The proposed additional 20 per cent ad valorem excise tax on non-alcoholic beverages is likely to have unintended consequences on the operators and consumers of soft drinks if implemented and the federal government may have to review its position to avoid a crisis in the industry. Kunle Aderinokun reports
A crisis may be brewing in the soft drinks industry with the recent proposal of an additional 20 per cent ad-valorem excise tax on non-alcoholic beverage products by the federal government, which covers the widely consumed Carbonated Soft Drinks (CSD).
The tax increase, being planned by the government, is coming with dismay to the operators in the carbonated ’soft drinks sub-sector of the Manufacturers Association of Nigeria (MAN) and they have already raised a discomforting alarm.
Following the introduction of an earlier N10 per litre ad-valorem excise tax regime, an industry study shows a revenue decline of eight per cent and 10 per cent between June and August 2022 as a direct result of the tax regime implementation, and the decline is projected to hit -25 per cent by the end of the year, if not reviewed. This excludes the cost of write-offs of products produced, excised but not sold. With the introduction of the proposed additional 20 per cent ad-valorem tax, the collapse of the soft drink market may be imminent.
As it stands, industry sources revealed that the manufacturers are grappling with issues in their operations, a development that would lead to workers layoff, and possible shutdown of plants amidst other multiplier effects on the entire already staggering economy.
According to recent research by Proshare, a financial information news service firm, with the N10 per litre levy alone, the industry would lose revenue of N1.9 trillion in five years which may result in a 39.5 per cent decline in different government taxes such as personal income tax (PIT), corporate income tax (CIT) and value-added tax (VAT).
The belief in the industry is that the ad-valorem proposal is a negative sum play. The absence of tax incomes in subsequent years will destroy the first-year gains in the government’s tax incomes. The loss of companies’ revenues and profits is bound to lead to a reversal of foreign direct investment (FDI) and a fall in production and sales. It was gathered that one of the large carbonated soft drink producers has placed a hold on its intended added local investment of 500m Euros for 2023 in anticipation of the proposed additional 20 per cent ad-valorem tax regime.
This disturbing development has continued to generate reactions from analysts and market watchers, who predicted that a bottle of soft drinks may go as high as N600 per bottle while a bottle of beer may be sold for as high as N1,000 in the coming months.
Therefore, it was not surprising that the accompanying reaction that greeted the displeasure by the sectoral group recently assumed the status of a volcanic eruption, as the sectoral heads cried out over the harsh N10 per litre ad-valorem tax regime they are struggling with and wondered how they will cope with the proposed additional 20 per cent excise tax the federal government is planning to introduce, which may spell doom for the industry.
According to the Corporate Affairs and Sustainability Director, Nigerian Bottling Company (NBC), Ekuma Eze, the proposed additional 20 per cent excise tax would cripple the operations of companies in the soft drinks industry which has already been over-burdened with a recent N10 per litre of beverage drink produced.
Also commenting, the Director-General of MAN, Segun Ajayi-Kadir, affirmed that the new tax regime is likely to cause a 0.43 per cent contraction in output and about a 40 per cent drop in total industry revenues in the next five years. He further explained that rather than the estimated revenue increase of N.8 trillion, the directive will cause the beverage sub-sector to lose up to N1.9 trillion in sales revenue between 2022 and 2025.
“The government is estimated to generate an excise tax of N81 billion between 2022 and 2025 from the group, but this will not be sufficient to compensate the corresponding government’s revenue losses in other taxes from the group. 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,’’ he said.
In his analysis, investment and financial analyst, Olufemi Awoyemi, asserted that the new ad-valorem or percentage tax would put downward pressure on sales by an estimated -16 per cent and increase inventories of finished goods and input costs. The weighted industry average decline in volume as of the third quarter of 2022 was -10per cent. For example, investigations show that the plastic raisins needed to produce PET bottles would have increased by 40 per cent in 2022. The tax’s impact has unsettled operators’ profit margins, which have continued to be chiselled thin.
But the question is: Is the government wrong in raising tax rates?
While taxing to discourage the consumption of certain products may be persuasive, doing so to carbonated soft drinks in Nigeria is considered off-the-mark. Soft drinks consumption in Nigeria does not constitute any threat as Nigerians’ sugar consumption rate is considered the lowest in the world and it is below the globally recommended.
Corroborating this position, the Chief Economist, Proshare Limited, Teslim Shitta-Bey said: ‘’Nigeria is one of the lowest consumers of sugar on the planet. United Nations Development Planning approved 9.1 as the ideal [decent level]. Nigeria does 8, United Kingdom does 3.6 per person, United States of America does 40 per person respectively.’’ But more importantly in Nigeria, soft drinks remain the only connection for the majority poor when on the move or celebrating.
The excise tax is considered an indirect tax, meaning that the producer or seller who pays the levy to the government is expected to recover their loss by raising the price paid by the eventual buyer of the goods.
Many feared the federal government appears to be putting the non-alcoholic beverages subsector in a familiar terrain in the economy, alleging that it is taking the industry on the same path as the defunct textile, tyre manufacturing, and paper milling industries in Nigeria
Today, Nigeria, which used to boast nearly 200 textile mills, does not have up to 20 mills that are still in operation. Moreover, the sector that used to employ 500,000 workers across the nation in its heydays could no longer boast up to 20,000 workers due to the huge tax burden.
Shitta-Bay, while analysing further the effect of the proposed additional 20 per cent excise tax on soft drinks during a TV business programme, asserted that “In government policies, taxes are expected to stimulate growth and not do otherwise.”
According to him, the scale of the tax in the carbonated soft drink sector is too high. The proposed additional 20 per cent ad-valorem tax on the value of the product plus a recent N10 per litre excise tax would create difficulties for manufacturers in the sector. Albeit, the position of the government is understandable; the government has been in a tight situation in terms of its finances, so there’s rather a need for them to pursue other windows of revenue generation.
Corroborating this position, Awoyemi described the proposed ad-valorem tax as a very unwise decision that will not only leave the carbonated drinks industry and the entire economy in a conundrum but also destroy the increase in taxation that is envisaged. This means the government would see a short-term rise in revenue, but losses in subsequent years and the eventual closure of factories will result in zero tax for the government in the future.
For growth and market stability, analysts expect government and its development partners to advance tax increases with an understanding of the operational effects on the corporations and their social impact on the economy, to strike a delicate balance that would allow the soft drink manufacturers to cope adequately.
The ad-valorem tax could be done in a way that recognises the rate of economic recovery, by taxation concerning efficiency and productivity while considering the social and fiscal implications of it, which includes the timing of the tax and the rate of increase.
Interestingly, a report by Kingsley Moghalu’s Think-Tank discussed the level of poverty in the country and the social connection that exists between the people at the base and carbonated drinks. Soft drinks are used for social events such as birthdays, Christmas celebrations, and even weddings. The relative unaffordability of soft drinks as a result of the ad-valorem tax spells a frightful future for the entire polity.
Buttressing the current realities, the Multidimensional Poverty Index Report (MPI) released recently by the National Bureau of Statistics confirmed that 133 million Nigerians are poor. This suggests more than half of Nigerians are already deprived of health facilities, education, and a daily intake of food and amenities. To be realistic, a bottle of soft drink sold above N150 is a big deal for the common man and right now it is even sold above that price.