manufact¬urers amounted to US-$12 million in 2014

• In Greece, a 125 per cent ex¬cise hike between 20¬09 and 2015 fuelled smuggling, strength¬ened the black econo¬my and increased tax evasion with 50 per cent decline in sales of Legal spirits The gen¬eral homogeneity of spirit/wine products across various cou¬ntries including bor¬der countries surro¬unding Nigeria, makes Nigeria particular¬ly vulnerable to smu¬ggling activities.

Analysts believe that the excise duty hi¬ke on wines and spi¬rits poses more dire consequences for the country in view of the health crisis it portends hence the need to handle it with utmost care.
Needless to say that the new Excise regi¬me would place addi¬tional cost on most Excisable Products which products which could manifest in the following manners:

Additional Cost to Consumers: Manufactur¬ers would naturally want to push any in¬creased Excise to the consumer as indire¬ct tax. However, th¬is could result in declined sales which then prompt consider¬ation of the impact of federal governme¬nt’s additional reve¬nues on each sold pr¬oduct vis-à-vis the following:

• Lost revenues aris¬ing from declined sa¬les and/or consumer shift to the grey market i.e. the tobac¬co and alcohol market which are under the radar of the FGN:

• Corporate and value added tax revenue decline due to redu¬ced profits and sales respectively.
Additional cost to manufacturers: In a bid to prevent consu¬mer resistance to hi¬gher cost which may affect demand for Ex¬cisable Products, manufacturers may abs¬orb the additional cost to maintain curr¬ent sales levels. This therefore questi¬ons the effectiveness of the new Excise regime because:

• Consumption would remain the same, cet¬eris paribus, there¬by defeating the obj¬ective of imposing Excise:

• FGN shares in the burden of additional cost through corpo¬rate tax deductibles resulting in reduced taxes; and

• Manufacturers may adopt cost cutting measures including job cuts, which worse¬ns the current unemp¬loyment situation.

On the way forward, stakeholders and ana¬lysts believe , is for the federal government to reverse the increase in excise duties, irrespective of whether the pres¬ident has signed the report that gave bi¬rth to them or not.

A review of the duti¬es is even more comp¬elling given that the wines and spirits’ producers were not taken into confiden¬ce in drafting the report. They deserve an opportunity to have their say even if the government ul¬timately has its way.

The producers have urges a dispassionate review of the prop¬osed tariff regime by the joint Legislat¬ure/Executive efforts with input from and consultation with the stakeholders to avert the threatened destruction of ov¬er N420 billion inst¬alled capacity/inves¬tment in the Sector and a reversal of the increase and the pegging of the new excise tariff to a ma-ximum of 50k per ce¬ntiliter which will still translate to at least 61.29 per cent incre¬ase over the previo¬us rate, said Chief Patrick Anegbe, Chairman and Aare Fatai Odes¬ile, Executive Secr¬etary, DIBAN.

Baring the current infrastructural and foreign exchange cha¬llenge, worsening em-ployment situation and inadequate mechan¬isms for monitoring and controlling ill¬icit trade of tobacco and alcoholic pro¬ducts, the platform for an increase in Excise may currently not be robust, thus the ti¬ming of the regime change may appear su¬b-optimal; said Chij¬oke Odo, Manager, Gl¬obal Trade Advisory, Deloitte.
.Ndukwe wrote from Abuja