The federal government recently approved an increase in excise duty on tobacco and alcoholic beverages, to bolster its revenue. This has the added benefit of reducing the health hazards associated with the consumption of tobacco and alcohol. The new excise duty, which takes effect from June 4, 2018, will be implemented over a 3-year period to reduce the impact on manufacturers and the fallout on inflation.
From a policy perspective, the newly approved tariffs will boost Nigeria’s tax to GDP ratio, currently at 6%, and reduce the fiscal deficit (2.5% of GDP). This could also help reduce the level of substance abuse. In addition, as a specific tax which replaces the ad valorem tax on alcohol consumption, the discretion of customs officers to divert taxes will be curtailed. However, the tax on tobacco will be a combination of the existing ad valorem rate of 20% and the new specific rate.
Incidence of Tax- Higher on the Poor
From a consumer perspective, the incidence of the tax is higher on the poor. This is because it is inflationary, reduces consumer disposable income and distorts the allocation of resources. Besides, imposing higher taxes could encourage smuggling activities, as well as tax evasion.
Manufacturers oppose the increase and the timing, as most are just recovering from a negative profitability and revenue contraction. Ideally, a countercyclical policy direction that would ensure injections 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.
Tax burden falls on Consumers
This sin tax, which cuts across the total beverage and alcohol sector, will likely be passed on to consumers. The effective increase in the price of spirits will range from 12% to 20% over current prices, while malt, beer, and stout will increase by 6% to 10%. The industry is battling with declining volumes and contracting margins. Hence, the impact of absorbing the cost of the tax might be over-whelming on current players in the industry.
To improve operational efficiency, brewers may adopt aggressive cost optimization measures, such as layoffs or even delay impending expansion plans. This will reverse some of the growth recorded by the food, beverage and tobacco sub-sector. In 2017, the sector improved by 8.62% over 2016, recording a growth of 2.35% and outperforming GDP growth.
Apart from the implications earlier mentioned, this move by the government will encourage the patronage of the informal tobacco and alcohol producers. Operations of this unregulated industry are poised to be more detrimental to health and have been known to incite public nuisance and abuse.
Impact on Brewing Companies
The leading brewers and distillers such as Nigerian Breweries, Guinness Nigeria and International Breweries will be the biggest losers, as most 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 such as Trophy and Hero will be hit the most, due to their lower price. Either way, the industry is likely to face a most challenging period in the next three to four quarters.
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