By Joseph O. Okuja
The impetus for expanding the tax base has arisen from the growing need for government to raise additional revenue in the face of growing revenue deficits and debt. The easiest solution considered by government in the just concluded budget cycle, in addition to raising the rates applicable to existing excise taxes, was to expand the scope of excise taxes to cover new products and services like mobile money and social media platforms.
Generally speaking, excise taxes target behaviours that the government considers to be economically or socially undesirable, and have traditionally been levied to curb consumption of the taxed items or transactions. They are intended to operate, at least in part, for the good of society by reducing the quantity of some defined economic or social harm. Taxing consumption is also far simpler than collecting income taxes because consumption taxes are levied at the point of sale and are entirely independent of an individual’s income level.
Now that a bill to amend the Excise (Amendment) Act 2018 is to be introduced in Parliament tomorrow, MPs must carefully evaluate the new taxes on their own merits, and understand the inherent limitations of these taxes, their regressive nature, and the unjustified reasoning and pronouncements by the proponents. The basic mechanics behind how excise taxes work should be relatively straightforward even for “sleeping” MPs, but I will not take this for granted. Basically, imposing an excise tax on a good or service makes it more expensive for consumers, which in turn leads consumers to purchase less of those goods and services. However, government relies on the fact that even after the tax has been added to the goods or services, at least some people will still consume the taxed goods and services; otherwise a significant reduction in demand for the taxed goods and services would be unrealistic and indeed self-defeating.
The key to the success of excise taxes is that the goods and services usually targeted to be taxed are demand inelastic, meaning that the demand for the good or service is not affected by the price increments as a result of the tax (there are no alternatives for consumers to switch to), and therefore government would still generate considerable revenue. However, the anticipated tax revenue comes at a cost. For starters, the proposed excise taxes tend to be regressive, hitting the poorest members of society the hardest and effectively penalizing lower income individuals for their unavoidable consumption choices, which are often dictated by their cost-sensitivity and a lack of access to viable alternatives. These taxes also produce negative unintended consequences, particularly if the tax is considered to be high, as consumers may try to avoid paying the tax. They could incentivize different methods of tax avoidance, both legal and illegal. Even on the benefits side of the equation, as government pushes to expand the tax base, it is at best uncertain whether these taxes will have the same benefits commonly attributed to the traditionally taxed excisable goods and services.
If government is looking to raise revenue by expanding the tax base into non-traditional areas like OTT and Mobile money transactions, then they must treat the new taxes as being different in kind to the traditional excise taxes on alcohol, fuel and tobacco; and resist the strong temptation to use OTT and MM taxes as a mere proxy to regulate the consumption of what they have determined to be a politically disfavoured service. A tax on accessing social media platforms and mobile money transactions cannot be viewed as “voluntary user fees,” so as to give it an appearance of fairness. We are in a digital world and to foolishly deny this fact can only create tension between the twin aims of raising revenue and curbing what government is considering as undesirable consumer behaviour.
My prayer is that the MPs redesign these taxes in ways to better serve both their revenue-raising and consumption curbing goals. Ironically, if the tax is considered high by consumers, it will definitely be very effective at discouraging consumption of the services and raise little revenue, but if the tax is minimal and embedded in the service, it will provide considerable revenue but not curb consumption in any meaningful manner. MPs should adopt a hybrid approach by redesigning the implementation of the tax as an indirect tax, and calibrating the taxes to a moderate level that maximizes tax revenue without totally discouraging consumption of the taxed services. In its current form, the costs in terms of its regressive nature and unintended consequences are far greater than the projected revenue yields.