New Excise Duty on Alcohol and Looming Health Crisis from Ogogoro, Kai-kai Consumption
Amadi Ndukwe
With dwindling revenue from oil, increase in government indebtedness and ballooning budget deficit at the federal level, it has become imperative for the government to look at other options for revenue generation.
One sector of the economy which the federal government has decided to tap into for additional income is the tobacco and alcoholic beverage sub-sector, which will have new excise duty rates with effect from June 4, 2018.
The new policy initiative was announced by the Minister of Finance, Mrs. Kemi Adeosun, in March.
She noted that the new rates were spread over a three-year period beginning from 2018 to 2020 in order to moderate the impact on prices of the affected products.
A breakdown of the new tariff indicates that under the newly approved rates for tobacco, in addition to the 20 per cent ad-valorem rate, each stick of cigarette will attract a N1 (N20 per pack of 20 sticks) in 2018, N2 specific rate per stick (N40 per pack of 20 sticks) in 2019 and N2.90k specific rate per stick (N58 per pack of 20 sticks) in 2020.
The new rates for alcoholic beverages cut across beer and stout, wines and spirits for the three years 2018 to 2020. Under the new regime, beer and stout would attract N0.30k per centiliter (Cl) in 2018 and N0.35k per Cl each in 2019 and 2020.
Wines would attract N1.25k per Cl in 2018 and N1.50k per Cl each in 2019 and 2020, while N1.50k per Cl was approved for Spirits in 2018, N1.75k per Cl in 2019 and N2.00k per Cl in 2020.
This, to the minister, is another avenue for government to generate more revenue in order to run the country effectively.
Since the announcement by the federal government, mixed reactions have trailed the approval among operators, organised private sector and Nigerians.
Some are supporting the federal government for approving the new tariff rates, seeing it as an opportunity for consumers of these commodities to have a rethink as it would reduce their intake due to the health hazard effect.
Many stakeholders such as the organised private sector, labour organisations among others have kicked against the hike which is envisaged to impose untold hardship to the manufacturing sector in view of higher operational costs which would crumble their businesses thereby sending many employees jobless.
Stakeholders are alarmed that the planned upward review of excise duty on locally produced alcoholic beverages and tobacco, would endanger 250, 000 jobs and an investment portfolio of about N420 billion.
As ominous as these risks are, a more dangerous and life threatening possibility is the looming health crisis as a result of consumers shifting their consumption to illicit and local gins popularly called Ogororo, Kai-kai or Akpeteshi.
Recall the killer gins incidences in 2015? Over 100 persons reportedly died in various parts of the country following consumption of locally brewed Ogororo, Kai-kai or Akpeteshi.
A recent study by KPMG has shown that 78.6 per cent of consumption in the spirits market consists of low priced value products and is dominated by mass market and low-income consumers.
Other findings from the KPMG study titled ‘Excise Duty Changes for Spirits and Wine in Nigeria’ indicated that availability of spirits in small packs and bottles has also driven growth amongst the low-income consumers and this low income segment is highly price sensitive and are likely to gravitate towards cheaper illicit products following sudden income or product price rises
According to Euromonitor, in 2016, economic recession drove many low income consumers to switch to illicit products Premium/ imported spirits are mostly consumed by upper-middle and high-income consumers and represent 9.8 per cent of the spirits segment and less than one per cent of the overall alcoholic beverages industry.
The study also revealed a recent downward shift of premium consumers to mid-priced products due to economic recession. In addition, consumption of premium spirits is considered a status symbol by young middle class customers, who in periods of economic decline are also likely to switch from mid-priced and premium spirits to other spirits or relatively lower priced alcoholic drinks
According to KPMG, spirits and wines are more price elastic than beer, therefore significant increases in excise duty rates may result in migration of consumption to the illicit market. The spirits and wine price elasticity in Nigeria is indirectly extrapolated to be -2.14 and -2.09 respectively.
Analysis of data from benchmark countries shows: that average beer-spirit price elasticity margin is -0.21 while average beer-wine price elasticity margin is -0.151.
Using the average price elasticity data derived from benchmarks to extrapolate the elasticity of spirits and wine in Nigeria using a beer price elasticity of -1.942 as the baseline, KPMG noted that “A disproportionate excise change induced price hike may result in significant switching of consumption to the illicit market.”
Accordingly, a change in excise from an estimated 613 kobo per cl to NGN 2 per cl will result in a 19 per cent increase in price while a 19 per cent increase in price will result in a 41 per cent decline in volume (based on the price elasticity of -2.14) and this is predominant in the low price segment (which represents 78.65 per cent of the total volume).
There is huge potential for increased illicit which has significant health risks.
In the absence of reliable data on Nigeria, the prevalence of unrecorded alcohol consumption in comparative SSA countries like Kenya (63 per cent) and Ghana (50 per cent) suggest a high informal alcohol consumption potential in Nigeria
Furthermore, in recent years, Nigeria has shown a high susceptibility to the impacts of unmitigated alcohol consumption. In 2016, there were a number of health cases reported by the Nigerian Press attributed to illegal consumption, production or bootlegging of spirits and wine products these included:
· 5 reported incidences across 4 states in the country.
· 81 fatalities, 3 injuries and 77 deaths were directly attributed to the consumption of illicit gin.
· 4 deaths were also attributed to deadly fire accident relating to storage of illicit brewed gin.
Given the challenges of border control and the illicit market, price increase driven by higher excise duty rates may result in loss of government revenue, increase in illicit alcohol consumption and significant health risks.
The challenges of border control presents a potential risk of increase in smuggling activities Nigeria’s border administration ranking is one of the least developed among peer countries. Nigeria is ranked at 121, below Russia, Ghana, Indonesia, Kenya, South Africa, Turkey etc. Excise duty rate on spirits and wine for border countries to Nigeria, ranges from 25 per cent in Chad to 45 per cent in Niger.
Price increase, arising from a number of factors including an increase in excise duty is a risk factor for higher rates of smuggling from neighbouring countries.
· In Canada, high alcohol taxes has led to smuggling of alcoholic beverages from the USA.
· In Zambia, a 60 per cent excise duty on alcohol made it profitable to smuggle from neighbouring countries. Revenue loss for legal spirits manufacturers amounted to US$12 million in 2014
· In Greece, a 125 per cent excise hike between 2009 and 2015 fuelled smuggling, strengthened the black economy and increased tax evasion with 50 per cent decline in sales of Legal spirits The general homogeneity of spirit/wine products across various countries including border countries surrounding Nigeria, makes Nigeria particularly vulnerable to smuggling activities.
Analysts believe that the excise duty hike on wines and spirits poses more dire consequences for the country in view of the health crisis it portends hence the need to handle it with utmost care.
Needless to say that the new Excise regime would place additional cost on most Excisable Products which products which could manifest in the following manners:
Additional Cost to Consumers: Manufacturers would naturally want to push any increased Excise to the consumer as indirect tax. However, this could result in declined sales which then prompt consideration of the impact of federal government’s additional revenues on each sold product vis-à-vis the following:
and/or consumer shift to the grey market i.e. the tobacco and alcohol market which are under the radar of the FGN:
due to reduced profits and sales respectively.
Additional cost to manufacturers: In a bid to prevent consumer resistance to higher cost which may affect demand for Excisable Products, manufacturers may absorb the additional cost to maintain current sales levels. This therefore questions the effectiveness of the new Excise regime because:
ceteris paribus, thereby defeating the objective of imposing Excise:
through corporate tax deductibles resulting in reduced taxes; and
including job cuts, which worsens the current unemployment situation.
On the way forward, stakeholders and analysts believe , is for the federal government to reverse the increase in excise duties, irrespective of whether the president has signed the report that gave birth to them or not.
A review of the duties is even more compelling given that the wines and spirits’ producers were not taken into confidence in drafting the report. They deserve an opportunity to have their say even if the government ultimately has its way.
The producers have urges a dispassionate review of the proposed tariff regime by the joint Legislature/Executive efforts with input from and consultation with the stakeholders to avert the threatened destruction of over N420 billion installed capacity/investment in the Sector and a reversal of the increase and the pegging of the new excise tariff to a maximum of 50k per centiliter which will still translate to at least 61.29 per cent increase over the previous rate, said Chief Patrick Anegbe, Chairman and Aare Fatai Odesile, Executive Secretary, DIBAN.
Baring the current infrastructural and foreign exchange challenge, worsening employment situation and inadequate mechanisms for monitoring and controlling illicit trade of tobacco and alcoholic products, the platform for an increase in Excise may currently not be robust, thus the timing of the regime change may appear sub-optimal; said Chijoke Odo, Manager, Global Trade Advisory, Deloitte.