As part of global trade, countries do impose duties and levies on imports to control the flow and movement of goods. This helps to generate national revenues, apply surcharge on luxury items, and possibly discourage a high level of imports by placing high effective duty rates on imports into strategic sectors to boost the competitiveness of the local industries.
Nigeria is known for maintaining several supplemental levies and duties on selected imports that significantly raise effective tariff rates. For example, Nigeria has an effective duty (inclusive of all charges) of 50% or more on about 100 tariff lines, especially on luxury goods such as yachts and motorboats (75%) and as well as on tobacco and alcohol (75% to 95%).
Nigeria places high effective duty rates on imports into strategic sectors to boost the competitiveness of the local industries. While this is a seemingly good strategy, many have seen this as a protection mechanism for cronies of the political gladiators in the country. For instance, wheat, sugar, rice and tomato paste have effective rates of 85%, 75%, 70% and 50% respectively. There is also an effective duty of 70% on salt and 55% on cement. These are sometimes interpreted as a protection for cronies of the political elites such as Aliko Dangote.
For seemingly good intents, the Federal Government of Nigeria (FGN) announced an Automotive Industry Development Plan (NAIDP) in 2013, which seeks to expand domestic manufacturing of motor vehicles. As part of this initiative, the FGN imposed a 35% levy on automobile imports (except for commercial vehicles), over and above the 35% import duty already levied, for an effective total duty of 70%. This was to discourage imports and create an enabling environment for existing assembly plants while also attracting new investments into the sector. There were debates as to whether Nigeria’s assembly plants and investment climate were ready for such a protection, but that’s a different discussion entirely.
The above implies that any new vehicle (other than commercial vehicles) imported into the country attracted an import duty of 35 per cent and an additional levy of 35 per cent, totaling 70% of the “assigned value” of the vehicle. The assigned value of the vehicle is calculated based on the year of make and other attributes. For used vehicles, the custom duties and levies are applied based on a 10-year (for cars) or 15-year depreciation period, with a minimum customs value of 30% of the value of the new vehicle equivalent.
Let us assume that you bought a Toyota Camry 2016 vehicle for $10,000. In determining the assigned value, the Nigerian Customs Service (NCS) would obtain the price of a brand new version of the car, say $30,000. They’ll then assume that the car would erode a value of $3,000 per year (10-year useful life), and the assigned value would then be $18,000 as of 2020. The effective duty to be paid would then be derived to be about $12,600 (excluding VAT and other charges) using the average official exchange rate.
The policy did encourage additional investments in the automotive sector. The functioning assembly plants in the country were just three as of 2013. As of now, more than 49 licenses had been granted with only a few commencing operations. However, there is a general believe that imports has continued to rise. For a country with a very porous border, porous enough that kidnappers from neighboring countries easily moves their victims into the Nigerian territory, such policies only created a very good incentive for professional smugglers who leveraged on the lower tariffs in the neighboring countries to bring in vehicles through the land borders. Consequently, the revenues generated by the NCS would have been impacted – due to the leakages caused by smuggling and other alleged corrupt practices within the NCS itself. In 2019, the Comptroller General of the NCS, Mr Alli, joined the call for a reduction in the 35 per cent extra levy on imported vehicles.
Last week, the FGN announced its intention to reduce the levies on automotive imports from 35% to about 5%, thus bringing the total effective tariffs down from 70% to about 40%. The above policy change would reduce the landing costs of the imported vehicles. In the above scenario, that would be equivalent to a savings of about $4,200 (excluding VAT and other charges). Would this savings get to the final car purchasers in Nigeria? I don’t know.
Zainab Ahmed, the Minister of Finance, explained that the reduction in tariff is targeted at reducing the cost of transportation. This appears like a subtle acceptance of the policy failure and the inflationary impact of that ill-timed policy. My concern and sympathy goes to anyone like Innoson and others who has made huge investments in that sector. The game has changed again, and they need to go back to rejig their strategy.