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Coca Cola and Pepsi lovers in trouble: Taxation of soft drinks in Nigeria

An opinion/concept note by The Oyemaja Institute of Law.

Zainab Ahmed, the Minister of Finance, Budget and National Planning recently announced the federal government's introduction of an excise duty of N10 per liter on all non- alcoholic, carbonated and sweetened beverages. This new policy referred to as "Sugar Tax '' is provided for under the Finance Act ( 2021 as amended).

Many, most notably the National Association of Nigerian Students (NANS) in the South-West zone, the Manufacturers Association of Nigeria (MAN) and finance experts, have raised arguments against the attempt of the government to justify its decision by stating that the purpose of the tax is to discourage excessive consumption of sugar and to generate income for the government for health related and other critical expenses.

Taxes remain a major source of revenue for the government in almost every country which allows the government to not only generate revenue but also to redistribute income. Over consumption of sugar on the other hand can contribute to illnesses such as tooth decay, type two diabetes and obesity (which is a major risk factor for heart diseases, cancers and other diseases).

This establishes that the concerns raised by the government as justification for the tax are indeed legitimate. The pertinent question therefore is whether or not this tax can indeed serve the objectives for which it was introduced.

First, income generation v the peculiarities of the Nigerian manufacturing context

Over the years, excise and custom duty have remained a major source of revenue for Nigeria. Excise duty is a tax imposed on manufactured goods as opposed to custom tax which applies to imported goods.

Following the abolishment of excise duty on most manufactured goods in 2001 except goods considered harmful such as alcohol and tobacco, excise duty lost its place as a major source of revenue and was only now used as a means of discouraging consumption of harmful goods.

According to a report by the Manufacturers Association of Nigeria (MAN) titled "MAN Report: Re-introduction of Excise Duty on Carbonated Drink Will Cost FG N197bn", Nigeria is more likely to lose more than double of what it stands to gain from the imposition of excise duty on all non- alcoholic, carbonated and sweetened beverages as a result of a reduction in other taxes such as Value Added Tax (VAT) and Company Income Tax (CIT) from the soft drinks manufacturers.


Excise Duty is an indirect tax. This implies that the system is designed in such a way that producers are expected to pass on the burden to the consumers by increasing prices. While Value Added Tax is highly dependent on sale of goods for use or consumption, Company Income Tax is imposed on the profit of a company and so reduction in sales will mean a reduction in Value Added Tax and Company Income Tax generated

Despite the economic blows and woes heightened by the recent outbreak of the COVID-19 pandemic, the Food and beverage industry has continued to thrive and contribute significantly to the economy, employment and tax. Like other manufacturers however, they have had to battle with the effects of the pandemic and recession which has increased the cost of production.

The introduction of excise duty may make it impossible for the non- alcoholic beverage industry to keep up with this performance. This is also likely to lead to retrenchment of workers or even relocation to more favorable places.

Even worse will be the fate of small and emerging business owners in the non-alcoholic beverage market who have not established a name for themselves. They stand the risk of folding up permanently.

To further discredit the not-so-convincing argument on the economic benefits of sugar tax, the Nigerian Labor Congress, in a letter to the President and Commander- In-Chief of the armed forces (President Muhammadu Buhari), seems to suggest that the tax will cause economic hardship to the Nigerian workers when it stated that the implementation of excise tax on non-alcoholic, carbonated and sugary drinks will cause an increase in price which will place these products out of the reach of average Nigerians.

Is this positive or negative? This largely depends on its effectiveness in reducing sugar consumption.

Excessive consumption of sugar v current food consumption patterns

Let's be honest, our consumption patterns make it so easy to consume more than a healthy amount of sugar in one sitting without even noticing it.

Blame it on the really hot weather, stress, cravings and a thousand and one other factors that make you want to reach out your hands to grab a chilled 50cl bottle of soft drink which contains about 54g of sugar (World Health Organization recommended adult daily sugar consumption in the mud).

Over 50 jurisdictions over the world have sought to address the issue of over consumption of sugar sweetened beverages by imposition of tax which are usually in the form of excise tax or value added tax.

The Specific Excise tax ( a form of Excise tax commonly employed) can be based on volume or sugar content. To understand this, let's compare South Africa’s "2.1c per gram of sugar per 100ml, after a “free pass” for the first 4g per 100ml" to Nigeria's N 10 per liter.

Targeting sugar directly by basing tax on amount of sugar used provides a headstart in promoting healthy living as the manufacturers, in a bid to increase profit margin, will be incentivised to reduce the quantity of sugar used in their products and employ non nutritive sweeteners (as "healthy substitutes" for sugar).

Really??? Healthy Substitutes???

While non nutritive sweeteners may appear to be safer than refined sugar, there are disadvantages to consuming artificial sweeteners. Although it may rule out type two diabetes, tooth decay and other sugar related diseases, it could most certainly create new problems such as addiction to sweet food at the detriment of healthy but not so sweet foods (such as vegetables).

Over consumption of artificial sweeteners ( which are chemicals) is not exactly safe either. Prices will also depend on the affordability and availability of artificial sweeteners, therefore we are left with the possibility of ending up with high prices and low sugar.

The volume based system on the other hand incentivises manufacturers to increase their prices but not to reduce sugar quantity as this provides no additional benefit in terms of profit. This therefore places the products out of the reach of certain members of the populace.

Now a manual worker is more likely to burn more energy than a person with a white collar job. These beverages provide instant energy. Whether or not the volume based system will actually be effective depends largely on several variables but the continued consumption by those who can afford it may make it really hard to achieve a healthier population through reduction of sugar intake.

We should also not forget that sugar can equally be consumed from other sources apart from non alcoholic beverages such as sweets and chocolates so if the real motivation of the government is to actually reduce sugar consumption, "witch-hunting" the non alcoholic beverage sector alone may be insufficient.

To further examine whether or not sugar tax is likely to affect people's inclination to consume more sugar, let us examine the words of Alain Samson (a behavioral economist) who stated that

"... people are not always self-interested, benefits maximizing, and costs minimizing individuals with stable preferences".

Have you ever grabbed a bottle of Coca-Cola on your way out of a conference centered on why sugar is bad for you? Are you more likely to go for the cheapest snack available of the one that you actually prefer (regardless of the price)? Is your spending actually limited by health considerations or "sapa"?

In the opinion of behavioral economists, sugar tax may raise awareness of the problem but they have limited effect on the behavior of individuals. The government is also not likely to win the people over by limiting their choices which may make the people resist what they perceive to be an authoritarian government.

Then, the forces of demand and supply come to play again and people get used to the new price (let's not forget that the 50 percent increase in the price of carbonated drinks only recently had little or no effect on consumption).

Circling back to South Africa's example, a sugar based system appears to be a better approach but a more holistic approach may be to tax sugar in whatever form that it is consumed and not merely in soft drinks.

Go big or go home

But then, since there are no guarantees that this will actually affect people's behavioral patterns, an even more excellent way may be to adopt the recommendation by New Zealand Institute of Economic Research on "the potential benefits of other food taxes and subsidies, food labeling, industry reformulation, public awareness, water availability, restrictions on marketing of unhealthy foods, and availability of sugar-sweetened beverages in and around schools" as policy options instead of or in addition to sugar taxes.

The possibilities are endless, but one thing is certain, the chances of the success of Nigeria's newly introduced "sugar tax policy", as an income generation and as a health promotion strategy, are slim in the face of current realities.

Yours in opinion,

Oyemaja Law.

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