Analysts see New Excise Duty on Carbonated Drinks Weakens Consumer Purchasing Power, Expects Consumer’s Shift to Fruit Juice As Alternative

Close up color image depicting freshly made fruit juices and smoothies on display in a row and for sale at Spitalfields Market, a food and vintage market in east London, UK. In the background, defocused, is a pile of fresh fruit and vegetables - the raw ingredients used to make the smoothies. Room for copy space.

Analysts see New Taxes weaken consumer to Boost Revenue;…
In the just concluded week, the Federal
Government stated that, as provided in the
2021 Finance Act, it would charge a six percent tax on the revenue of foreign companies providing digital services to customers in Nigeria.

According to the Minister of Finance and National Planning, Mrs Zainab Shamsuna Ahmed, the digital services include apps, high frequency trading, electronic data storage and online advertising amongst others.

She stated that Nigerian government would work with the digital non-resident companies to get them registered as tax agents for Federal Inland Revenue Service (FIRS) in order to ease collection and remittance of the VAT.

Also, the drive by FG to increase revenue was also extended to the shores of manufacturers of non-alcoholic, carbonated and sweetened beverages amid the introduction of sugar tax.

The Finance Minister hinted that the excise duty of N10 per litre on non-alcoholic, carbonated and sweetened beverages was in line with the Finance Act that was signed into law by President Muhammadu Buhari on Friday, December 31, 2022.

According to the Fiscal authority, the sugar tax would serve dual purposes – one, to raise revenue for health-related expenditure in the budget and two, to discourage Nigerians from consumption of excessive sugar via beverages.

However, the Manufacturers Association of Nigeria (MAN) stated that the new duty would cause a 0.43 per cent contraction in output and a 40 per cent drop in total industry revenue in the next five years.

It mentioned that this might lead to government losing revenue from other taxes such as Company Income Tax as profits of affected companies decline.

Meanwhile, the Federal Government appears to have no choice than to find new means of generating revenue to fund its ever-increasing budget deficit in the midst of low revenue and galloping expenditure.

Going by the 2022 budget recently signed by the President, FG is expected to spend N17.13 trillion, which is 18% higher than the 2021 budget.

Recurrent (non-debt) spending, estimated to amount to N6.91trillion, would gulp 40% of total expenditure, and 20% higher than the 2021 budgeted outlay.

An aggregate capital expenditure of N5.96trillion would constitute 35% of total expenditure.

This provision is inclusive of Capital component of Statutory Transfers, GOEs Capital & Project-tied loans expenditures. Debt servicing would amount to N3.61trillion, which is 21% of total expenditure, and 34% of total revenues.

Also, provision to retire maturing bonds to local contractors or suppliers would amount to N270.71 billion or 1.6% of total expenditure – the provision is in line with the FGN’s commitment to offset accumulated arrears of contractual obligations dating back over a decade.

On the income side, FG projected an aggregate revenue of N10.74 trillion in 2022, 32% higher than the 2021 projection of N8.12 trillion, to fund estimated expenses of N17.13 trillion – hence, leaving FG with a short fall of N6.39 trillion as deficit.

In aggregate, 35% of the proposed revenue is expected to be sourced from oil-related sources while 65% is to be earned from non-oil sector, which largely comprises of taxes

We welcome the FG’s decision to introduce digital taxes to augment revenue as this is a low hanging fruit.

Also, the reasons alluded to for an excise duty of N10 per litre on sweetened carbonated drinks appear noble but could further reduce the purchasing power of citizens, especially in hotter climates where they are considered an important refreshment.

Beverage makers could also face a shift in demand by consumers to more affordable substitutes, such as fruit juices.

Government should also explore increasing sin tax as well as taxation on imported luxury items and provide support to producers of quality local subtitutes thereby also reducing demand for forex.