The implications of recent changes to Nigeria's tobacco tax policy
This piece examines the new tobacco tax policy in Nigeria, and its implications for public health, fiscal revenue, industry revenue and competitiveness, as well as employment and livelihood.
In March 2018, the Federal Government of Nigerian approved new tax policies for tobacco products and alcohol beverages, which would be effected from 4 June 2018. The new tobacco policy will maintain the current 20 percent ad valorem-based excise duty rate on tobacco products, and introduce an additional N20 (US$ 0.07) specific tax on each pack of 20 cigarettes in 2018, which would increase the specific tax per pack to N40 (US$ 0.13) in 2019 and eventually N58 (US$ 0.19) per pack in 2019. This amounts to 16.4 percent excise tax burden in overall, which is significantly lower than the 75 percent excise tax burden on tobacco products recommended by the World Health Organization, and below that of some other African countries (such as Ghana and Senegal).
Before now, two notable tobacco control legislations existed: the Tobacco Smoking (Control) Act of 1990, and the National Tobacco Control Act (NTCA) of 2015. A combination of enhanced evidence-based research and advocacy for tobacco control, as well as governments desire to seek innovative ways in to mobilise revenues in recent years, have led to the policy changes.
In what follows, we outline the implications of the new policy for public health, fiscal revenue, industry revenue and competitiveness, as well as employment and livelihood. In order to examine these implications, a Tobacco Excise Tax Simulation Model (TETSiM) was empirically applied, in addition to secondary analysis.
The simulation model projects that the quantity of cigarettes consumed in Nigeria will fall by about 4.7 percent over the next three years under the new tax regime, if there is no change in the net-of-tax price. Consumption will by a larger percentage when the industry (producers, wholesalers & retailers) passes on excise tax burden to consumers without decreasing the net-of-tax price of cigarettes.
The model also projects that excise duty revenue from tobacco sales will increase by over 500 percent to N39.3 billion (US$ 128.5 million) over the next three years, irrespective of industry response –as excise duty is levied on cigarette production (not consumption) and the specific tax component is less susceptible to undervaluation.
Findings also show that industry revenue will fall by 3.3 percent to N98.7 billion over the next three years under the new tax regime. This outcome will hold either due to an expected fall in the quantity of cigarette consumed in response to a tax-induced price increase, or a failure of the industry to pass on the tax burden to consumers in form of higher prices. However, the tobacco industry can maintain or increase industry revenue in instances where it increases the net-of-tax price given market power.
"The improved but minimal tobacco tax policy change is projected to have a marginal positive impact on public health and a larger impact on government revenue"
Secondary data analysis shows that the new tobacco tax policy is unlikely to severely impact industry competitiveness due to the large market power and supernormal profit. The Nigerian tobacco industry operates as a near monopoly with British American Tobacco Nigeria (BATN) holding 79 percent of total retail volume. Moreover, the cheap production costs and significant market power allow for the tobacco industry to have a large mark-up and enjoy supernormal profits. Specifically, the Nigeria Customs Service indicates that the unit cost analysis for a pack of cigarettes is N60 (which is the basis for the ad valorem duty rate), whereas a pack of twenty cigarettes for the most sold brands retails for an average price of about N250, signaling a huge markup by the industry.
Studies in Low or Middle-Income Countries (LMICs) show no evidence that higher tobacco taxes will lead to significant job losses as very few businesses are tobacco-dependent, and smokers typically reallocate money previously spent on tobacco to other products. Experiences in other countries suggest that job losses do not occur due to changes in tax regimes, but due to manufacturers’ own policies (such as mechanisation or managerial changes).
Hence, the new policy is unlikely to lead to job losses for those directly employed by the tobacco industry. Similarly, it is unlikely to severely impact the livelihoods of those indirectly employed by the tobacco industry (tobacco farmers and distribution value chain) since most tobacco farmers practice mixed farming hence can readily switch to alternative crops if demand for tobacco leaves falls.
In conclusion, the improved but minimal tobacco tax policy change is projected to have a marginal positive impact on public health (depending on industry response) and a larger impact on government revenue (irrespective of industry’s legal response). The new tobacco regime is also expected to have minor negative consequences on the tobacco industry, but does not threaten the existence of tobacco firms nor severely threaten the livelihood of those directly and indirectly employed by the industry.
Going forward, it is important to, first, fight against factors that weaken the effectiveness of the new policy or yield unintended consequences. Particularly, improving monitoring, evaluation and border control especially with the use of automated systems (such as the track and trace system) is vital in this fight.
Second, strictly enforcing complementary tobacco control measures as contained in the World Health Organisation’s MPOWER key points (such as advertisement/sponsorship ban in all states) to reduce tobacco use and guarantee holistic socio-economic benefits of tobacco control beyond realising tax revenues is essential. Realised revenues from the new tobacco tax policy can be considered for earmarking to fund other complementary tobacco control interventions and fund programmes to support alternative livelihoods for potentially vulnerable groups.
Third, more collaboration is needed between relevant government ministries, departments and agencies, as well as civil society organisations and think tanks in research, advocacy and policy process for tobacco control interventions.
Lastly, a further upward review of the excise duty rate on tobacco products with a larger portion of specific tax in the tax structure is recommended.