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 orÂ¬der to moderate the impact on prices of the affected producÂ¬ts.
A breakdown of the new tariff indicates that under the newly approved rates for tobaccÂ¬o, in addition to the 20 per cent ad-valÂ¬orem rate, each stick of cigarette will attract a N1 (N20 per pack of 20 sticks) in 2018, N2 specifÂ¬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 stoÂ¬ut, wines and spirits for the three yeaÂ¬rs 2018 to 2020. UndÂ¬er the new regime, beer and stout would atÂ¬tract N0.30k per ceÂ¬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 20Â¬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 ministeÂ¬r, is another avenue for government to generate more revenue in order to run the country effectivelÂ¬y. Since the announcemeÂ¬nt by the federal goÂ¬vernment, mixed reaÂ¬ctions have trailed the approval among operators, organised private sector and Nigerians.
Some are suppoÂ¬rting the federal government for approvÂ¬ing the new tariff rates, seeing it as an opportunity for consumers of these coÂ¬mmodities to have a rethink as it would reduce their intake due to the health hazard effect.
Many stakeholders suÂ¬ch as the organised private sector, labÂ¬our organisations amÂ¬ong others have kickÂ¬ed against the hike which is envisaged to impose untold harÂ¬dship to the manufacÂ¬turing sector in view of higher operatiÂ¬onal costs which wouÂ¬ld crumble their bus-inesses thereby sendÂ¬ing many employees jobless.
Stakeholders are alaÂ¬rmed that the planned upward review of excise duty on localÂ¬ly produced alcoholic beverages and tobaÂ¬cco, would endanger 250, 000 jobs and an investment portfolÂ¬io of about N420 bilÂ¬lion.
As ominous as these risks are, a more daÂ¬ngerous and life thÂ¬reatening possibility is the loo-ming health crisis as a result of consumÂ¬ers shifting their consumption to illicÂ¬it and local gins poÂ¬pularly called Ogororo, Kai-kai or Akpeteshi.
Recall the killer giÂ¬ns incidences in 201Â¬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 KPÂ¬MG has shown that 78Â¬.6 per cent of consÂ¬umption in the spirits market consists of low priced value products and is domiÂ¬nated by mass market and low-income consÂ¬umers.
Other findings from the KPMG study titled â€˜Excise Duty ChanÂ¬ges for Spirits and Wine in Nigeriaâ€™ indÂ¬icated that availabiÂ¬lity of spirits in small packs and bottÂ¬les has also driven growth amongst the low-income consumers and this low income segment is highly price sensitive and are likely to gravitÂ¬ate towards cheaper illicit products folÂ¬lowing sudden income or product price rises
According to EuromonÂ¬itor, in 2016, econoÂ¬mic recession drove many low income con-sumers to switch to illicit products PreÂ¬mium/ imported spirÂ¬its are mostly consuÂ¬med by upper-middle and high-income consÂ¬umers and represent 9.8 per cent of the spirits segment and less thÂ¬an one per cent of the overall alcoholic beverages industry.
The study also reveaÂ¬led a recent downward shÂ¬ift of premium consuÂ¬mers to mid-priced products due to econÂ¬omic recession. In addition, consumption of premium spirits is considered a staÂ¬tus symbol by young middle class customeÂ¬rs, who in periods of economic decline are also likely to switch from mid-priced and premium spiriÂ¬ts to other spirits or relatively lower priced alcoholic drÂ¬inks
According to KPMG, spirits and wines are more price elastic than beer, therefore significant increaÂ¬ses in excise duty rates may result in migration of consumpÂ¬tion to the illicit market. The spirits and wine price elastÂ¬icity in Nigeria is indirectly extrapolaÂ¬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 prÂ¬ice elasticity data derived from benchmÂ¬arks to extrapolate the elasticity of spÂ¬irits and wine in Nigeria using a beer price elasticity of -1.942 as the baseli-ne, KPMG noted that â€œA disproportionate excise change induced price hike may reÂ¬sult in significant switching of consumÂ¬ption to the illicit market.â€
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 (bÂ¬ased on the price elÂ¬asticity of -2.14) and this is predominaÂ¬nt in the low price segment (which reprÂ¬esents 78.65 per cent of the total volume).
There is huge potentÂ¬ial for increased illicit which has sigÂ¬nificant health risks.
In the absence of reÂ¬liable data on NigerÂ¬ia, the prevalence of unrecorded alcohol consumption in comÂ¬parative SSA countriÂ¬es like Kenya (63 per cent) and Ghana (50 per cent) sugÂ¬gest a high informal alcohol consumption potential in NigerÂ¬ia
Furthermore, in receÂ¬nt years, Nigeria has shown a high suscÂ¬eptibility to the impacts of unmitigated alcohol consumption. In 2016, there weÂ¬re a number of health cases reported by the Nigerian Press attributed to illegal consumption, produÂ¬ction or bootlegging of spirits and wine products these included:
â€¢ 5 reported incidences across 4 states in the country.
â€¢ 81 fatalities, 3 injÂ¬uries and 77 deaths were directly attriÂ¬buted to the consumpÂ¬tion of illicit gin.
â€¢ 4 deaths were also attributed to deadly fire accident relatÂ¬ing to storage of ilÂ¬licit brewed gin.
Given the challenges of border control and the illicit markÂ¬et, price increase driven by higher exciÂ¬se duty rates may reÂ¬sult in loss of govÂ¬ernment revenue, incÂ¬rease in illicit alc-ohol consumption and significant health risks.
The challenges of boÂ¬rder control presents a potential risk of increase in smuggÂ¬ling activities NigeÂ¬riaâ€™s border adminisÂ¬tration ranking is one of the least devÂ¬eloped among peer coÂ¬untries. Nigeria is ranked at 121, below Russia, Ghana, IndÂ¬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, arisÂ¬ing from a number of factors including an increase in excise duty is a risk facÂ¬tor for higher rates of smuggling from neighbouring countriÂ¬es.
â€¢ In Canada, high alcoÂ¬hol taxes has led to smuggling of alcohÂ¬olic beverages from the USA.
â€¢ In Zambia, a 60 per cent excÂ¬ise duty on alcohol made it profitable to smuggle from neig-hbouring countries. Revenue loss for legÂ¬al spirits manufactÂ¬urers amounted to US-$12 million in 2014
â€¢ In Greece, a 125 per cent exÂ¬cise hike between 20Â¬09 and 2015 fuelled smuggling, strengthÂ¬ened the black econoÂ¬my and increased tax evasion with 50 per cent decline in sales of Legal spirits The genÂ¬eral homogeneity of spirit/wine products across various couÂ¬ntries including borÂ¬der countries surroÂ¬unding Nigeria, makes Nigeria particularÂ¬ly vulnerable to smuÂ¬ggling activities.
Analysts believe that the excise duty hiÂ¬ke on wines and spiÂ¬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 regiÂ¬me would place addiÂ¬tional cost on most Excisable Products which products which could manifest in the following manners:
Additional Cost to Consumers: ManufacturÂ¬ers would naturally want to push any inÂ¬creased Excise to the consumer as indireÂ¬ct tax. However, thÂ¬is could result in declined sales which then prompt considerÂ¬ation of the impact of federal governmeÂ¬ntâ€™s additional reveÂ¬nues on each sold prÂ¬oduct vis-Ã -vis the following:
â€¢ Lost revenues arisÂ¬ing from declined saÂ¬les and/or consumer shift to the grey market i.e. the tobacÂ¬co and alcohol market which are under the radar of the FGN:
â€¢ Corporate and value added tax revenue decline due to reduÂ¬ced profits and sales respectively.
Additional cost to manufacturers: In a bid to prevent consuÂ¬mer resistance to hiÂ¬gher cost which may affect demand for ExÂ¬cisable Products, manufacturers may absÂ¬orb the additional cost to maintain currÂ¬ent sales levels. This therefore questiÂ¬ons the effectiveness of the new Excise regime because:
â€¢ Consumption would remain the same, cetÂ¬eris paribus, thereÂ¬by defeating the objÂ¬ective of imposing Excise:
â€¢ FGN shares in the burden of additional cost through corpoÂ¬rate tax deductibles resulting in reduced taxes; and
â€¢ Manufacturers may adopt cost cutting measures including job cuts, which worseÂ¬ns the current unempÂ¬loyment situation.
On the way forward, stakeholders and anaÂ¬lysts believe , is for the federal government to reverse the increase in excise duties, irrespective of whether the presÂ¬ident has signed the report that gave biÂ¬rth to them or not.
A review of the dutiÂ¬es is even more compÂ¬elling given that the wines and spiritsâ€™ producers were not taken into confidenÂ¬ce in drafting the report. They deserve an opportunity to have their say even if the government ulÂ¬timately has its way.
The producers have urges a dispassionate review of the propÂ¬osed tariff regime by the joint LegislatÂ¬ure/Executive efforts with input from and consultation with the stakeholders to avert the threatened destruction of ovÂ¬er N420 billion instÂ¬alled capacity/invesÂ¬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 ceÂ¬ntiliter which will still translate to at least 61.29 per cent increÂ¬ase over the previoÂ¬us rate, said Chief Patrick Anegbe, Chairman and Aare Fatai OdesÂ¬ile, Executive SecrÂ¬etary, DIBAN.
Baring the current infrastructural and foreign exchange chaÂ¬llenge, worsening em-ployment situation and inadequate mechanÂ¬isms for monitoring and controlling illÂ¬icit trade of tobacco and alcoholic proÂ¬ducts, the platform for an increase in Excise may currently not be robust, thus the tiÂ¬ming of the regime change may appear suÂ¬b-optimal; said ChijÂ¬oke Odo, Manager, GlÂ¬obal Trade Advisory, Deloitte.
.Ndukwe wrote from Abuja