Import Tariffs, Excise Duties and FG’s Revenue Projections
In this article, Akeem Ogunlade argues that there should be a balance between import tariffs and excise duties
Bombast is regarded as one of the best ways to contribute to debate about national development in Nigeria. It appears people generally need to grandstand and possibly literarily make outlandish claims and assumptions in order to be heard. Or else how do you explain the recent import tariff increase on some goods, which Nigeria has capacity to produce, and some NGOs berating the government’s fiscal policy, calling for an increase in excise duties on same goods produced in Nigeria? If the government accedes to their demand of 150 per cent hike in excise duties on tobacco produced in Nigeria, it will translate to imported tobacco products becoming cheaper than the local alternatives. That will be a recipe for disaster.
Minister of Finance, Kemi Adeosun’s announcement of import tariff hike on selected consumables and luxury products such as rice, salt, sugarcane and SUVs, boats, sports cars and tobacco products was welcomed as a complement to the Central Bank of Nigeria(CBN)’s forex prohibition list. In an economic recession, what better way to quickly halt the downturn and ensure the country’s production base is not damaged? It is to impose higher taxes on lifestyle and luxury goods, while encouraging the local production of staples and other consumables particularly those that the country has comparative advantage in producing. It is a policy thrust that policymakers struggle with all the time. Do we allow cheap imports into the country to halt spiralling prices of goods, thereby destroying local jobs and making the economic difficulties worse? Or hike import tariffs to protect local industries and jobs while ensuring the long term growth and prosperity of the country?
The case of tobacco products is even more complicated. Cigarette smoking, being a lifestyle choice, is dependent on the consumer’s choice. As studies have shown, the higher the retail price, the more likely smokers will search for cheaper alternatives. And the alternatives are cheaper because the products were most likely smuggled or are illicit. In both scenarios, purveyors of the illicit or smuggled products must have avoided paying statutory duties altogether, which is a loss to governments and the unregulated nature of the products make them more harmful to the consumer.
Indeed, the World Customs Organisation, whose members manage 98 per cent of global trade, in its study tiled, The linkage between tax burden and illicit trade of excisable products, summarised thus: “Illicit trade in tobacco is now a global phenomenon. Experience across both advanced and developing economies demonstrates that the key economic drivers influencing the illicit tobacco trade are excessive tax levels, usually resulting in a sharp decline in cigarette affordability, compounded by weak or no enforcement of existing laws and organised crime’s willingness to supply given the opportunity to gain large profits from tax avoidance.
“The clear implication is that recommendations for a ‘one size fits all’ global excise tax incidence target of 70 percent, as proposed by the World Health Organization (WHO), would be very destabilising if implemented. Excise incidence is flawed as the basis for setting tax policy, as the WHO has acknowledged in its own country research. International experience, including that of the European Union (EU) accession countries, clearly shows that countries which have implemented the sort of substantial tax increases that the WHO’s proposals would imply have seen a sharp rise in illicit trade in cigarettes, damaging the long-term tax base and undermining public health objectives.”
The World Customs Organisation acknowledged that illicit trade in cigarettes is more rampant in developing countries because of the weak law enforcement environments and in the case of Nigeria, large, porous borders. Nigeria’s West African neighbour, Ghana, is currently experiencing a nightmare combating illicit trade. When the country imposed high taxes on certain categories of products and especially high duties on cigarettes produced in Ghana in order to meet its revenue projection, smuggling reached an all time high last year. The head of the country’s revenue board was left lamenting that the revenue projection was not achieved as a result of smuggling, which also led to the closure of tobacco factories in Ghana.
Policymakers do not have very many pleasant choices when deciding on how best to regulate the tobacco industry. Since it is generally agreed that smoking is a lifestyle choice which cannot be legislated out of existence, the next step is examining whether to go with the puritanical zeal of the anti-tobacco groups and close local tobacco factories. If that is done, smugglers will fill the vacuum that the closure will create. If we then go with the demand of heavily taxing cigarettes produced in Nigeria, making it costlier than the imported variety, smokers will naturally make the shift to the imported variety, thereby leading to loss of market by local manufacturers, factory closures and consequent job losses.
As the World Customs Organisation pointed out in its study, the best policy that has the potential to minimise illicit trade is to make importation of cigarettes unattractive as well as collaboration with Customs organizations in neighbouring countries and driving full enforcement of existing laws and prosecution of offenders. A careful balance between import tariff and excise duties is recommended. Beyond this, however, is engaging in impactful, mass communication targeted at young people below the legal age to smoke (in Nigeria, it is 18 years), discouraging them from picking up a cigarette etc. That, truly, is where the NGOs will be most relevant, not haranguing government over its policy choices.
* Ogunlade is of the Centre for the Promotion of Enterprise and Business Best Practice, Wuse 2, Abuja.