How fresh consumption tax will remove food-drinks from menu list

The clear and present danger is that if the planned 20 % consumption tax being mooted by the federal government sails through the prices of food-drinks will further hit the rooftop just as other commanding heights of the economy will suffer dire consequences. Ibrahim Apekhade Yusuf in this report examines the issues.

Hitherto, if you are out in the scorching sun and feel highly dehydrated, the next best thing you would ordinarily think of is to get a bottle of an icily cold fizzy and non-alcoholic beverage to quench your taste, especially if you are teetotaler. But simple as this craving may seem it will soon become a luxury you enjoy at such a great cost henceforth as the average price of a soft drink like a 50CL coke or similar brands for that matter may go up as high as N1, 000. Yes you heard right!

Unlike in the recent past, you don’t need to break your bank. With as little as N200 max, you can get any non-alcoholic drink of your choice.

Crux of the matter

The Federal Government has hinted of plans to introduce 20 per cent Ad-valorem Excise Tax on Non-Alcoholic Beverages which covers the widely consumed Carbonated Soft Drinks [CSD] segment. This planned increase is coming at a time the sector is yet to come to grip with the effect of the prevailing N10 per litre tax regime is already crippling the sector with its biting effects on their businesses.

Industry study already indicates the impacts of the prevailing N10 per litre excise tax effect between June and August 2022 shows a – 8% revenue decline as a direct result of excise tax implementation.

The proposed 20% excise tax hotly debated by the tax authorities may signal the end of the carbonated soft drinks sub-sector, experts have argued.

According to economic analysts, it is projected that the decline will hit –25% by December 2022 if not reviewed. This excludes the cost of write-offs of products produced, excised but not sold. With the proposed 20% Ad-valorem tax introduction, the collapse of the soft drink market is imminent. This will be catastrophic as thousands of jobs will be affected and the ultimate aim of the government in collecting revenue will be completely defeated.

“’Most certainly the additional 20 per cent will not only kill the sector but result in the loss of revenue by the Federal Government, and a consequential phenomenal loss of jobs by various layers of the Nigerian workforce.’’

This sectoral distressed position was laid bare recently by the Soft Drinks Manufacturers Sub-sector of the Manufacturers Association of Nigeria [MAN], which accounts for 33 per cent of the entire manufacturing sector in Nigeria.

For instance, on the prevailing N10 per litre excise tax on CSD, the Director-General, Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, affirmed that the new tax regime is likely to cause a 0.43 percent contraction in output and about a 40 percent drop in total industry revenues in the next five years.

He explained that rather than the estimated revenue increase of N4.8 trillion, the directive will cause the beverage sub-sector to lose up to N1.9 trillion in sales revenue between 2022-2025.

“The government is estimated to generate an excise tax of N81 billion between 2022 and 2025 from the group, 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.

ABC of Ad valorem tax

“The principle about ad valorem tax is that it a tax of productivity. If they are not doing well, you cannot tax negative productivity. Ad valorem tax is usually a situation where you discover your economic recovery cost is doing well and you now take tax to extract it from the increase in value and not from a declining value,” explained Obi Nwachukwu.

Sadly, there is news of a proposed 20 percent ad-valorem tax on non-alcoholic beverages which prompted the sectoral heads of the CSD sub-sector of the Manufacturers Association of Nigeria [MAN] to cry out, condemning it in its totality as it will lead to the eventual collapse of the sector.

Interestingly, the manufacturing industry contributes 15 per cent to the Gross Domestic Product (GDP) of the Nigerian economy, while the food and beverage sector contributes 5 per cent, and with a payment of N202billion to the government on Value Added Tax (VAT), and N207 Billion in Company Income Tax, an enormous amount that would be lost by the Federal Government if the sector is allowed to collapse, which will have a multiplier effect on infrastructural development and growth of the already troubled economy.

The Nigeria Bureau of Statistics (NBS), the food and beverage division of the economy in the last five years generated 1.5 million jobs, both direct and indirect, and it was from 2020 to date, that some companies in the sector strived to pay Minimum Tax, which is a pointer to the fact that the business climate is deteriorating, as the companies are finding it difficult to carry out their operations effectively.

There is evidence that the current N10 per litre excise tax on non-alcoholic beverages is ravaging the sector as the companies pay N10 for every litre of beverage produced, whether or not sold.

Speaking at the meeting with one voice, the sectoral heads decry the devastating effects of the N10 per litre tax, which has become burdensome with the high cost of operation in the country and its constituent elements. This is already having devastating effects on the end cost to consumers, considering their poor economic condition; an additional 20 per cent will most certainly kill the sector.

They, therefore, called for the suspension of the catastrophic excise tax being proposed by the Federal government to forestall the collapse of the industry.

Corroborating this position, Ekuma Eze, Corporate Affairs and Sustainability Director, Nigerian Bottling Company (NBC) pointed out that the N10 per litre currently in practice has no bearing on profitability for any of the members of the sectoral group.

He stated that since the introduction of the N10 per litre Excise Tax, businesses in the sector have been experiencing a worrisome decline, the average loss in volume and revenue is -10 per cent between June to September 2022, and it is estimated that the decline will further worsen to -25 per cent by December 2022.

Who pays consumption taxes?

A consumption tax is a tax on what people spend, rather than what people earn. This ensures that the tax code is neutral with respect to current and future consumption, and that the income is only taxed once. A consumption tax system would shift the time of collection from when money is earned to when money is spent.

The President of Chartered Institute of Taxation Nigeria (CITN), Adeshina Adedayo, explained that Consumption Tax is paid upon consumption of goods and services in an economy. “It is an indirect tax. One must purchase a good or service to pay the tax. In actuality, there is hardly anyone that does not make purchases; hence it is inescapable. It is the generic name for taxes imposed on sales, tariffs, and excise, with respect to goods and services.”

On whether Consumption tax and Valued Added Tax (VAT) can be applied to the same goods or services, he said it is possible, though it will amount to double taxation. “For instance, the Hotel Occupancy and Restaurants Consumption Tax of Lagos State is a Consumption Tax for which event centres, hotels and restaurants pay five per cent to Lagos government. The same entities pay 7.5 per cent to Federal Inland Revenue Services (FIRS) as Value Added Tax, making it a total Consumption Tax of 12.5 per cent. There are arguments by some persons that the two are different, but I think it is just semantics.”

Responding to those querying the moral aspect of the development, , he said unfortunately, morality has no place in taxation, which is firmly rooted in the legal space, and not in the realm of moral rectitude. “As an Institute, CITN follows the law wherever it leads us,” Adedayo stated.

Providing insight on what Consumption tax is, the Social Mobilisation Manager, ActionAid, Mr. Adewale Adeduntan defined Consumption tax as one imposed on goods, services, and other items sold, exchanged, or utilised. He noted that unlike income taxes, which are imposed on earnings, including savings, consumption taxes are imposed basically on consumables.

He said: “Consumption taxes can come in many forms. The most common forms are “indirect” taxes, such as retail sales tax, or value added tax. Consumption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage. The Hotel Occupancy and Restaurant Consumption Tax Law, for instance, imposes a five per cent tax on goods and services consumed in hotels, event centres and restaurants within Lagos State.

“These include food, drinks, consumables, rental accommodation, and other transactions. Notably, consumption taxes are regressive, as both the rich and poor pay the same rate. Good tax systems emphasise less on consumption taxes and more on income, profit, and wealth taxes, which are known as direct taxes.

He explained that VAT tax is a consumption tax, as it is ultimately borne y by the final consumer. “Essentially, everybody pays Value Added Tax because we are all consumers of different goods and services. It is not a charge on businesses paid to the revenue authorities by the seller of the goods, who is the “taxable person.” Rather, it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax. Thus, Consumption tax is borne by any person, corporate or otherwise who pays for the use or possession of any hotel facilities, consumables, or personal supplies to consumers by or on behalf of the hotel, restaurant, and event centres. The owners and operators of hotels, event centres and restaurants are regarded as collecting agent for the government.”

So, is it proper to take both Consumption tax and VAT on the same product or service? He stated that it is already happening and will continue to happen, if the framework for the administration of tax is not critically defined to address areas of such overlap.

“The FIRS is still collecting VAT and similarly, in the exercise of its fiscal legislative powers, Lagos State government has also enacted and imposed tax on the consumption of services and goods arising from hotels, event centres and restaurants. The tax, as stated earlier, is levied on the food, drinks, consumables, rental accommodation and other transactions in the hotel facility or event centres and restaurants. It is important to note that this is excluding VAT and other service charges. Thus, same product or service is currently being taxed for consumption tax and Value Added Tax (VAT).”

For soft drinks, it’s going, going…

Speaking with a cross-section of brand experts, they expressed their misgivings of the planned introduction of the excise duty tax, saying it may not bode well for the economy.

The carbonated soft drinks sib-sector appeared to be having its last decade and may go into extinction sooner than it can be imagined. If this happens, it would not be the first time the Federal Government under the current democratic dispensation would fold its hands and watch a strategic segment of the country’s industrial sub-sector slide into oblivion.

Citing the incident of the once budding textile and tyre manufacturing industries that has since collapsed, the duo of Dr. Dare Soyombo and Akinwale Hassan recalled that the poor operating environment occasioned by double taxation led to the extinction of the once thriving textile industry in the country.

“Today, Nigeria, which used to boast of 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 heyday can no longer boast up to 20, 000 workers,” lamented Soyombo.

With over 190 million low-income citizens out of the official national population figure of 218 million, who are within the consumption bracket of the ‘fizzy drinks’, the demand for carbonated soft drinks among this target segment is phenomenally huge either as ‘supplements’ to augment daily food or simply for memorable occasions, as can be seen from the different brands, within the CSD segment that provides ample variants to choose from, from the stable of the various soft drink manufacturers.

Expectedly, there has been a chain of reactions since the news went abuzz that the tax authorities were planning to impose a tax on the sector.

According to analysts, the move will lead to a collapse of the soft drinks sector considering the perennial downward slide of the Nigerian economy already struggling with the pangs of the prevailing 10% of N10 per litre tax regime that is crippling the sector with its biting effects on their businesses.

Industry study already indicates that the tax imposition would affect companies like the Nigerian Bottling Company [a local subsidiary of Coca-Cola], 7-Up, Rite Foods [makers of Bigi drinks] and Nestle Nigeria Plc.

Firing the first salvo, the Founder and Chairman of Proshare Limited, Mr. Olufemi Awoyemi, at a press briefing to lament over the proposed plan, said introducing the new tax on a sector that is struggling to stay afloat will only spell doom for the CSD sector, while also creating job losses in the manufacturing sector.

According to him, ad-valorem tax is a tax principle based on productivity of a sector that is thriving and productive, maintaining that the Federal Government cannot introduce a sector that is currently having a negative level in terms of productivity.

In his words: “Ad valorem tax is normally a tax where you discover your economic recovery curve and you are growing well to extract from the increase in value not from a decline in value. In a country where inflation continues to grow so high, where the interest rate continues to grow so high, when the consumer’s purchasing power is declining, you then increase the cost of what is most affordable to them. It will turn out negative; so my own is not to defend so much of the industry, but to defend Nigeria because at the end of the day, that profit Nigeria is looking for in that proposed tax will only be a mirage.

“The manufacturing sector for which we have not invested things in, we have not made it easier for them to clear goods from customs at an efficient price, we have not made it easier for them to do distribution through transportation network, we have not made it easier for them to get forex, we have not made it easier for them to be able to compete to bring in equipment and where we do not have power for our operations, means there is an optimal limit to which you can tax this particular sector,” he advised.

The new Ad-Valorem or percentage tax would put downward pressure on sales by an estimated -16% [the weighted industry average decline in volume as of the third quarter [Q3] 2022 was -10%] and increase inventories of finished goods and input costs.

For example, investigations show that the plastic raisins needed to produce PET bottles will have increased by 40% in 2022.

The proposed tax follows an earlier flat rate charge of N10 per litre of drinks produced [sold or unsold]. The tax’s impact has unsettled operators’ profit margins which have continued to be chiseled thin.

“In one instance, one of the largest carbonated drink makers saw revenues dip to such an abysmal extent that it had to call in consultants to give an overview of the conglomerate’s books to assess the impact of the tax on business sustainability. The outcome was unflattering,” Awoyemi said.

Pressed further, Awoyemi while sympathising with the government over the credit crunch it is experiencing however said the said what the country stands to lose with the imposition of the 20 consumption tax is humongous.

“The Nigerian government is not wrong to go after that sector. It’s not wrong to focus on taxation. Where it is wrong is ion the way it is approaching; it is the volume and the value with which it is approaching it and it is in the manner. But most importantly, when you juxtapose all these things together, you will see that the policy will cause more harm than safety as it were.”

Taxation is considered an economic measure used to generate revenue for the government. Collecting taxes and fees is a fundamental way for countries to generate public revenues that make it possible to finance investments in human capital, infrastructure, and the provision of services for citizens and businesses. Taxation can also be used to influence or direct the consumption pattern of citizens.

In the business landscape, governments, the world over, impose excise tax on a legislated tax on specific goods or services at purchase such as fuel, tobacco, and alcohol-based drinks to generate revenue and also to control its consumption. It can be used to encourage or discourage investment in certain sectors of the economy. In this, the government can significantly reduce the number of ‘harmful’, ‘anti-social’ but not illegal economic activities, but when it is on the excess, it spells doom for businesses operating in a country, because of its burden to their operations.

While taxing to discourage 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.

Echoing similar sentiments, the Chief Economist, Proshare Limited, Teslim Shitta-Bey, observed that “Nigeria is one of the lowest consumers of sugar on the planet. United Nation 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.’’

Expatiating, the erudite economist, while analysing the effect of the proposed additional 20% Excise Tax on soft drinks during a business programme, ‘Today’s Business on SilverbirdTV’ asserted that in government policies, taxes are expected to stimulate growth and not do otherwise.

According to Shitta-Bey: "the position of government is understandable; the government has been in a tight situation in term of its finances, so there’s rather a need for them to pursue other windows of revenue generation. However, this particular direction is primitive. Instead, what the government must do is to work on blocking the exorbitant holes in its current spending. By design and implementation, taxes are supposed to stimulate growth; a tax design is to instigate. You create an environment for expansion in consumption and productivity, so you need a tax that is not primitive.’’

Also speaking, the Chief Economist, Proshare Limited, Teslim Shitta-Bey, said the industry suffers a challenge of infrastructure and energy, which he said, is very critical for the future prospects of growth in consumer demand.

He added that the problem is not tax, but about the tax base.

“How many people are actually taxed? Many of the institutions and individuals in this country are not taxed. Can we, therefore, identify those who are not paying taxes and not paying their own share of the common patrimony of the commonwealth and get them to start paying something? So, in an economy that is generally shrinking, do you add taxes to do such economies? That is not the best practice.

The best practice is to look at alternative methods by which governments at sub national and national level can generate income,” he urged.

He further urged the federal government to look at the issue of financialisation, saying that it must look beyond income statements, advising that Nigeria can use its balance sheet as an alternative form of raising finance for the economy.

He also added that one of the largest bottling companies in the country suspended its investment of over £300 million in the first quarter of 2023 for the expansion of their domestic operations in the country due to the proposed plan to introduce the ad-valorem tax.

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.

In the short run, an excise tax on any product increases its price and its burden is shared by both the producers and the consumers, but the exact effect depends on the elasticity of demand and supply for the commodity in view. It can also be ad-valorem, which means it has to be paid by percentage or specific cost charged by unit. But this has become worrisome because of its retarding effect on the companies being taxed, though it is favourable to the government, which sees these taxes as profitable. And this is really the all shade of wrong with this particular 20% Ad-Valorem Excise Tax in context.

Analysts believed the tax advocates had no social impact assessment before proposing the excise tax on carbonated drinks. The one-sided narrative that considered economic justification of taxes without social impact assessment has unintended consequences. 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.

Relatedly, in the analysis of Professor Martin Ike-Muonso, a professor in Economics with interest in sub-national governments Internally Generated Revenues [IGR] growth strategies, he asserted that modern public finance, the role of taxation is primarily four including revenue generation for the provision of public goods [infrastructure], facilitation of production efficiency and the handling of governments’ operational expenditures, the stabilisation of economic growth process, resources redistribution, and other non-economic objectives such as discouraging harmful goods consumption.

“Tax policy design and implementation always reflect policy-makers’ views and interests in achieving these four broad areas individually and interactively with other factors and that is why they are ideally concerned about policy effectiveness, even from design points,” he asserted.

In contrast, experience with governments in Nigeria has shown meager consideration of tax policy effectiveness during the design phases and, by extension, at their implementations. Accordingly, monitoring the magnitude and interactive chain of burden and relief impacts on variables central to revenue expansion efforts becomes less attractive and non-priority.