On the Proposed Excise Increase
By the turn of this decade, it is not likely that any single event would have had nearly as much impact as the covid-19 pandemic, at its peak in 2020. At the time, projections were that the global economic output would be reduced by at least $8.5 trillion. Much into 2022, economies are still reeling from the shocks and concomitant losses: a situation further compounded by dire global issues, such as extreme weathers precipitated by climate change and the Russia-Ukraine war, and also unique national situations (such as the insecurity crisis, and worsening extreme poverty levels) that present some concerns. It is within this frame, amongst others, that countries have to reconcile their economic standing.
In Nigeria, the reality is one that can be greeted with mixed feelings. On the one hand, the country is having to deal with a huge public debt portfolio and the possibility of further increase to fund critical components of the 2023 appropriation bill. On the other hand, the report of 2.25% GDP growth as of the last quarter published by the National Bureau of Statistics (NBS), even though lower than for the same period in 2021, presents some silver lining. At the intersection of these two realities is the important discourse on the efforts to shore up revenue, which seems to represent the most pressing fiscal concern. It is against this backdrop that the efforts by the government to increase public revenue can be appreciated.
However, it is important to draw a picture that best captures the realities. While it is true that some businesses and, indeed, sectors such as the financial services sector have recorded significant growth in recent months, the situation is not quite the same for others, particularly for those who have to deal with heavy tax burdens and excise duties. The data shows, for example, that the beverage sector bears a significantly higher burden than the average for other sectors. According to reports, based on financial performance between July and September 2022 and a forecast to year-end, the production quantities and turnover could possibly decrease by -25% and -10%, respectively while gross profit and profit before tax by -33% and -137%.
This point should immediately alert us that we are faced with a conundrum. The efforts and expectations to raise tax revenue may be considered appropriate, but then, the pertinent question at this point is: at what cost? This question bears a timing component, but is essentially about the increasing burdens with which businesses have to contend, within the wider frame of the volatile business environment and the considerations of the socio-economic realities of their stakeholders. On the business side, the systemic challenges are a major concern. There is the challenge of failing infrastructure, access to sufficient foreign exchange, multiplicity of taxes, restrictions on trade and import, power/ energy challenges which further increase production costs, soaring demand elasticity, inflation, insecurity challenges and sundry issues on cost of doing business. These are only a summary list of issues that businesses have to navigate through while staying true to their product and service commitments. It goes without saying that these are definitely not the best of times for businesses, since they do not operate in isolation of the prevailing economic conditions.
The situation is not less stark for consumers. One example, the disclosure in the 2022 Multidimensional Poverty Index (MPI) - the report by the NBS that 63% of Nigerians live in multidimensional poverty, presents very grave concerns. The level of inflation, at 21.09% as of October 2022, is another major issue. Beyond the adverse consequences on the general standard of living, the situation puts a more severe strain on consumer spend. It also leaves businesses with difficult choices to make in the days ahead.
These considerations are a reason why the proposed departure from the 2022 Fiscal Policy Measures and Tariffs Amendments (FPM 2022), by way of radical increases in excise, raises grave concerns. The FPM 2022, released in March this year, had mapped out applicable excise rates from 2022 to 2024, which gave the industry some measure of predictability to aid corporate and investment planning. Shockingly however, barely 5 months after the release of FMP 2022, there emerged credible indications that the government was proposing to increase the excise for 2023 and 2024 by as much as 100%, for certain beverages. It is our considered view that such a move will have a net negative effect on sustainable government revenue, national GDP and the corporate image of Nigeria, given the likely erosion of investor confidence in a market already marred by volatility. A look at the numbers may well buttress this point. Data shows that while revenue from excise duties from the sector grew by 12% in 2021, it is likely to grow by only 5% in 2022. The VAT follows a similar pattern. While a 40% increase was recorded in 2021, a marginal 5% increase is expected in 2022. Let us examine that the industry contributed $2.3 billion to the GDP and generated $526.2 million in revenue to the government in 2019. This is in addition to the more than 300,000 direct and indirect jobs that the industry creates. The industry is as burdened as some others, and a further strain may result in drastic business measures, which may include potential reduction in labour engagements.
Given this context, the proposal to increase the excise duties should appreciate the fine details of these economic, dynamics rather than a hurried, seemingly quickfix implementation to increase revenue accruable to the government without the consideration of the immediate fallouts of the policy. In the meantime, more emphasis should be placed on encouraging backward integration efforts and adoption of local raw materials sourcing, as well encouraging greater production by manufacturing companies.
The arguments that increase in excise duties would generate greater revenues for the country appears not to give the full picture when one considers that such move will reduce productivity of the companies being taxed. Similarly, the socio-environmental and the public health objectives of the government cannot be achieved on linear considerations. Such objectives call for innovation in approach, adeptness in communications and advocacy and a working partnership between stakeholders and the government. It is also imperative to note that a further increase in excise duty, while hurting businesses in the industry, would not significantly bolster the government’s efforts to meet up with its revenue targets which run into trillions of Naira.
Moving forward, it is expedient to consider a number of alternative pathways to revenue generation. First, it should be considered a priority to close the huge tax compliance gap in the country and bring every tax eligible citizen into the net. Progress in this regard would facilitate the collection of the correct accruals, and steadily ease the fiscal burdens. Along similar lines, emphasis should be placed on intensifying efforts to widen the tax base and ensure adoption of data-driven and evidence-based reviews. It is not simply enough to increase excise duty based on ostensible high profit margins; it is important that data leads in these conversations, going forward.
Perhaps the critical component of the excise duty consideration is a more active engagement with the players in the industry, to gain a full grasp of the industry’s activities and clarity on the issues. This includes discussion about the actual state of things, more realistic and innovative approaches for increased revenue generation, as well as sustainable solutions to challenges plaguing the industry.
At this point, what should be the most critical consideration should be efforts to help businesses make significant gains to consolidate their post-covid-19 recovery efforts. This is imperative, because the issues at stake are not only to address the fiscal gaps, but to steadily increase the overall quality of contribution to the national economic pool. It is why an increase in incentives for productivity should be the priority, not an increase in excise duties.