Consumption Tax: Is Fashola Going Too Far?

The new consumption tax introduced by the Lagos State government on hotels, restaurants and event centres in Lagos seems to be creating fireworks between the government and stakeholders. Joseph Ekeng takes a look at the issues.

The look on their faces didn’t portend anything good. All across the space in the Agip Recital Hall, Muson Centre, a couple of weeks back, guests gathered in small groups chattering and grumbling that the Lagos State government was gradually becoming a pain in the neck. That day, the hall was filled with major stakeholders in the hospitality industry in Nigeria who have been invited by Governor Raji Fashola to rob minds together and seek their understanding on the new consumption tax, which brings an extra five percent charge on consumers of goods and services in the industry.
However, what transpired in the room was far from an affable mind robbing session. It was more like a take-it-or-leave-it offer from the governor on a vulnerable group of business owners who reasoned that they are already being overstretched by a long list of government levies. This latest addition is coming at the tail of a chain of state government rates and taxes regime which includes value added tax, pay-as-you-earn, tourism development fees, land use charge and advert permit to LASAA, Food and Regulated Premises License rate, Jurisdiction Permit, waste management levy, environmental protection fee and annual fire safety certificate rates.
Since coming on as the governor of Lagos State in 2007, Fashola has made tax payment a major cornerstone of his government by invoking existing tax laws to force companies and individuals to cough out more than what they did in previous administrations. But the unprecedented developmental effort by the governor in all parts of the state have tampered the pain of increased taxes, yet Lagosians are worried that the governor may be stretching his luck too far by initiating new tax laws that further undermines their profits. The consumption tax law which took effect from August 1, 2009 has been criticized as an unnecessary burden. Tola Onanuga, president, Lagos State Hoteliers Association, noted that the Consumption Tax Law amounts to double taxation in the light of the provisions of the Value Added Tax Act of 1993 and the Sales Tax Act of the Lagos State Government of 2004, said to have been repealed by Fashola. “The items covered therein are actually the same as those covered under the present Consumption and Occupancy Tax Law of Lagos State.. The Consumption Tax Law would eventually compromise quality and lead to low patronage,” Onanuga said.
Otunba Jimi Ogunba, a barrister, supported Onanuga’s standpoint and described the consumption tax as not “properly reasoned”. According to him, efforts had been made to change the names of the tax over and over, but it is still taxation on consumerism, which is already imposed in Value Added Tax. “This is double taxation and it will fail,” he declared.
Indeed, customers of hotel, restaurants and event centres are already feeling the pains of the new levy. Some of the hotels and event centres in Ikeja, Lagos visited by M2 have already begun implementing the new law. One event centre in Agidingbi, Ikeja have gone ahead to print a new receipt booklet for consumption tax payments. Some of the officials in the outfit who spoke with M2 revealed that a few customers have been turning down the extra payment. The centre’s 500-people capacity hall, which hitherto attracted a N390 000 rental fee, now goes for N409 500. Some other hotels simply charge en-block, making it hard for customer to decipher the added charges.
Fashola’s stance on the consumption tax issue have been challenged in court by the hotel and eatery operators who believe that that the court has already ruled on the matter in the case involving Coca Cola versus Lagos State, where the Lagos High court ruled that the N210 million sales tax claim by the Lagos State was tantamount to double taxation. In the suit before Justice Okechukwu Okeke of the Federal High Court, the plaintiffs sought an order of interlocutory injunction restraining Lagos State from enforcing the new tax law. As a result of the legal challenge, many event centres have decided to hold on to the consumption tax until the case is decided. “If the case is decided in our favour, we will pay it back to customers but if it is decided in government’s favour we’ll pay to them,” a staff from one of the outfits said. But a number of others have already started remitting to government.
While the matter is still pending in court, the Lagos State has continued to seek understanding from the stakeholders, arguing that the new tax policy is aimed at redistributing wealth. The new tax regime is not targeted at the poor, Fashola said. “It would in actual fact help in income redistribution, given that the target taxpayers consists of people in the middle and upper class as well as those on sponsorship who lodge in hotels,” the governor explained.
The government noted that the levy will only amount to N50 in every N1, 000 spent, or N500 in every N10, 000, adding that “the potentials of this contribution are far-reaching and extremely critical for our developmental purposes.” With a budget of N405billion, Lagos State is unarguably the biggest spender among the 36 states, but the funds that accrue to it from the federation account is only N240billion, just a little over half of its budget requirement. The balance of the budget is sourced internally mainly through tax. That is why Fashola is so passionate about taxes. The governor argued that the new tax law will empower the state better to further build infrastructures in the state and catch up with other developed cities.”We have always decried the relative level of development and compared ourselves with the progress made in other jurisdiction without asking ourselves what prices those jurisdictions have had to pay for the level of their development,” the governor said.
The governor reasoned that all event places abroad demand consumption tax.”All patrons of such places have to pay. All those who access hospitality outfits across the world do pay,” he said recently.
The new law provides that a consumption tax be imposed on any person who pays for the use of any hotel, hotel facility or event centre or purchases consumable goods or services in any restaurant, whether or not located within a hotel in Lagos State.
It defines the amount taxable to be “the total cost of facilities, consumables or personal services supplied to a consumer in, by or on behalf of the hotel, restaurant or event centre” adding that “the rate of tax imposed by the law shall be five percent of the total bill issued to the consumer excluding VAT.”
Despite the hullaballoo about the consumption tax, Lagos is still considered more tax friendly than a host of other cities outside Nigeria. A research on the subject shows that while the highest income tax in Lagos is 25 percent, cities in Europe and other African countries charge the same tax as high as 43 percent. Officials in the Lagos State government also noted that with 5 per cent VAT and total tax charge of 10 per cent on bill, the total rate is still lower than the 15 per cent (VAT + Tourism Levy) in South Africa, 17 per cent (VAT + Consumption Tax) in Egypt, 18 per cent VAT in Kenya, 11 per cent (VAT + local Lodging Tax) in the Netherlands, 12.5 per cent Standard VAT rate in Ghana and 17.5 per cent VAT in the United Kingdom, UK.
But some concerned observers are worried about the Lagos government’s unrestrained tax drive and its penchant to throw up new tax laws. They consider that it is too early to copy the tax policies abroad because those countries over the years have proved that taxes are money well spent. Besides they also said that while Fashola could be said to be doing a lot in terms of infrastructural development, Lagos is still far from an ideal situation. “The fact that some other cities in the world charge 45-48 percent taxes gives them no leverage to charge 25 percent or more,” Ade Bolaji said. “The economy is in bad shape, about 90 percent of the population of the state are not working; erosion and flooding are making people miserable. The government of Fashola needs to way the pros and cons before embarking on arbitrary increase of taxes,” he said.
This is food for thought for Fashola. But, with about two years left on his tenure, he still has ample time to prove he knows what he is doing.