Experts Warn Government Against Implementation of Proposed Additional 20 Percent Ad-Valorem Tax on Non-Alcoholic Beverages

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As the controversy surrounding the proposed additional 20 per cent ad-valorem tax on non-alcoholic drinks mounts, economic experts have warned of the dire consequences it would create if the government proceeds with the introduction of the additional excise tax, taking into view, the devastating effect of the recent ₦10 (Ten Naira) per litre excise tax.

The experts, Olufemi Awoyemi, Founder and Chairman, and Teslim Shitta-Bay, Chief Economist /Managing Editor, both of Proshare Limited, Nigeria’s foremost Financial Information Hub, and Taiwo Oyedele, a Fiscal Policy Partner and Africa Tax Leader at PricewaterhouseCoopers (PWC) a reputable accounting firm, opined that the new ad-valorem or percentage tax of 20 per cent on carbonated soft drink products could put some revenue gains on government coffers, but its adverse impact on the economy would outweigh the gains.

Their viewpoints came on the heels of the recent sectoral heads meeting of the carbonated soft drinks sub-sector of the Manufacturers Association of Nigeria (MAN) in Lagos, where they lamented that since the introduction of the ₦10 [Ten Naira] per litre excise tax on soft drinks, there has been a serious decline in volume and revenue which was at –10 per cent between June and September 2022 and estimated to reach – 25 per cent by the end of the year.

Awoyemi said while it is good for the government to generate revenue through its tax policy, there is a need for a balance to create an environment for the manufacturing companies to thrive, as they have just recovered from the coronavirus (COVID-19) pandemic, foreign exchange challenges, high cost of raw materials and technology adoption, among others.

He posits that the proposed additional 20 per cent ad-valorem tax on soft drinks will impact negatively on the government, manufacturing companies, and citizens, and should be done in a way that recognises the rate of economic recovery, which means in relation to their ability to be more efficient.

He said this calls for critical review because if the government only looks at the money that will be generated without its effect on the soft drink manufacturers which will shut down their production plants due to revenue shortfalls and the layoff of workers, together with the high cost of the products, it would be catastrophic to the nation.

“The ad-valorem tax can be done in a way that recognises the rate of economic recovery, by taxation in relation to efficiency and productivity while considering the social and fiscal implications of it, which includes the timing of the tax and the rate of increase.

Putting these factors into consideration will prevent the lingering economic catastrophe and will prevent policymakers from having a militarised economic mindset that scares investors,” the economic expert enthused.

“If the government looks only at the economic gains without what the soft drink sector will go through, without an equilibrium, there will be a conundrum, and that means government plans will be defeated,” Awoyemi stated.

While affirming that it is economically advisable to adhere to the International Monetary Fund (IMF) and the World Bank recommendations on the improvement of certain areas of the economy through taxation, it should be looked at from what obtains in the country and not in other climes.

“I believed the tax advocates had no social impact assessment before proposing the excise tax on carbonated drinks. The one-sided narrative that considered economic justification of taxes without social impact assessment has unintended consequences,” he averred.

On the issue, Shitta-Bay asserted “a tax is designed to create an environment for expansion, consumption, and productivity, so you need a tax that is not primitive”.

He said “the scale of the tax in the carbonated soft drink sector is too high., that the proposed 20 ad-valorem tax on the value of the product plus a recent ₦10 per litre excise tax will create difficulties for manufacturers in the sector.

The renowned economist explained that the immediate pain points would include the high unit cost of products, fall in demand, decline in corporate revenues, lower foreign direct investment (FDI), and rising job losses.

Teslim added that if the ad-valorem tax is to reduce sugar intake, it would be worthy of note to state that sugar consumption in Nigeria is one of the lowest consumers on the planet, with 8 kg per person, while the United Kingdom records 36 kg per person and the United States of America 40 kg per person.

Oyedele stated, “We know the government needs money because it does not have enough to fund critical infrastructure, overheads and the rest of them, and the best thing to do is to strike a balance, that delicate balance, as to what to task, what rate of tax would be appropriate for each sector and when to impose that tax.”

He said the Federal Government should fix an excise tax that should not be burdensome to the soft drink sector, for the companies to thrive since they contribute hugely to the country’s GDP, and employment level.

“It doesn’t mean whether the recommendation is coming from the World Bank, IMF or the ECOWAS committee, the government should sit and say to itself, what should l do for my economy at this particular time? It should also look at the products, like soft drinks, how critical it is to Nigerians whose income per head is very low,” Oyedele affirmed.

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