Finance Act As Nigerian Manufacturing Sector's Nemesis

By Dike Onwuamaeze

The recent introduction of excise duty on soft drinks will mark the beginning of the decline of the sub-sector in Nigeria.

Nigerian manufacturers now approach the month of January and the enactment of the Finance Act with a sense of foreboding. Since 2020, each January and the annual ritual of the Presidential assent to the Finance Bill, has been an occasion to amend the some tax laws in a manner that would increase the tax levied on the Nigerian manufacturers, reintroduce new taxes or launch a fiscal policy that would weaken the competitive edge of local manufactured products against foreign made goods.

It was so in January 2020, when the enactment of the Finance Act of 2019 increased the Value Added Tax by 50 per cent, from five per cent to 7.5 per cent. It was also like that in January 2021 when the Finance Act of 2020 cut lowered the levies imposed on the importation of fully built vehicles by 35 per cent at the detriment of local automobile manufacturers. The levy was meant to protect the local manufacturer from competition from foreign auto manufacturers.

Now, January 2022 is in no way different. The enactment of the Finance 2021 has imposed an excise levy of N10 per litre on non-alcoholic carbonated drinks. The finance act, which was signed into law by President Muhammadu Buhari on December 31, 2021, takes effect from this January.

This was disclosed by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, when she did the public presentation of the 2022 Appropriation Act in Abuja on January 5 this year.

The reintroduced excise, which Ahmed referred to as "Sugar Tax," would discourage excessive consumption of sugar beverages which contributes to diabetes, obesity among others and also raise revenue for the funding of the health sector.

She stated: "There's now an excise duty of N10/ per litre imposed on all non-alcoholic and sweetened beverages. This is to discourage excessive consumption of sugar in beverages, which contributes to a number of health conditions including diabetes and obesity.

"But it is also used to revenues for health-related and other critical expenditures. This is in line with the 2022 budget priorities."

Tax as Kiljoy

However, the reintroduction of the excise duty on carbonated drinks is like a killjoy to the manufacturers of soft drinks in the country. A source in one of the manufacturers of the soft drinks told THISDAY it would be sad if government would slam excise duty on the sub-sector without a proven scientific research that linked consumption of soft drink to cases of diabetics in the country.

He also said that government has failed to give a thought about some manufacturers that have reformulated their products and have currently added zero sugar carbonated soft drinks to their offerings. He said that they are entitled to certain exemptions.

According to the International Journal of Scientific and Research Publications (IJSRP), excise leads to high production costs, which adversely affect production levels resulting in dwindling profits. This will grossly impact the small and emerging business owners in the non-alcoholic beverage sector.

Nigeria is the sixth highest consumer of soft drink but per capita consumption is low. Introducing excise will easily reduce production capacity causing manufacturers to struggle to meet investor commitments as well as cause investor to take investments to other countries.

The report stated that a decrease in production levels or ability to purchase raw materials as a result of the introduction of excise tax will result in reduced profits for the supply chain players in the non-alcoholic beverage sector.

Finance Act grants tax incentives (holiday) to industries in the agricultural sector. Excise duty on non-alcoholic beverages will be reflected here, which will increase the total cost of production especially on already compliant companies. This impact will spill over to different players in the value chain including packaging, distribution and retail industries in terms of costs and product availability.

MAN, NLC, NECA KICK

Already, the Manufacturers Association of Nigeria (MAN), the Nigeria Employers' Consultative Association (NECA), the Nigerian Labour Congress (NLC) and the Centre for the Promotion of Private Enterprises (CPPE) and tax experts, have condemned the reintroduction of the levy, which they describe as 'penny wise pond foolish' because government would lose more revenue than it would collect by implementing the excise duty.

The Director General of MAN, Mr. Segun Ajayi-Kadir, said that the introduction of excise duty of N10/liter on non-alcoholic, carbonated and sweetened beverages, despite its potential overwhelming negative impact, is rather unfortunate.

Ajayi-Kadir stated that there is no doubt that the potential revenue gains were the basis for the introduction of this excise. But the revenue aspirations of government in introducing this excise might not be justified in the long run. He, however, added that "it would appear that the goose that lays the golden eggs is being led to perdition."

Unsavoury Implications

He stated that recent studies have shown that introducing excise duty on non-alcoholic beverages would likely cause a 0.43 per cent contraction in output and about 40 per cent drop in total industry revenues in the next five years.

Moreover, the government has estimated that it could generate an excise tax of N81billion between 2022 and 2025 from the group. However, this would be realised at the expense of N142 billion in VAT revenues and N54 billion in Company Income Tax (CIT) revenues between 2022 and 2025.

"What is not realised by many is that excise begets high production costs, which in turn adversely affect production levels and intimately result in dwindling profits. This will grossly impact the small and emerging business owners in the non-alcoholic beverage sector.

"Nigeria is the sixth highest consumer of soft drink but per capita consumption is low. Introducing excise will easily reduce production capacity causing manufacturers to struggle to meet investors' commitments as well as cause investor to take investments to other countries.

"As seen from previous impact analysis, excise affects production outputs, revenues and profits. This causes companies to pursue cost cutting measures to reduce the effect of diminishing revenue and profits by reducing employee salaries or retrenchment.

Presently, the country's unemployment rate is at about 33.3 per cent and at this rate is projected to further increase. A further cut in jobs for an industry that employs over 1.5 million people directly and indirectly will worsen the unemployment position in the country resulting in an increase in social vices and moral decadents

"An introduction of an additional tax will cause manufacturers in a bid to offset tax and maintain profit raise prices of their products to higher rates thus shifting tax incident to consumers," Ajayi-Kadir argued.

The NECA, in a similar reaction, stated that the reintroduction of the excise duty has raised growing concerns for the survival of the Nigerian manufacturing sector in 2022 and beyond and called for its suspension.

The President of NECA, Mr. Taiwo Adeniyi, has said that the excise duty could lead to increased number of industrial actions, job losses and rising unemployment etc.

Adeniyi said: "We may recall that in 2009 during the global financial crisis, excise duties on carbonated drinks were suspended to aid the sustainability of businesses. We make bold to say that the economic situation that necessitated its suspension in 2009 has not abated, but rather, worsened. In fact, businesses currently face greater hardship than what obtained in 2009. Thus, the introduction of the tax will be counter-productive as it will lead to further stifling of businesses in the manufacturing industry. It will result in reduction of the purchasing power of the masses as any increase in price will likely be passed to the consumers.

"It is imperative that government, in the interest of Nigerians and the economy, should suspend the reintroduction of excise duty on carbonated drinks. Rather, Government should continue to support and promote the industry to attain full recovery after the onslaught of the COVID-19 pandemic and position it to further accommodate the teeming unemployed Nigerians, particularly the youths."

NLC ON EXCISE TAX

The Nigeria Labour Congress (NLC) has warned the federal government to rescind the decision to avert industrial action, adding that the new levy would cause a loss of N1.9 trillion.

The President of NLC, Comrade Ayuba Wabba,said: "We hope that the current situation will not be allowed to degenerate into a breakdown in industrial relations in the sector and generally in the country."

Wabba stated that the health reason touted government to justify the excise duty did not sound plausible. "We are amiss why the government did not place the excise duties on sugar itself as a commodity rather than on carbonated drinks. The truth of the matter is that additional increase in the retail price of carbonated drinks would put more Nigerians at risk of serious health challenges as many people would resort to consuming sub-standard and unhygienic drinks as substitutes for carbonated drinks," he said.

"One of the reasons we advanced was that the re-introduction of excise duties on non-alcoholic, carbonated and sugary drinks will impose immense hardship on ordinary Nigerians who easily keep hunger at bay with a bottle of soft drink and maybe a loaf of bread.

"Our concern is the mass hunger that would result from the slightest increase in the retail price of soft drinks owing to imposition of excise duties as it would be priced beyond the reach of many Nigerians."

He pleaded with the government not to constrain the manufacturers of soft drinks to divest from Nigeria just like two giant tyre manufacturers like Dunlop and Michelin did when they moved to Ghana.

An Economist and the Chief Executive of the CPPE, Dr. Muda Yusuf, has described the reintroduction of excise duty on soft drinks as ill-timed, insensitive and most inappropriate given the prevailing harsh economic and business conditions.

Yusuf said: "Nigerian manufacturing companies, and indeed most investors, are going through tremendous stress at the moment. They are currently grappling with serious macro-economic challenges and structural constraints impacting on capacity utilization, productivity and competitiveness. This is affecting sales, turnover, profitability, shareholder value and the sustainability of investments. The norm globally at this time is to provide incentives for industries to aid their recovery from the shocks of the pandemic and escalating costs. We cannot afford to be doing the exact opposite.

Manufacturers, across all product segments need a respite, especially in the light of the unprecedented escalation of production and operating costs."

However, the Minister of Industry, Trade and Investment, Mr. Niyi Adebayo, has assured manufacturers of government support to enable them to get good returns on their investment as government is doing everything to assist manufacturers to access foreign exchange, particularly for the importation of machineries for those using local raw materials for their production.

The minister gave this assurance while playing host to a delegation of Expand Global Industries Ltd.,

He maintained that the ministry would continue to assist manufacturers to remove any identified bottleneck that could impede their production process, especially with respect to the ease of doing business.

In a statement by the Special Assistant to the Minister on Media, Mr. Ifedayo Sayo, the Minister said his ministry would continue to partner with manufacturers to ensure that they were kept in business for the good of the investors.

This article originally appeared on This Day

Photo: The Guardian Nigeria