With Tax Hike on Tobacco, Alcohol, FG Kills Two Birds with One Stone

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The federal government has increased tariff on tobacco and alcoholic beverages as part of efforts to control their consumption, but what are the economic implications? Bamidele Famoofo reports

Economic experts have never failed to let Nigeria know that it cannot develop with oil money alone. They have consistently emphasised the key role of tax revenue in the effort to achieve economic development. Recently, at the spring meetings of the International Monetary Fund and World Bank held in Washington D.C, the organisers made it clear to Nigeria that it must widen its tax revenue base to finance growth-enhancing upgrades to the country’s infrastructure and social programmes. Obviously, the message has considerably sunk in.

In July 2017, as part of measures to improve tax collection in the country, the federal government launched the Voluntary Assets and Income Declaration Scheme. VAIDS provides an opportunity for taxpayers, who are in default to voluntarily declare their assets and income and pay taxes due on them in return for exemption from associated penalties. The scheme was in April extended to June 30 after its March 31 terminal date following appeals from organisational and individual taxpayers.

 Tobacco, Alcohol Tax

Nearly one year after the introduction of VAIDS, the federal government has announced plans to extract additional money from the manufacturers and consumers of alcoholic beverages and tobacco by means of increasing taxes on the products. In addition to a 20 per cent tax on tobacco, the government says it will add an extra fixed tax per cigarette. And a percentage tax on alcoholic beverages will be replaced by taxes of fixed amounts based on volume.

According to the Ministry of Finance, the move would have “a dual benefit of raising the government’s fiscal revenues and reducing the health hazards associated with tobacco-related diseases and alcohol abuse.”

The ministry said the new regime was in line with a directive from the Economic Community of West African States regional bloc on the harmonisation of member-states’ legislations on excise duties.

 Reaction

While some Nigerians have argued that raising duties in Nigeria for alcohol could further hit consumer demand amid fragile growth, others said it would help the country to grow its revenue.

PricewaterhouseCoopers Limited said it was clear that government was looking for various means to generate more tax revenue. The international consulting firm, however, noted that the choice of products affected by the new review suggested that government wanted to avoid imposition of duties on necessities and basic products, which may affect the wider population.

PwC hinted that the new tax was regressive given that it imposed relatively lower burden on premium products.

Manager Global Trade Advisory, Deloitte, Chijoke Odo, said reviewing the excise regime was long overdue, as tax was not static and should evolve as trends and economic situations change. Odo, however, cautioned that the excise regime should have undergone numerous reviews based on actual changes in the economy over time, evolving health and environmental findings, and perceived challenges with administration.

Revenue Target

Apart from expecting the new tax regime on alcoholic beverages and tobacco to make more money available to government to aid growth in the recuperating economy, no specific financial target has been disclosed by the government. But economic experts said the new tax regime had the potential to change Nigeria’s status from the least country with tax to gross domestic product ratio in the world.   Nigeria’s tax to GDP ratio is estimated to be six per cent, the lowest in the world at the moment.

“The National Tax Policy has continually advocated a shift from direct to indirect taxes, which are easier to collect and administer, thereby making evasion difficult. On this premise, it is believed that a shift of focus to indirect tax would significantly improve Nigeria’s tax to gross domestic product ratio,” Odo said.

 

Impact

From a consumer perspective, experts said the incidence of tax was higher on the poor. “This is because it is inflationary, reduces consumer disposable income and distorts the allocation of resources,” Financial Derivatives Company stated. “Besides, imposing higher taxes could encourage smuggling activities, as well as tax evasion.” 

Experts have also argued that the leading brewers and distillers, such as Nigerian Breweries, Guinness Nigeria, and International Breweries, will be the biggest losers, as many of them have embarked on aggressive expansion plans in anticipation of a pickup in demand. This would intensify competitive rivalry among the players and further erode margins.

However, given that the tax imposed on alcoholic beverages is a regressive tax, as opposed to the previous ad valorem regime, value brands will be hit the most, due to their lower prices, experts say. Either way, the industry is likely to face a most challenging period in the next three to four quarters.

Manufacturers have, therefore, kicked against the increase and the timing, as most are just recovering from a negative profitability and revenue contraction. “Ideally, a counter cyclical policy direction that would ensure injection into the system would have been more appropriate. However, taxes are withdrawals and the increase in excise duty is likely to reduce margins and could prompt higher unemployment,” an industry expert, who did not want to be named, argued.

 Gain

Minister of Health, Professor Isaac Adewole, on the occasion of ‘World No Tobacco Day’ celebrated in Abuja recently was confident that the new tax regime would curb the menace of tobacco-related diseases, which he said cost the country about $7.6 billion in 2015 alone. “Let me draw attention to the fact that tobacco use is responsible for huge economic losses emanating from both direct and indirect medical costs,” Adewole said. “It is estimated that Nigeria loses $800 million annually to stroke, heart disease and diabetes. In 2015, the projected accumulated loss to tobacco was put at $7.6 billion.”

The minister noted that for every $1 gained from tobacco business, about $3 was expended on healthcare cost, stressing that the tobacco industry makes huge profit without taking responsibility for the harm they do to public health. He disclosed that over 20 billion sticks of cigarettes were consumed annually in Nigeria.

Adewole also said 4.5 million adults currently used tobacco products, while about 82 per cent of people who visit bars and nightclubs were exposed to second-hand smoke.

Speaking on the trending shisha (flavoured tobacco) among young Nigerians, Adewole said the country would not accept tobacco consumption in whatever disguise, as there is a need to protect the future of the country.

“A key outcome of this review was the ban on all characterising flavours, including the addition of menthol into tobacco products. This decision is to protect our children from getting enticed by flavoured tobacco products. Let me stress that the ban on tobacco products with characterising flavour is still in place and the ban includes shisha because it has flavour,” he said.

In his speech at the event, the World Health Organisation country representative, Wondi Alemu, said tobacco control was one of the most effective means to achieve Sustainable Development Goals, which target reduction by one third premature deaths from non-communicable diseases by 2030. Alemu said the elimination of tobacco use will help to prevent millions of people dying from non-communicable diseases.

“On average, tobacco users lose 15 years of life. In the African region, about 146,000 adults, aged 30 years and above, die every year from tobacco related diseases,” he said.

Health Risks

According to experts, second-hand smoke poses serious health risks worldwide, especially among infants. In fact, exposure to second-hand smoke is one of the leading causes of preventable deaths.

A recent study published in the Journal of American Medical Association said smoking caused more than 80 per cent of lung cancer deaths as well as 77 per cent of larynx cancer deaths.

According to data published on the American cancer society website, tobacco use accounts for 87 per cent of lung cancer deaths in men and 70 per cent of lung cancer deaths in women.

Nigeria targets economic, health, and socials gains from its latest increase in tax on tobacco and alcoholic products.