Illegal importation has cost Nigeria N90 billion in revenue.
Nigeria has lost $550 million (N90 billion) in revenue to the grey market of the automobile industry over the last 4 years, Financial Derivatives Company, a diversified financial institution, has said.
According to the firm, this amount is equivalent to 4.5 per cent of the total exports of Kenya or 4 per cent of the total exports of Ghana.
“This amount could fund the construction of one petroleum refinery or a modern power station with 1000MW capacity. On a leveraged basis of 1:3, it can finance the rehabilitation of 2 seaports and 2 modern airports. With an in-come per capita of $1500 and infrastructure gap of $200bn, this is not chicken feed” the firm said in a report titled ‘Nigerian Ports: A car smuggler’s paradise.
The grey (illegal importation) market importers primarily source the automobiles from the Middle East (Dubai and Abu-Dhabi), according to the report.
Grey market products, the report stated, can originate from theft, unreported sale of goods, the leaking of excess inventory into the market, illegal sales across borders (playing the price arbitrage game), and multiple sales of the same product where the manufacturer receives revenue only for the sale first reported.
“When these cars arrive at the destination ports, various schemes are carried out to either avoid duty payment or make the lowest possible payment. These schemes include false declaration of automobile data, declaring high duty vehicles as low duty vehicles, under invoicing, payment of duty on a few units of the imported vehicles and colluding with officials to pay a negotiated duty,” it said.
The report added that in some cases, automobiles that are destined for land-locked nations such as Burkina Faso, Niger, and Chad, and transshipped through the ports find their way to the Nigerian market, avoiding custom duty payment in the process.
This grey market affects government revenue from both direct and indirect taxes, which are two major sources of government revenue.
“The direct tax loss comes from the reduced sales and profit in the legitimate automobile industry while the indirect tax loss comes from the custom duties and excises. However, majority of the loss comes from the indirect taxes. The grey importers evade tax through several means including: declaring new vehicles as used vehicles, negotiating with custom officials and false declaration of vehicle data,” the report stated.
Unfavourable effect on the economy
The Federal Government’s non-oil receipts declined by 30.3 per cent to N589.98bn from preceding quarter and one of the reasons was a fall in customs and excise duties, as was noted by the Central Bank of Nigeria, CBN, in its fourth quarter report for 2012.
Comparing government expectation in the medium-term frame-work and the actual government revenue shows that the government receipts through customs and excise duties remain below expectation, the firm said, using assumptions from the Federal Government of Nigeria’s Medium-Term Expenditure Framework and Fiscal Strategy Paper (Revised) 2010-2012.
“In the medium-term framework, Customs halved its CIF (Cost, Insurance and Freight) to 7% from a target of 14% due to revenue collection being below expectation. The actual revenue collected shows that the 2012 customs and excise duties collection was N398.1bn, 26.7% below the N543bn (based on 7% of CIF) set by Customs for the 2010-2012 period. Custom duty as a percentage of non-oil GDP was a marginal 1.7%.The estimated loss to government between 2008 and 2011 to the grey market was 57.8% of collected customs revenue”, the report stated.
“The continuous decline in government customs receipts can be due to either a reduction in national import, or to increased importation through the grey market, avoidance of duty payment by grey market operators, and corruption at the ports. Duty-avoidance, which involves the legal exploitation of the duty regime in an attempt to reduce the amount of duty paid, coupled with duty-evasion techniques are believed to be a major factor to the plummeting government revenue,” it added.
The firm said on investigation, most manufacturers with local representatives have spent a great deal of effort to reduce the grey market activities by working with trade associations and governments (both domestic and foreign); but the Nigerian government is yet to take advantage of this effort.
“One way the government can do this is to enforce the SON/ISO/SONCAP rules, especially on vehicles import, which would attack one of the primary contributors to the fall in its own revenue. Other methods the government can use are strengthening the nation’s borders to prevent the inflow of illegal products, enforcing import standards and the reduction of duties which might encourage importers to operate legally,” the report stated.
It added that training and supervision of custom officials to reduce the incidence of bribe collection and improve efficiency in their work will also produce great benefits for the country; saying if all this can be done, substantial amounts of revenue will be generated which would spur substantial growth and development in the country.