Some tax and import duty provisions in the 2023 Fiscal Policy Measures of the federal government would significantly hurt the economy and worsen the de-industrialization worries in the Nigerian economy. The construction and transportation sectors are also vulnerable to fiscal policy-induced downside risks.
Some of the measures could exacerbate inflationary pressures which are detrimental to economic growth and manufacturing, construction and transportation sectors. It is double whammy for economic players to contend with a regime of high import duty, prohibitive tax rates amid a depreciating currency.
Fiscal policy measures must seek to ensure a good balance between objectives of revenue generation, boosting domestic production, enhancing the welfare of citizens, promoting economic growth, deepening economic inclusion, facilitating job creation and recognizing societal ethos, beliefs and values. Specific reviews of the new fiscal policies are as follows:
Excise duty on Beverages, Drinks, Wine
The fiscal policy measures imposed the following rates:
- Non-Alcoholic Beverages, Fruit Juice, Energy Drink Excise: Duty of N10 per liter
- Beer And Stout: 20% Ad valorem Tax; N75/Litre
- Wine Production: 30% Ad Valorem; N75/Litre
- Spirit and other Alcoholic Beverages: 30% Ad Valorem; N150/litre
It should be noted that Ad valorem tax is based on the value of the product, which makes the impact even more injurious to industrialists.
Sustaining current investments in these sectors would be a herculean task. These policy measures failed to reckon with the multifarious challenges which industry operators are currently grappling with, some of which include the following.
- Weak and declining consumer purchasing power.
- Naira exchange rate depreciation which is taking a huge toll on cost of production.
- High energy cost
- Multiple taxes and levies already being imposed on the industry players.
- Risk to jobs in the sector and its extended value chain including millions of MSMEs in its distribution and marketing chain.
- Downside risk to manufacturing sector outlook in the Nigerian economy.
Implications for the sector and the economy
Drop in sales for investors in the sector
- Negative effect on tax revenue from the sector.
- Loss of direct and indirect jobs which could be in a couple of millions.
- Millions of farmers supply local inputs such as grains to the sector may lose their livelihoods.
- Risk of decline in profitability and shareholder value.
- Elevated risk of smuggling of the products.
40% Import duty on vehicle
It is difficult to justify this high import duty on vehicles for the following reasons:
- The Nigeria is about 90% dependent on road transportation which underscore the importance of motor vehicles in the economy.
- There is an increasing affordability problem for citizens with regard to vehicle acquisition, especially by the middle class of the Nigerian society.
- Cost of locally assembled vehicles are beyond the reach of most Nigerians, contrary to the assurance given by government at the inception of the auto policy.
- There is limited access to credit for vehicle purchase by Nigerians. Over 90% of purchases are done out of pocket, which is extremely challenging. And where the credit facilities exist, the interest rates are outrageous, between 25-30%.
- The economy has experienced huge exchange rate depreciation which had already exacerbated vehicle acquisition cost in the first place.
It is therefore insensitive of policy makers to impose a whooping 40% import duty on vehicles in an economy where there is no mass transit system and where vehicle ownership has become a necessity, especially for the middle class.
There is an additional 2% and 4% green tax, depending on the engine capacity of the vehicle. This translates to import duty of 42% or 44% depending on the engine capacity of the vehicle.
Implication on the economy and the citizens
High transportation cost as vehicles costs increases.
- Risk of increased vehicle smuggling, especially in the light of porous borders.
- The number of rickety vehicles, especially commercial buses will remain high as replacement cost becomes prohibitive.
- The middleclass will continue to contend with affordability problems.
Import duty of 45 percent on iron and steel Products
The country is currently contending with high cost of construction of both public and private properties. Infrastructure costs have also become very exorbitant. Housing deficit is still very high. It is therefore difficult to justify this high import duty on a major input of construction industry. Some of the implications of the high tariff on iron and steel include the following:
- Increase in cost of housing construction.
- Increase in the cost of infrastructure projects.
- High and increasing risk of building collapse because of the prohibitive cost of construction materials.
- High risk of smuggling of iron and steel products.
- High risk of false declarations and collusion with governed operatives at the ports.
- The high tariff is detrimental to the construction industry.
Tax on domestic wine producers
The local wine industry is already under tremendous from imported wines, which are largely smuggled. With a 30% Ad Valorem tax and a specific tax of N75/litre, most wine industries operating in the country may have to shut down. It is ironic that rather than support local wine producers to be more competitive and create more jobs, the government has opted to impose even higher taxes on them.
The immediate risk is that the domestic wine market would be taken over by imported, and mostly smuggled wine. Ultimately, the Nigerian economy, domestic investors in the sector and the employees of these firms would be the victims of this policy. The government would also suffer revenue loses because smugglers do not pay tax as they operate in the underground economy.
The story of producers of spirits and alcoholic beverages is not different from that of the domestic wine producers.
Tobacco industry
Tax on tobacco industry was reviewed. New tax is 30% Ad Valorem; N8.20k per stick. There are two main issues with the tobacco sub sector which pose a policy dilemma. There is the morality of tobacco production, and there is the economics of it. There is consensus that smoking is dangerous to health. In recognition of this, companies producing it are already mandated to inscribe this on their product packages. Advertisement of tobacco products is already outlawed in Nigeria. And smoking in public places is prohibited by law. There are many other stringent restrictions, including a subtle stigmatization of smokers. But strangely, all of these have failed to deter smokers, not just in Nigeria, but across the world. It is an addiction issue. It is therefore in order to continue to take steps to discourage smoking.
However, we should avoid extreme measures which may put the industry at the risk of extermination for the following reasons:
- There is the risk that the cigarette market would be completely taken over by smuggled tobacco products which are completely outside the radar of regulatory and revenue authorities. A large underground cigarette economy would be inadvertently created which would be more damaging to the health of citizens and the economy. We need to reckon with the reality of our porous borders.
- Loss of thousands of direct and indirect jobs being currently generated by the domestic tobacco industry.
- Heightened risk of abuse of alternative drugs which may be more damaging than tobacco.
Meanwhile, we need to reiterate that this position is not anyway an endorsement of cigarette smoking; it is a risk management proposition while the campaign against smoking is sustained.
- The truth is that tobacco products produced in the country is a lesser evil than the ones smuggled into the country which are completely outside any regulatory oversight.
- Dr Muda Yusuf is the director /ceo, Centre For the Promotion of Private Enterprise CPPE
