FG imposition of N10/litre excise duty on soft drinks lacks strong justification

FG imposition of N10/litre excise duty on soft drinks  lacks  strong justification

Last week, the Federal Government announced the introduction of excise duty of N10 per litre on all non-alcoholic, carbonated and sweetened beverages. Excise duty is a form of tax imposed on the locally manufactured goods.

The new policy, now referred as ‘Sugar Tax’, is contained in the Finance Act signed into law by President Muhammadu Buhari on December 31, 2021. Mrs. Zainab Ahmed, Minister of Finance, Budget and National Planning, disclosed this during the public presentation of the 2022 Appropriation Act last week in Abuja. She said the 2021 Finance Act also raised excise duties and revenues for the health sector.

The Minister said the excise duty on soft drinks would discourage excessive consumption of sugar beverages which contributes to diabetes, obesity among others. “There is now an excise duty of N10/ per litre imposed on all non-alcoholic and sweetened beverages; And 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 [generate ] revenues for health-related and other critical expenditures. This is in line with the 2022 budget priorities,” she said.

Truly, in countries around the world, consumption of sugar-sweetened beverages (SSBs) among others, are significant contributors to the global epidemic of non-communicable diseases. As a consequence, they contribute, as well, to excess health care costs and productivity losses.

A large and growing body of research, especially  from global health organisations,  documents that taxes specific to such products, known as excise taxes, reduce consumption of these products and thereby diminish their adverse health consequences. Although such taxation has historically been motivated primarily by revenue generation, governments are increasingly using these taxes to discourage unhealthy consumption.

From economic point of view, excise taxes or duties  generally result in higher prices for consumers, reducing demand for taxed products. The size of the reduction and whom prices most affect depend on consumers’ price elasticity of demand ( i.e., the percentage change in the quantity demanded resulting from a 1% price increase). In economics,  price elasticity is a function of whether consumers treat the good as a necessity or a luxury item, how much of a consumer’s income is spent on that good, and the availability of substitutes.

Over the years, extensive evidence has accumulated on the impact of taxes and prices on the demands for tobacco products and alcoholic beverages. Similar evidence has recently emerged on the demand for SSBs. Much of the early evidence on tobacco and alcohol demand came from  high income countries (HICs). Over the past two decades, considerable research has been done on the demand for tobacco products in low- and middle-income countries (LMICs), but similar evidence on alcohol demand is limited. Much of the evidence on SSB demand with respect to prices comes from HICs, whereas recent evidence based on taxes comes from LMICs.

So, summarily, excise taxes are a powerful tool for reducing tobacco use, excessive drinking, and SSB consumption. The demands for these products are sensitive to prices, and governments that have raised or introduced taxes have seen reductions in consumption and, for tobacco and alcohol tax increases, improved health outcomes. Simulation modelling suggests that SSB taxes may produce a similar impact on weight, diabetes, and other health outcomes.

Given their ability to target specific products and raise their relative prices, excise taxes are the most effective option for taxing tobacco, alcohol, and SSBs. Taxes based on ethanol content for alcoholic beverages and sugar content for SSBs are likely to induce product reformulation and other supply-side responses that can increase their positive impact on health. Differentiating tobacco taxes according to products’ relative risks could help drive some smokers to less hazardous means of consuming nicotine.

Most countries’ tobacco excise taxes are well below recommended levels as a share of price. Alcoholic beverage taxes generally account for a small share of the price, thus having little impact on the affordability of these products in most countries. Few countries have taxes on SSBs, and taxes in these countries are low. The potential of these taxes to significantly reduce consumption and save lives remains high.

But, curiously, when did  Federal Government  begin to take the issue of health challenges in the country serious?  Surprisingly, while explaining that the reason the Federal  Government increased excise duty on soft drinks and beverages is partly on the ground of  health , the finance minister ignored the paltry sum allocated to the health sector in the 2022. What  people want to know  if  the government wants to use excise duty to stop the consumption of carbonated drinks with a view to reducing  its health implication or that the government wants to generate  more revenues.

The Federal Government has for the umpteenth time failed  to meet the Abuja Declaration by African leaders in 2001 and the World Health Organisation (WHO) to allocate, at least, 15 per cent of yearly national budgets to health. In April 2001, the African Union (AU) countries met in Abuja and set a target of, at least, 15 per cent of the annual national budget . In Nigeria  the entire national budget is just about $40 billion and what can you do with that in a country with over 200 million people?

 A breakdown of the 2021 appropriation bill presented to a joint session of the National Assembly by President Muhammadu Buhari showed that only 4.526 per cent (about N592.166 billion of the proposed N13.082 trillion) was allocated to health despite the ongoing COVID-19 challenge and the threat of another pandemic.

Meanwhile , stakeholders in the health sector have decried the proposed N820 billion budgetary allocations for health, which represents five per cent of the N16.39 trillion 2022 Appropriation Bill signed into law.

A virologist, vaccinologist and Chief Executive of Innovative Biotech Limited, United States and Nassarawa State, Dr. Simon Agwale, told The Guardian: “Unfortunately, the entire national budget is just a drop in the ocean and I don’t think anything would change even if it is properly implemented .

The organised private sector thinks the health reason the Federal Government has adduced for  the imposition of excise duty is not strong enough. It said  it has nothing to do with health and that the target is revenue generation.

It said the imposition of N10 per litre on non-alcoholic, carbonated and sweetened beverages could translate to an increase in the retail price of products by up to 5% with lower end products bearing higher burden.

The Manufacturers Association of Nigeria (MAN) said the introduction  is capable of leading to a 0.43 per cent contraction in output, and about 40 per cent drop in total industry revenues in the next five years.

The association, in a statement, released last Thursday, and signed by its Director-General, Mr Segun Ajayi-Kadir, argued that the new excise, despite its potential overwhelming negative impact, was being motivated by potential revenue gains, rather than those reasons given by the government for its introduction.

While noting that the food and beverage industry had contributed significantly to the economy and taxes, despite the nation’s challenging business environment, introducing such duty, the association added, would amount to ‘leading the goose that lays the golden eggs to perdition’.

“The affected sub-sector has contributed most significantly to the economy and taxes, despite the debilitating impact of Naira devaluation, the inadequacy of forex and the COVID-19 pandemic.

“The food and beverage contributed the highest (38%) of the total manufacturing sector to the GDP.It comprises 22.5 per cent of manufacturing jobs and generates more than 1.5million jobs. So, this excise would certainly cast a sunset to this performance,” the association stated.

MAN further argued that the revenue aspirations of the government in introducing the excise might not be justified, on the long run, since such gains would not be enough to compensate the corresponding government’s revenue losses in other taxes that might be experienced due to the introduction of such levy.

“The government is estimated to generate an excise tax  of N81billion between 2022 and 2025 from the group. This will not be sufficient to compensate the corresponding government’s revenue losses in other taxes from the association’s members.

“For instance, the corresponding effect of reduced industry revenue on government revenues is estimated to be up to N142billion contraction in VAT raised by the sector and N54billion CIT reduction between 2022 to 2025. This is not to mention the potential negative impact on manufactures/supply chain,” the statement read.

The association expressed the belief that such excise would lead to high production costs, which, in turn, would adversely affect production levels, and ultimately result in dwindling profits.

“Nigeria is the 6th 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 investors to take investments to other countries,” it added.

The Nigeria Employers’ Consultative Association (NECA) says the federal government should suspend the new excise duty of 10/litre on carbonated drinks and should instead, continue to support the manufacturing industry to attain full recovery after the onslaught of the COVID-19 pandemic.