Why tax stamps pose more of a problem than solution

BY SULAIMAN ABIODUN

As the world’s deadliest pandemic in recent time continues to ravage the global space leaving behind tales of woes and throwing countries into unimaginable and devastating economic consequences, countries are putting together their best brains to protect what is left of their economic realities while planning for a post Covid-19 era. These days, the world is dealing with a pandemic and the resultant effect of the pervasive virus is massive job cuts and a fragile economy. Economists have predicted that the twin shocks of the pandemic and plunging oil prices will plummet the country into a recession this year.

Already, consumer prices recorded the sharpest increase of 1.21% in June 2020 with inflation also climbing to its highest since April 2018 at 12.4% with forecasts of even higher inflation figures by the end of the year. This implies higher poverty and unemployment across the nation.

It is, therefore, a no-brainer, for every government, revenue generation in these times is even more critical than it has ever been in a while. This is why policies that are geared towards increased tax revenue are embraced by government wholeheartedly. Nonetheless, any policy that is inimical to the growth of industries, and ultimately, the prosperity of the citizenry at this critical time in history is one that should be jettisoned without playing Russian roulette.

One of such policies is the proposed implementation of a FISCAL MARKING SYSTEM otherwise known as TAX STAMPS SYSTEM to ensure alcohol revenue is optimised, protected and to combat illicit alcohol trade. The thinking behind the consideration of this policy is apparent: Government wants to ensure accurate taxation process with the aim of minimising losses in the taxing of alcohol, and any automated system that seems to provide a solution is welcome. However, it is not that simple!

Decisions such as this must be weighed on several scales and not adopted on a whim or the premise of perceived success in other countries. It is not enough to copy and paste an anti-illicit alcohol strategy because a couple of other countries have attempted the same.
For one, the challenges of Nigeria’s business environment are peculiar, and any strategy or policy being adopted by the government must consider these peculiarities. Our circumstances are not regular and any error in judgement regarding regulations that will have a far-reaching impact on stakeholders across a wide-ranging spectrum of the economy must be given not just careful thought but also be backed by empirical facts and the relevant metrics.

Also, foreign direct investments (FDI) are bound to be harder to come by when regulatory policies are subject to too many vagaries, and even current investors are likely to channel their much-needed funds elsewhere when regulations are too stiff and unrealistic. The implication of this is the paucity of capital for companies in the alcohol sector.
Nigeria’s complex, multi-faceted market is hard to crack, even more so by beer companies who now have to contend with consumer scepticism around their products because of Covid-19.

For many alcohol companies, it has been a battle staying afloat during these times, with the hospitality sector under different forms of lockdown due to the pandemic, and one would consider it a miracle that there have been no incidences of massive layoffs or pay cuts so far.

However, to keep the tide calm, the government of the day needs to be proactive in stabilising the alcohol industry, not just on account of the importance of the industry to the country’s GDP, but also for the sake of thousands of Nigerians who earn their income from the sector. The last thing the government should pay attention to is the call for a tax stamp system to ostensibly eliminate the possibility of companies in the alcohol industry remitting less excise duty than they should be.

There is varied compliance with the payment of taxes throughout the alcohol industry, but the area which makes the least sense for the implementation of tax stamps is the beer industry. According to a comprehensive study conducted by Euromonitor International, unregulated beer accounts for only 1.1% of total unregulated alcohol by volume and only 6% of beer in circulation is unregulated.
This makes one wonder what makes it imperative to introduce a fiscal marking system given that there is almost zero underpayment of taxes by local companies in the beer industry.

Also, the implementation of fiscal marking is by no means a cheap venture. The cost of implementation: from the cost of equipment to the redesign of the bottles to incorporate the tax stamps, the labour-related cost, and most importantly the costs of the tax stamps themselves which are typically paid out of Nigeria to a foreign company, beer companies will be faced with significantly increased production costs.
At a time when there’s been significant dip in sales, and consequently, the bottom line, the proposition falls flat with industry stakeholders, particularly at a time when companies in Nigeria are already struggling with Covd-19.

There’s nowhere the world over where a 100% alcohol track and trace system exists. What obtains in select markets can at best be described as counting mechanisms. In countries such as Tanzania, Colombia, Morocco, and Kenya where tax stamps have been in use, there has been neither a marked positive impact on the industry or populace nor record of a significant increase in revenue generation for the government.

What is most disturbing about the proposed system is that it is likely to have the opposite effect to what is intended – increased costs on manufacturers will increase beer prices which in turn will drive consumers to drink cheaper illicit alcohol, which is untaxed and often harmful to health. So the Government objective of decreasing illicit trade and increasing taxes will in fact have the opposite effect, of increasing illicit trade, and reducing taxes as less beverages will be sold.

Denmark abolished tax stamps on wines and spirits and the United Kingdom Parliament rejected the idea of implementing tax stamps on beer when it became clear that beer brewers, many of whom are compliant with government regulation would be negatively affected if the policy was enacted. Perhaps the most compelling reason the indiscriminate implementation of fiscal marking should be avoided is the near-certain concomitant effect of job cuts. The proposed tax stamps means reduced production efficiency and increased costs, resulting in price increases on products, and resultant volume decline. If this happens, affected organisations will have no choice but to downsize as their already tight margins are further threatened.

The only ones who will smile to the bank are the foreign tax stamp producers, and even they are bound to take a hit if desperate illicit alcohol traders elect to produce counterfeit versions of these stamps, as they have done in many other countries.
Tax stamps and related technologies that only serve to complicate simple processes are not what the industry or our nation needs right now.

The Federal Ministry of Finance, Budget & National Planning and the Federal Ministry Industry, Trade & Investment can protect alcohol tax revenues by ensuring the continuous effective monitoring of alcohol production which is already currently audited by custom officials. Other measures include robust enforcement of tax laws through improved surveillance and stricter licensing controls. Stiffer penalties should also be instituted for illicit activity.

That is what guarantees a win-win for all stakeholders: government gets paid its appropriate excise duties, manufacturers do not have to incur any extra costs, employees get to keep their jobs, and other stakeholders maintain their interests.

Any other arrangement will profit a minute few to the detriment of the majority with the attendant fiscal and social consequences.