Nigeria’s New Excise Regime: Is this the Right Time?

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Tuesday, April 17, 2018/5:49PM/Chijoke ODO, Manager, Global Trade Advisory, Deloitte

Barring any last minute reversal, locally manufactured alcoholic and tobacco beverages (“Excisable Products”) will be subject to a new excise regime from 4 June 2018. This new regime is pursuant to Section 13 of the Customs, Excise Tariff, etc. (Consolidation) Act which enables the Nigerian President to impose, vary or remove any import or excise duty.
 

The Federal Government of Nigeria (FGN) charges an indirect tax (Excise) on Excisable products which are goods considered harmful to the environment and public health/morals.
 

Under the new regime, Excise on alcoholic beverages will be charged on an ad-quantum basis (volume of production in centiliters multiplied by the applicable rates) as opposed to ad-valorem (based on ex-factory price of alcohol produced), For tobacco products, Excise will also be charged on an ad-quantum basis (number of sticks produced multiplied by the applicable rates), in addition to the existing ad-valorem Excise (based on ex-factory price of cigarettes/tobacco produced).
 

Preliminary analysis indicated a potential increase in Excise bills. This has generated diverse views on the impact and timing of the regime change. The proponents consider the change as overdue while opponents argue that it is ill-timed considering the current economic landscape.
 

On this premise it becomes imperative to understand the triggers for the change and thereafter evaluate its impact.
 

The Triggers
Economic realities: The penultimate amendment to the Excise regime in 2009 sought to manage the effect of the global economic crises on manufacturers and consumers. In the same vein, it seems the 2018 amendment is hinged on the need to diversify sources of FGN’s revenue following the recovering from a crude oil induced recession. 

Global Pressure:
There is increased regional and global pressure (some of which are based on commitments made through treaties e.g. the World Health Organisation Framework Convention on Tobacco Control) on FGN to raise taxes on Excisable Products to curb their consumption. 

Efficiency:
There is need to make the regime more efficient and curb revenue leakages. Under the current regime there are allegations that valuation of Excisable Products is subject to abuse-based on Nigerian Customs Service using its discretion in arriving at values for Excise purposes. 

Shift to indirect tax:
The National Tax Policy has continually advocated for a shift from direct to indirect taxes, which are easier to collect and administer, thereby making evasion difficult. On this premise, it is believed that a shift of focus to indirect tax would significantly improve Nigeria’s tax to gross domestic product ratio estimated to stand at approximately six percent (6%)-currently one of the lowest in the world.
 

Impact of the Change
Needless to say that the new Excise regime would place additional cost on most Excisable Products which Products which could manifest in the following manners: 

Additional Cost to Consumers:
Since excise is an indirect tax, manufacturers would naturally want to push any increased Excise to the consumer an indirect tax, manufacturers would naturally want to push any increased Excise to the consumer. En However, this could result in declined sales which then prompts consideration of the impact of FGN’S additional revenues on each sold product vis-à-vis the following:

• Lost revenues arising from declined sales and/or consumer shift to the grey market i.e. the tobacco and alcohol market which are under the radar of the FGN: 

• Corporate and value added tax revenue decline due to reduced profits and sales respectively. 

Additional cost to manufacturers
: In a bid to prevent consumer resistance to higher cost which may affect demand for Excisable Products, manufacturers may absorb the additional cost to maintain current sales levels. This therefore questions the effectiveness of the new Excise regime because:
 

• Consumption would remain the same, ceteris paribus, thereby defeating the objective of  imposing Excise: 

• FGN shares in the burden of additional cost through corporate tax deductibles resulting in reduced taxes; and 

• Manufacturers may adopt cost cutting measures including job cuts, which worsens the current unemployment situation. 

Overall, in my view, reviewing the Excise regime was long overdue as tax is not static and should evolve as trends and economic situations change. The Excise regime should have undergone numerous reviews based on actual changes in the economy over time; evolving health and environmental findings; and perceived challenges with administration.
 

However, due to the current infrastructural and foreign exchange challenge, worsening employment situation and inadequate mechanisms for monitoring and controlling illicit trade of tobacco and alcoholic products, it could be argued that the platform for an increase in Excise may currently not be robust. Thus in my view, the timing of the regime change may appear sub-optimal;

Additional, the objective of controlling consumption does not appear to have effectively guided the imposition of ad-quantum Excise. There appears to be issues with the categorization and imposition framework-e.g. if discouraging alcohol intake is the driver for Excise, why should an alcoholic beverages with 3% absolute alcohol content be subject to more Excise than another alcoholic beverages with 5% absolute alcohol content, because the latter is categorized as beer or stout and the former is not? If discouraging intake of carcinogenic substances and/or nicotine is the driver for Excise, should a consumer of raw tobacco or perhaps nicotine based e-cigarettes, not be subject to Excise?
 

Nonetheless, the review of the excise regime is not unexpected, as Excise is becoming increasingly popular around the world as the lever to either control or fund the external costs of various forms of behavior, For instance, climate change has triggered conversations around carbon, green or fuel taxes etc. Incidentally, Nigeria is a signatory to the Paris Agreement on Climate Change and certain commitments on reducing carbon emissions are expected to be made. Similarly, increasing incidence of diabetes has driven many countries to introduce various forms of sugar tax.
 

Stakeholders should note that Nigeria is responding to her domestic economic issues and global considerations on potentially harmful products or behaviours; it is therefore only a matter of time before the ambit of Excise extends to other products deemed harmful to the society.
 

*Chijoke ODO is a Manager, Global Trade Advisory at Deloitte
 

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