Press release by the Manufacturers Association of Nigeria on the increase in excise rates for alcoholic beverages and tobacco, as contained in the 2023 Fiscal Policy Measures dated 20th April 2023.
Date: Tuesday, 16th May 2023
Welcome / Protocols
Introduction
On the 2nd of May 2023, the Manufacturers Association of Nigeria (MAN) issued a press release in reaction to the recently published 2023 Fiscal Policy Measures (FPM) and the Federal Ministry of Finance, Budget and National Planning, dated 20th April 2023. In that press release, MAN raised significant concerns about the provisions of the 2023 FPM, including the record increase in excise on beverages and tobacco and the introduction of a tax on Single Use Plastics (SUP), amongst others.
MAN would like to use this opportunity to elaborate on its concerns with the extraordinary increase in excise on beverages and tobaccoand reiterate its position on the Single Use Plastics tax.
Background
The government initiated a 3-year excise roadmap system in 2018, after extensive consultation with the industry, and the roadmap ran successfully until its conclusion in 2021, without any change or issues. This enabled the industry to successfully plan its operations, given the certainty in excise. In 2021, the government retained the excise rates for 2020/21 until May 2022, while it used the 1-year period to engage extensively with industry to decide on a revised roadmap. Following this engagement, the government released the 2022 FPM with a revised 3-year excise roadmap which, though providing for higher excise rates, still took into consideration input from the industry and the potential impact on the economy.
Barely five months into the implementation of the 2022 excise roadmap, the industry became apprised of plans by the government to further increase excise rates. Industry engaged with the federal government and by the end of 2022, had the understanding from these engagements that the excise rates stipulated for 2023 underthe 2022 FPM would be retained as such. This understanding was further confirmed at a meeting held between the Manufacturers Association of Nigeria (MAN) and the Honourable Minister of Finance, Budget and National Planning on 29th March 2023. At that meeting, the Honourable Minister assured representatives of MAN that there would be no increase beyond the pre-scheduled increase for 2023 as provided in the excise duties roadmap in the 2022 FPM.Consequently, the exponential increase in excise in the 2023 FPM came as a shock to the industry and is, in effect, ‘an increase on an increase’, since there was already an approved increase in place for 2023.
MAN’s concerns with the excise increase as contained in the 2023 FPM.
1. The manufacturing sector is in acute recession.
The increase is coming at a time when the manufacturing sector is immersed in unprecedented crisis and an acute recession, due to extraordinary challenges, namely: sustained scarcity of naira (which has led to a crash in consumer purchases); limited access to foreign exchange (which has led industry to purchase foreign exchange from the parallel market, thereby increasing costs); high inflation (further driving up cost of operation and prices of products) and a struggling economy. These extraordinary challenges have significantly impacted the industry. For instance, the brewing sector suffered a massive decline of -169% in profit before tax in Q1 2023. Also, the industry turnover for non-alcoholic beverages and tobacco declined by -15%, while gross profit and profit before tax declined by -31% and -96% within the same period, respectively. The Naira scarcity and limited access to foreign exchange have exacerbated the continuing impact of systemic challenges such ashigh cost of operations, multiplicity of taxes, limited electric power supply and infrastructural challenges. For instance, the Nigerian manufacturing sector recorded a 36% downturn in profit margins from 2021 to 2022 and over 400% increase in energy costs, further constraining growth of the sector. Data from the National Bureau of Statistics (NBS) showed that inflow of foreign direct investment (FDI) into Nigeria fell by 33% in 2022. This is not the time to impose additional increases in excise.
2. The rate of excise increase is exponential and excessively burdensome.
The rate of increase is exponential and not consistent with best practice globally. For instance, the excise for beer was effectively increased by about 200%, translating to a tripling of excise on the product. This is coming against the backdrop of the huge tax burden on the tobacco and beverage sectors, with the tobacco industry already being taxed 5 times more than the average for other industries.
3. Significantly diminished sales volumes will lead to business restructuring and a reduction in investment across the impacted sectors.
The manufacturing sector has been struggling with crashing sales, mainly attributable to the sustained naira scarcity. A continuing decline in sale volumes will necessitate production cuts and a reevaluation of investments in the sector. Specifically, if sales proceeds can no longer sustain business overheads and operating expenses, businesses will be forced to scale down their operations which would result in factory closures, job losses, a decline in exports and much more.
Data from the National Bureau of Statistics (NBS) showed that inflow of foreign direct investment (FDI) into Nigeria fell by 33% in 2022, while unemployment rate stands at 33.3% and rising. These indices will worsen if the increase in the 2023 FPM is applied.
4. The inevitable decline in profitability in the industry will lead to a decline in government revenues.
The decline in sales and profitability of the industry will result in a decline in the industry’s total tax contribution to the government, because companies income tax (CIT), value added tax (VAT) and education tax are directly tied to the performance and profitability of the companies.
Further, over-taxing regulated products will nudge consumers towards cheaper, illicit products which will lead to further loss in revenue to governments, in addition to endangering consumers.
5. The sectors’ value chain will be severely impacted.
It is instructive to note that the impacted industries support other businesses within their value chain, cutting across agriculture, logistics, bottling, labelling and packaging businesses, as well as distribution, wholesale and retail businesses, catering for over 950,000 direct and indirect employees. For instance, over 37,000 sorghum farmers rely on the brewing sector for their livelihood.
A crash in sale volumes and consequent cuts in production will severely impact these businesses in the value chain, which will have a multiplier effect on the national economy. For instance, transactions with suppliers in the sector declined by over N260 billion by the end of 2022, when compared to 2021.
6. Retaining the 2023 FPM will have a negative signaling effecton current and prospective investors.
The 2018 roadmap was excellently conceived and executed, and the federal government was faithful to its commitments for the 3-year duration. This enabled the industry to plan its operations efficiently. It also engendered stability and certainty within the sector, which are key factors for economic growth. Reneging on the 2022 roadmap within a year of its execution, (and so significantly, in spite of the serious implications of this action), will send negative signals to current and prospective investors in Nigeria, and thereby damage investor confidence. This will not be a good legacy for the current administration.
7. The total excise derivable from the excisable sector is insignificant when compared to Nigeria’s revenue needs.
The revenue need of the government has been mooted as a reason for the excise increase. However, the total excise receivable from the sector is insignificant when compared to Nigeria’s revenue needs. The total excise received in 2022 was about N120billion. With the announced increases, additional tax revenue to the Government in 2023 will at best amount to about N130billion given the offsetting impact of lower VAT and corporate income tax collections. While the tax is an exponential increase from the current regime, the likely revenue is insignificant when compared to the N12 trillion deficit in the 2023 budget.
8. The Implementation period provided for in 2023 FPM is contrary to the National Tax Policy
The 2023 FPM stipulates 1st June 2023 as the implementation date for the new excise. This runs contrary to the National Tax Policy, which requires a minimum of 90 days before the implementation of tax changes.
Concerns with the Single Use Plastics Tax
We would also like to use this opportunity to reiterate our concerns about the Single Use Plastics tax. Our primary concern is that it does not appear to have a basis in law, as it is not provided for under the Customs, Excise, Tariff, etc (Consolidation) Act (CETA), unlike beverages and tobacco. The tax will also further fuel inflation and weaken consumer purchasing power, without achieving the desired climate change objective.
Industry request
In view of the foregoing, we respectfully request the federal government to:
1. Suspend the 2023 FPM and retain the 2022 -2024 excise duties roadmap as approved in the 2022 FPM, to foster stability in the affected sectors and their value chain, in the interest of the national economy.
2. Reverse the tax on Single Use Plastics and engage with relevant stakeholders to facilitate ongoing initiatives, which have a better prospect of achieving the desired environmental objectives. Agood example of this is the Food & Beverage Recycling Alliance, approved by the federal government.
3. Consider, with input from the sector and other critical stakeholders, alternative measures to achieve revenue andother objectives of the government in a sustainable manner.
Thank you.
Segun Ajayi-Kadir, mni
Director-General, Manufacturers Association of Nigeria (MAN)