Intrigues As Lagos Loses Case For Consumption Tax

Is the embarrassing defeat suffered by the Lagos State government at the federal high court over the consumption tax an indication that the government is taking its revenue generation drive too far? Joseph Ekeng writes.

The task of building good roads, effective transportation system, beautiful environments, modern schools and providing the infrastructure that Lagos State requires to transform into a mega city is clearly a daunting one. It is not just intimidating, but very capital intensive. The situation is compounded by the fact that in 2007, when Raji Fashola emerged the governor, Lagos’ infrastructure was almost in a state of total disrepair.

In just about two and half years, Fashola has done so much; he has sunk billions of naira to move Lagos in the direction of other great cities around the world. Indeed, Lagos is fast rebranding, getting away from it ugly past. But this has come with unprecedented commitment from the tax paying public. The all-out effort by Alausa to enforce tax regulation has so far been well received by Lagosians, most probably because of the remarkable changes they are seeing around the city.

But the reaction to the introduction of a consumption tax by the government, earlier this year, was a clear sign that the government may have over-stretched the goodwill it is enjoing. The consumption tax demands that all hotels, event centres and eateries in Lagos should pay five per cent of all purchases to the state government. That means that if a hotel used to charge N20000 for lodging per night, it immediately adjusts it up to N21 000. The extra N1000 goes to the coffers of Lagos State.

But the affected businesses would have none of that, positing that it 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. They immediately sought legal intervention as the Lagos government insisted on immediate enforcement of the new enactment.

As a matter of fact some of the event centres and eateries visited by M2 owing to constant pressure by Lagos State operatives have been complying with the regulation. But, after months of legal wrangling, the court held that government was wrong.

The court ruled, last week, that if the law was allowed to be implemented, it would amount to double taxation on the part of the tax payers. Hospitality industry operators under the umbrella bodies of Association of Fast Food Confectioners of Nigeria, the Registered Trustees of Lagos Hoteliers Association and Hotel and Personal Services Employers Association were motivated to seek legal redress after a similar case of double taxation was decided in favour of Coca Cola earlier in then year.

In the Coca Cola versus Lagos State, case the Lagos High court ruled that the N210 million sales tax being claimed by the Lagos State was tantamount to double taxation. Justice Okechukwu Okeke, who ruled in the Coca Cola case also held similar ground in favour of the operators. “I sympathise with the Lagos State government on the averment that the law was intended to raise funds for the development of the state, but it amounts to double taxation,” he said.

Hasty implementation

But while the case was pending in court, the Lagos State government carried on with the implementation of the consumption tax regulation. In the words of Adeola Ipaye, Special Adviser to the State Governor on Taxation and Revenue, “typical of government officials, they coerced and pressured operators to comply.”

An official at The Event Centre, Agidingbi, one of the most popular event places in Ikeja, told M2 that government officials have always been on their necks, forcing them to comply with the tax. Though the outfit had promised at the outset of the law to refund the money to customers once the case was decided in their favour, they reneged after undue pressure from government agents. “The Lagos government is very serious about this tax, they are always coming here to pressure us over the income tax,” the official, who simply gave her name as Ify said. “They have collected the tax up till this month,” she quipped.

The Event Centre Agidingbi is one of the 1099 hotels, events-centres and restaurants that had complied with the law. Yet there are still over a hundred other hospitality outfits that refused to comply on the basis of the legal tussle. Tunde Temionu, an executive of the Lagos Hotelier Association, criticized those who conformed, labelling them as ignorant. “If the association is in court over the double tax, tell me why they should pay?” he asked, adding that no member of the plaintiff’s body yielded to the law on double taxation.

Curious Price Increase

Some of the outfits that didn’t comply with the regulation were Tasty Fried Chicken and Domino Fast Foods. Officials of TFC told M2 that they were yet to implement the law pending last Monday’s court ruling. This claim is coming as a surprise to many customers of TFC, who now have to pay more for the products and services of the eatery. Incidentally the sudden gallop in price took effect just about the time the law was coming into effect.

Many of the patrons of the eatery are of the opinion that the price increases was for the tax. “What was the increase for?” Eddy Offor, a regular patron of the eatery, is left wondering.

However, Kingsley Chibuzor, Corporate Affairs Manager, Tasty Fried Chicken, insists that the company did not implement the new tax. “Tasty Fried Chicken did not implement the consumption tax law on any of its customers as long as the court proceedings tarried. And that was in accordance with our Association’s decision not to impose any tax on consumers till the matter was resolved,” he said.

The Merchant Manager, Domino Fast Foods, Mrs Serah, confirms knowing that many other eateries implemented the tax law. She told the magazine that Domino kept faith with the judiciary. According to her, the management of Domino was confident the court would be firm and fair in ruling on the matter brought before it by AFFCON.

Her words: “I am so happy that we won at last. We did not add the consumption tax to our services during the trying period because we knew that the Lagos State Government was fighting a lost battle,” Sarah said.

Tax Not For Operators

Sarah’s sentiment is certainly not acceptable to the Lagos State government who appear bent on having their way. The state has insisted that it will appeal the ruling, and that, until the appeal is decided, the implementation of the tax will continue, but only on the about 1099 operators that have already complied. The 100 hoteliers that sued on the matter will remain exempted until the appeal is decided.

Ipaye told journalists shortly after the ruling that the Lagos State Attorney General is opposed to the Plaintiff’s application for a restraining order on the ground that the court had not yet heard arguments about the validity of the state law. Other grounds of opposition are based on established legal principles that would not restrain a state government from implementing a law validly passed by the State House of Assembly.

He reiterates that the contentious tax is not imposed on operators, but the consumers of hotel services, accusing the court of impinging on the fundamentals of federalism. “This decision revives arguments on the practice of federalism as we now have a situation in which a Federal High Court restrains a state government from the implementation of a state law, which is indeed the constitutional duty of the state government,” he said.

Fashola also added that the tax was geared towards the redistribution of income. “It would in actual fact help in income redistribution, given that the target taxpayers consist of people in the middle and upper class, as well as those on sponsorship, who lodge in hotels,” the governor explained.

The governor seems not to understand the reason for the opposition being put up by the hoteliers. He sees no reason for challenging a levy that amounts only to N50 in every N1000 spent or N500 in every N10000, adding that “the potentials of this contribution are far-reaching and extremely critical for our developmental purposes.”

But Tola Onanuga, president of the Lagos Hoteliers, disagrees with Fashola. Onanuga’s grouse is that hotel, eatery and event centre operators in Lagos are already paying too much in taxation. He listed some of the charges to include 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.

Why Consumption Law Might Fail

The Lagos State government has argued that even with the consumption tax Lagos is still more lenient than other major cities around the world. But stakeholders reject such argument as too shallow. In a recent publication on Businessday newspaper, Oserogho & Associates gave some legal perspective on the issue. The legal firm noted that the old Sales Tax Act was abrogated and in its place, Value Added Tax (VAT) was introduced for application to the entire federation (and states) of Nigeria. VAT, which is also a consumption tax, is charged and paid on the supply of all goods and services other than such goods and services which are expressly exempted under the VAT Act.

It clarifies that unlike the Lagos State Consumption Tax, which is solely for the benefit of the Lagos State Government, VAT is administered by the Federal Government of Nigeria Agency, the Federal Board of Inland Revenue (FBIR), with the proceeds of VAT being distributed under an agreed formula by the 36 States of the Federation of Nigeria. Some still contend that VAT as presently administered, is against the principle of federalism, with its distribution formula seen as extremely inequitable in the light of the fact that a large percentage of VAT collected in Nigeria is from businesses situated in Lagos State.

It concluded by saying that the Taxes and Levies (Approved List for Collection) Act of 1998 does not accommodate State Governments enacting for their own states, a separate Consumption Tax.

The Lagos Hoteliers Association maintains they are ready to go all the way to the Supreme Court to defend their claims. “They will fail, even if they go to the Supreme Court, and that will be shameful for them,” Temionu, who is also a contributor to the Punch newspapers, said. He blamed the crisis on wrong advises being meted out to the governor. They should go back to the drawing board and provide more friendly policies for the industry,” he said.

Perhaps, the most fitting conclusion of this argument is to summarise the perspective of most business people in Nigeria who reason that Nigeria is one of the countries in the world that is perceived to have some of the highest cost of doing business as a result of the lack of basic infrastructural facilities and multiple taxation. So, while Lagos State is fast making progress in providing infrastructure, it is still too early to compare itself with other cities whose infrastructures are in a perfect state.