One of the new policies introduced in the 2022 Finance Act signed into law by President Muhammadu Buhari on December 31, 2021, is ...
One of the new policies introduced in the 2022 Finance Act signed into law by President Muhammadu Buhari on December 31, 2021, is the N10/litre excise duty on all nonalcoholic, carbonated, and sweetened beverages. Government said it aims to discourage excessive consumption of sugar in beverages, with the intention to reduce the incidences of obesity and diabetes in the country. This new “sugar tax” will also raise revenues for health related and critical expenditures.
The process to the imposition of this levy started in the third quarter of 2021 at the interactive session on the 2022-2024 Medium-Term Expenditure Framework (MTEF), when the members of the National Assembly resolved to amend the Finance Act to include levies on all carbonated and non-carbonated drinks. At the forum, the Comptroller-General of the Nigerian Customs Services, Hameed Ali, submitted that all companies, producing alcoholic and non-alcoholic beverages should be subjected to levies as their products are injurious to health. Since the negative health implication is the reason why government is levying alcoholic drinks producers, it is therefore also necessary that the carbonated drinks production with similar health consequences should be taxed, he asserted.
The government has signed into law the 2022 Appropriation Act, signaling its resolve to start levying the excise duties as contained in the Act. The law stipulates that for every litre of carbonated drink produced and consumed in the country, a N10 excise duty is expected to be paid into the government coffers by the producer. Among the companies that will be subjected to this levy are, Coca-Cola Nigerian, 7Up Bottling Company, Rite Foods, La Casera Company, Fayrouz, produced by Nigerian Breweries, and other producers of carbonated drinks in Nigeria. With the commencement of the implementation, the argument has shifted to who bears the burden of the N10/litre levy.
There are various reasons why government imposes taxes. Apart from raising revenue, taxes (sales) are used to discourage the consumption of a supposed harmful product. According to the government, excessive consumption of sugar through any means is one of the reasons why so many Nigerians are infected with diabetes and obesity. Thus, the imposition of this N10/litre on all nonalcoholic, carbonated, and sweetened beverages produced with sugar is therefore it’s way of discouraging the consumption of these products.
Taxation of any kind comes with consequences, referred to as incidences or burdens which affects the distribution of welfare of one or more economic agents. The magnitude of this effect, however, depends on the elasticity of demand of such products, i.e., the degree of responsiveness of consumers to a change in the price of the commodity, in this case, the carbonated drinks. The excise levy on carbonated drinks will no doubt seek to raise the prices of these products. This is the more reason why the burden of the levy will be borne by the consumers of such products. In other words, the demand for the product will remain inelastic, the increase in the price of the products will not have much effect on the consumption of the product even though it will be borne by mostly the consumers. There may be impacts on the company, though.
Increases in taxes everywhere reduces the disposable income of consumers. Where there is no corresponding increase in the disposable income of consumers, the quantity of such products bought and consumed must as a matter of fact reduce. This is where the producers must worry about. Despite inflation, Nigerian authorities have concluded plans to fully deregulate the petroleum sector in July 2022, which has the tendency to shoot prices of commodities to the roof top without a corresponding appreciation in consumer income. Any increase in the price of carbonated drinks, in the era of deregulation and its consequences, will eventually reduce the quantity sold by the producerss in the carbonated drink sector of the FMCG, and ultimately their profitability. This justifies the statement that the existence of a tax often reduces the extent of market transactions.
The companies should leverage the Coca-Cola Company model of how to tackle problems associated with increases in taxes meant to dissuade consumption of their products
- The companies increase the sizes and prices of other less sugar products. This increase in sizes which may come with a little price addition may attract consumers to these products thereby helping the company to recoup its losses using this market. The use of these methods is important for consumers who believe in the company’s original taste and quality, devoid of sugar.
- As an old company, another way the company can increase its market share in this tax regime period is by not passing the entire excise levy on to consumers. The company should absorb part of the levy while the consumers will bear the rest. Through this way, the price increase resulting from this will be so minimal such that it will attract more consumers from other competitors whose prices will be fully shifted to consumers.
NB: Labour and the Organised Private Sector (OPS) are currently engaging government to see what can be done to protect the producers. While the discourse is ongoing, it is important that the Coca-Cola Nigeria Limited devises one of the above means or others at its disposal to sustain its market leadership position in the industry.