THE Federal Government disconcerted the business community afresh by slamming a new excise duty on carbonated and sweetened beverages as it desperately seeks to raise revenue and tackle health challenges associated with the consumption of sugar-sweetened drinks. Embedded in the Finance Act 2021 signed into law in December by the President, Major-General Muhammadu Buhari (retd.), the N10 per litre levy is a new burden on producers, and portends additional job losses, production cutbacks and eventually, lower tax revenues. As the economy battles to recover from furious headwinds, joblessness and mass poverty, the productive sectors require incentives, not extra tax burdens.
Imposed as the economy grapples with the impact of the COVID-19 pandemic and the recession that it precipitated, the tax, as expected, provoked sharp criticism from the organised private sector.
The government however considers it necessary. As explained by the Minister of Finance, Budget and National Planning, Zainab Ahmed, “This is to discourage excessive consumption of sugar in beverages, which contributes to a number of health conditions, including diabetes and obesity. But it is also used to raise excise duties and revenues for health-related and other critical expenditures. This is in line also with the 2022 budget priorities.”
While the avowed motive appears laudable, the approach is ill-considered. It will only compound the economic woes currently facing businesses and households.
Carbonated beverages, or ‘soft drinks’, are non-alcoholic drinks that contain carbonated water, sweeteners, natural or artificial flavouring; the sweetener is usually sugar, high fructose corn syrup, fruit juice. MarketWatch estimated the global soft drinks market to be worth $1.59 trillion in 2020 and projected to grow by 9.31 per cent by 2027. It is also a major driver of employment, exports, and tax revenues.
In Nigeria, it is no less important. According to Statista.com, in terms of revenue from soft drinks, the country ranked sixth worldwide in 2020, generating revenues of $18.15 billion after the United States ($270.41 billion), Japan (56.34 billion), China ($43.06 billion), the United Kingdom ($30.01 billion), and Germany ($23.25 billion). Grouped under the country’s Food and Beverages sector that contributes 22.5 per cent to manufacturing value and 4.6 per cent to GDP, the World Trade Organisation ranks Nigeria highest in Africa in terms of investment in the local F & B industry and imports.
With a 33.3 per cent unemployment rate, low export revenues and factory closures, the excise duty – a tax on production, licensing, and sale – is ill-timed, and counter-productive. The government hinges its move on health grounds, and to raise cash amidst diminishing revenues, higher costs of running government and prohibitive debt servicing obligations.
On the latter, it misses its way completely; you do not impose taxes on sectors that generate jobs, productive activities, and exports in a time of economic contraction. On the contrary, you provide incentives to keep the factories humming, supply chains going, and to sustain jobs. To protect SMEs following the coronavirus crisis, the World Bank said 151 of the 845 policy instruments adopted by governments around the world related to tax relaxation measures, and 205 to employment support.
A report commissioned by the Manufacturers Association of Nigeria pointed out that while the duty could rake in N81 billion for the government 2022-2025, it would likely lose about N197 billion from other taxes, including VAT, and Companies Income Tax. MAN fears the beverage sub-sector could lose N1.9 trillion in sales earnings, with attendant job lay-offs and adverse effects on supply chain businesses. Labour unions claim the F&B sector generated N200 billion as VAT in the last five years, and provided 1.5 million jobs. Over 15,000 workers could immediately lose their jobs, they added. One report cites 15 major manufacturers operating in the country and many smaller ones churning out about 100 soft drink brands.
The Buhari regime unwisely disdains stakeholder input and often fails to consider the long-term impact of its capricious policies. It should defer this tax until the economy turns the corner and begins to record impactful growth.
The Nigerian Employers’ Consultative Assembly recalled that in 2009 during the global financial crisis, excise duties on carbonated drinks here were suspended to aid businesses. It noted that the situation that necessitated the suspension of the excise then had not abated, but “in fact, businesses currently face greater hardship than what obtained in 2009.” The tax, adds PwC, could result in a five per cent increase in the market prices of lower-end products.
The government stands on firmer ground when it cites health concerns arising from high consumption of carbonated drinks. Over-consumption has been found to carry risks of obesity, type-2 diabetes, dental decay, and low nutrient levels. In response, globally, governments have deployed a raft of regulatory measures, including curbs on advertising, exposure of messages to children, legislation on sugar content, bans and taxation. European Union countries strictly regulate the sugar content in drinks, restrict certain media messages targeted at children, and jointly fund wellness programmes with operators and NGOs. Arguments rage over imposing taxes in the US, and the UK, but most countries avoid this, opting for regulating content and marketing. This is the best option for Nigeria currently. Any additional tax should be deferred to allow the economy to recover.
To raise cash, the government should block the massive leakages, compel its agencies to remit all revenues, privatise state-owned commercial assets, liberalise critical sectors, and curtail corruption. Also, cut the cost of governance, slash the number of MDAs, and reduce the size of the Presidential Air Fleet. Luxury goods should be heavily taxed instead.
The government should rather impose, specify – and enforce – sugar limits on carbonated beverages. The economy is too fragile to absorb sudden tax levies. Crucially, new policies that will add to costs should be announced at least two years ahead of implementation date. The “immediate effect” reflex carried over from the military era is crude and disruptive. The regime should be more business-friendly and consult widely with all stakeholders and the OPS in devising economic policies.