Taxation
Tobacco taxes are the most cost-effective tobacco control tool (WHO, 2021).
Increasing taxes reduces consumption of tobacco products, increases government revenue, and saves lives.
This page provides information on current tobacco-tax policies in Nigeria, shows the effects of increasing tobacco taxes, and debunks common industry arguments against tax increases. It also shows the experience of similar countries that have successfully increased taxes.
WHO calculates that if all countries increased taxes on cigarette packs by 50%, governments around the world would earn an extra US$ 101 billion in revenue; there would be 49 million fewer smokers and this would avert 11 million deaths from smoking worldwide.
WHO
Tobacco Tax Policies
in Nigeria
Nigeria uses a combination of specific and ad valorem taxes. There is a 20% ad valorem tax and a ₦58 ($0.16
) specific tax per pack of 20 cigarettes. (CSEA Africa, 2020)Prior to 2018, Nigeria only taxed tobacco using an ad valorem tax of 20%. The specific tax was first introduced in June 2018 at ₦20 ($0.05) for a pack of cigarettes. This increased to ₦40 ($0.11) in 2019 and ₦58($0.16) in 2020.
The average retail price for a pack of cigarettes in Nigeria was ₦220 ($0.60) in 2018. Excise taxes made up 25% of the retail price of a pack of cigarettes in that year.
Other tobacco products are taxed with a specific tax. In 2020, other tobacco products, which include smokeless tobacco products and shisha, were taxed at ₦1,000 ($ 2.6) per kg or ₦3,000 ($7.8) per litre.
Types of taxes applied to tobacco products
Excise taxes. A tax levied on a specific good.
- Specific Tax: A tax levied based on quantity – eg tax per carton / per cigarette / per gram loose leaf.
- Ad Valorem Tax: A tax based on monetary values – eg a percentage on the factory or retail price.
Other taxes.
- Value Added Tax (VAT): Levied as a percent of value of many different goods. Nigeria has a relatively low VAT of 7.5% (increased from 5% in 2020).
- Import Duties: Levied on imported goods
International Agreements on Tobacco Taxation
Nigeria ratified the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) in 2005. The FCTC recommends that excise taxes (ad valorem and specific) make up at least 70% of the retail price of a pack of cigarettes.
Nigeria is also a member of the Economic Community of West African States (ECOWAS), and their tax directive requires members to implement a specific tax of at least $0.40 (₦122) per pack of 20 cigarettes and an ad valorem tax of at least 50%.
Nigeria falls short of both these measures. To meet the ECOWAS directive, the ad valorem tax would need to increase from 20% to 50% and the specific tax would have to increase by ₦64, i.e from ₦58 to ₦122. (Tesche et al,. 2020)
It is estimated that Nigeria raised ₦55 billion ($155.1 million) in tax revenue from tobacco taxation in 2020.
A study based on 2018 data estimated that the quantity of cigarettes purchased would decrease by 32% and government revenue would increase by 127% if Nigeria increased tobacco taxes to the levels of the ECOWAS tax directive.Price of a 20-Cigarette pack of the most sold brand in ECOWAS |
- Cigarette Prices|
- Higher than Nigeria
- Below Nigeria
- Nigeria price
- Currency
Data source: WHO report on the global tobacco epidemic
In 2018, Nigeria’s cigarette prices were almost the lowest among all ECOWAS countries:
The price of cigarettes in Nigeria is low in comparison to other African countries; increasing tax will increase the price of a pack of cigarettes.
Effects of Increasing Tobacco Taxes
Increasing Tobacco Taxes Saves Lives
It is a well-known fact that approximately 50% of smokers will die from tobacco-related diseases. However, increasing taxes on tobacco products – and meeting the ECOWAS and WHO standards – can reduce tobacco-related deaths.
(WHO, 2015)If Nigeria had met the ECOWAS tax directive in 2020, 3,000 smokers who would have died prematurely from tobacco-related diseases in that year would have been prevented.
An additional 90,000 people would not die prematurely from tobacco-related diseases over the next 30 years. Even more lives could be saved through following WHO recommendations; if Nigeria had met WHO recommendations in 2020, 6,000 fewer Nigerians would have died from smoking- related diseases that year, and 189,000 lives would be saved over the next 30 years.
There are other important impacts that occur after increasing tobacco taxes: (1) tobacco use decreases, and (2) government revenue increases. The decrease in consumption has an added impact – there is also a decrease in disease and death caused by smoking-related diseases.
When we presented a road map for implementation, and the government said we don’t have money because revenue is shrinking. If we had data telling us how much they would generate with tobacco control implementation, it would have been very useful.
TCDI Assessment Mission
In low and middle income countries, studies have shown that increasing the price of cigarettes by 10% leads to a 8% decrease in tobacco consumption.
Tax increases can affect consumption through three channels:1.
Higher prices encourage people to quit smoking and make people less likely to continue smoking.
2.
Some smokers will smoke fewer cigarettes.
3.
Higher prices discourage people from starting to smoke. Young people are more price-sensitive than adults. Therefore tax increases can have a big impact on this group. Most people start smoking as teenagers, so this is an especially important group to target.
Nigerian Tax Model
Using data from Nigeria and lessons from international literature, we can predict how increases in tax will affect tobacco consumption, government revenue, and mortality using a Tobacco Excise Tax Simulation Model (TETSiM) developed by the Research Unit on the Economics of Excisable Products (REEP).
TETSiM is a “tool to quantify the likely impact of a change in the cigarette excise tax structure and/or the level of the cigarette excise tax on a number of variables, including the price of cigarettes, cigarette consumption and excise tax revenue”.
The TETSiM has been used for Nigeria, as well as for other countries, including South Africa, Kenya, Ghana, to evaluate how changes in tobacco tax rates and structures will impact their economies.
This model is used by both academics and policy makers.In 2018, excise taxes on tobacco in Nigeria accounted for 25% of the price of a pack of cigarettes and fell short of the ECOWAS directive and WHO recommendations.
Increasing the specific tax would increase the price of cigarettes. In the figures below, we will show how increases in the specific tax would impact tobacco consumption, government revenue, and mortality, and highlight how these would be impacted if Nigeria met the minimum requirements of the ECOWAS tax directive and WHO recommendations.
Cigarette Consumption would Decrease
It is estimated that Nigerians smoked 17.4 billion cigarettes in 2020.
If cigarette taxes had met the ECOWAS directive of a 50% ad valorem tax and ₦122 specific tax per pack, the total number of cigarettes smoked would have decreased from 17.4 billion to 15.9 billion in 2020. Excise taxes would have accounted for 52% of the retail price of cigarettes if the ECOWAS directive was met. The WHO recommends that excise taxes make up 70% of the retail price of cigarettes.In the graphs below, we present two scenarios, one of which is the most conservative and the other the least conservative:
Scenario 1 – conservative case: This aims to increase the specific excise tax by USD0.4 per year (the uniform excise specific tax increases by 45%, 67%, and 66% from year 1 (2022) to year 3 (2024), respectively. The ad valorem tax increases by 30%, 40% and 50% in years 1, 2, and 3, respectively).
Scenario 2 – least conservative case: This aims to increase the specific excise tax to reach USD1.00 by the end of year 3 (the uniform specific excise tax increases by 45%, 138% and 189% in years 1 (2022), 2 (2023), and 3 (2024), respectively, and the ad valorem tax increases by 30%, 40%, and 50% in years 1, 2, and 3, respectively).
Total consumption (packs) and excise tax per pack (Naira)
Over-shift |
Under-shift |
Data source: Research Unit on the Economics of Excisable Products
Total consumption (packs) and real excise revenue (billion Naira)
Over-shift |
Under-shift |
Data source: Research Unit on the Economics of Excisable Products
Total tax amount in real Naira for mid-price brands |
Scenario 1
Scenario 2
Data source: Research Unit on the Economics of Excisable Products
Tobacco Tax Best Practices
The WHO and the WHO FCTC Secretariat have shared some best practices for implementing efficient and effective tobacco taxes to enhance compliance, collection of revenue, and to reduce the risk of illicit trade.
A simpler tax system is better.
Specific excise taxes treat all tobacco products equally
Specific excise taxes treat all tobacco products equally
All tobacco products pay the same amount of tax with specific taxes, regardless of brand or type of product. In countries that use a combination of specific and ad valorem taxes, the WHO recommends that there be a minimum specific tax floor and that the specific tax component makes up a large proportion of the total excise tax.
Nigeria is in the process of following this advice by increasing the specific tobacco excise tax while keeping the ad valorem taxes the same.The WHO recommends automatically adjusting specific tobacco taxes, since one disadvantage of specific taxes is that their value can be eroded by inflation. Inflation and changes in household income should be taken into account when establishing taxation levels. Regular adjustments should be made to ensure that tobacco products become less affordable over time.
Apply comparable tobacco taxes to all tobacco products
Apply comparable tobacco taxes to all tobacco products
All tobacco products, including shisha and e-cigarettes, should be taxed in a comparable way, especially where the risk of substitution exists. Increasing taxes on some products but not others could lead people to switch to tobacco products that are more affordable. Nigeria has recently introduced a tax on other tobacco products, including shisha.
Include comprehensive tobacco taxes in tobacco control strategy
Include comprehensive tobacco taxes in tobacco control strategy
These strategies should be in line with other policy measures recommended in the FCTC and should include things such as smoke-free policies, large graphic health warnings, and tobacco advertising, promotion and sponsorship (TAPS) bans.
Tobacco tax administration should be strengthened
Tobacco tax administration should be strengthened
A strengthened tax administration will reduce opportunities for tax avoidance and tax evasion and will ensure that tax revenue is maximised. This would include measures such as licensing of the tobacco supply chain, use of fiscal markings e.g track and trace, and building the capacity of tax enforcement agencies.
Efficient and effective tobacco tax systems and administration
Efficient and effective tobacco tax systems and administration
These systems should be structured to minimize the costs of compliance and administration which in turn reduce tax evasion and the risk of illicit trade.When establishing or increasing national levels of taxation, countries should consider having regular adjustment processes or procedures for the periodic revaluation of tax systems and administration, as well as tobacco tax levels.
Examples of specific policies that can be implemented:
- Earmarking taxes. Earmarking taxes sets aside revenue from tobacco taxes for a specified expenditure, for example funding primary health care, especially in the treatment of tobacco-related diseases, smoking cessation services, and prevention programs, and tobacco control. Examples of tobacco tax earmarking are found in the United States of America, Thailand, Romania, Egypt, Algeria, and Botswana.
- Track and Trace systems. These allow governments to track tobacco products from where they are produced to their final point of sale (tracking) and to trace them back to the point of production from the final retail point (tracing). These systems can help reduce illicit trade and increase tax revenue.
Lessons From Other Countries
Some countries, such as The Gambia, South Africa, and Colombia, have implemented changes to their tobacco taxes. Reviewing these cases can be helpful for Nigeria.
South Africa
Increasing tax rates does not drastically increase illicit trade
Between 1993 and 2009, South Africa increased tobacco taxes by more than 10% a year over and above the inflation rate. During this time, smoking prevalence fell from 32% to 20.5%. Government revenue increased from 3.7 billion Rand in 1993 to 12 billion Rand in 2009 (in constant 2014 prices).
Despite warnings from the tobacco industry that this would lead to a drastic increase in illicit trade, the illicit trade share remained around 5%. The South African government improved public health by decreasing smoking and was able to increase revenue. Despite the rapid increase in the excise tax, there was no noticeable increase in illicit trade.Between 2010 and 2017, illicit trade has increased significantly, despite the fact the taxes increased at a rate of 1% – 2% a year, compared to an average of 10% a year between 1993 and 2009. During this time, a specialized unit that focused on illicit trade in tobacco in the South African Revenue service was disbanded. This significantly weakened the enforcement of tobacco control laws.
The Gambia
Increasing taxes decreases consumption and increases government revenue
Before 2013, the Gambia charged an ad valorem tax on cigarettes and did not charge excise tax on other tobacco products. In 2013, the Gambia moved from an ad valorem excise tax to a specific excise tax on cigarettes and introduced a specific excise tax for other tobacco products.
The excise tax on a pack of cigarettes increased from GMD3.30 in 2012 to GMD5 in 2013 and GMD 9 in 2014. All tobacco products in the Gambia are imported; therefore, imports are a good proxy for consumption. Between 2012 and 2014, cigarette imports decreased from 1.1 million tons to 550,000 tons. Excise revenue more than doubled, from GMD89 million to GMD258 million over the same period.
Tax rates in the Gambia are still below the WHO recommendations. However, they are working with the WHO to develop policies to increase tax rates and implement other tobacco-control best practices.
Colombia
Tax increases can be paired with other tobacco-control policies to have the greatest impact
In 2015, Colombia was planning to increase tobacco taxes drastically. The Colombian government was worried that this might lead to an increase in illicit trade. They passed a new anti-smuggling law before the tax increase. Tobacco taxes on a pack of 20 cigarettes increased from US$0.23 to US$0.71. After this tax increase, the price of a pack of cigarettes nearly doubled. Consumption fell from 674 million packs in 2016 to 446 million packs in 2018. Despite this large decrease in consumption, revenue nearly doubled over the same time period, and there was no significant increase in illicit trade.
Industry Arguments
Against Tax Increases
The tobacco industry will always oppose tax increases on its products. (WHO, 2014)
Increases in the excise tax on tobacco will make their products more expensive and less affordable, which will lead to a decrease in tobacco consumption, or they will have to absorb at least part of the tax increase, which will lower profit margins.
Their arguments against tax increases are not supported by evidence or are greatly exaggerated. The tobacco industry uses many arguments to discourage tobacco-control policies. Other examples of tobacco industry myths have been compiled by The Campaign for Tobacco-Free Kids.Myths and Facts
Tobacco industry interference has been particularly strong against efforts to increase tobacco taxes. The industry aims to ensure that tobacco products remain affordable, while protecting their own profits – at the expense of public health
WHO
Myth: Cigarette tax increases do not reduce youth smoking.
Fact: Many studies have shown that increasing taxes is an effective way to increase the price of tobacco products for both adults and youth.
Myth: Cigarette tax increases will hurt tobacco farmers.
