Interrogating consumption Tax as VAT crisis deepens

As the Lagos State Government recently signed into law the collection of the Valued Added Tax (VAT) in the state, not a few stakeholders and citizens are wondering if this new stance will have any bearing on the collection of Consumption tax that already in force and applies to certain goods and services.

Bankole Adedipe is one of the Lagosians that are questioning the moral justification of Lagos Government’s intention in this regard.

Narrating his ‘unpalatable experience’ to The Guardian, Adebayo said: “Recently, I was at a restaurant around Allen Roundabout in Ikeja to buy food. After eating, I was surprised at the bill the cashier gave me. By my calculation, I had thought I would be paying N6000, but the cashier handed to me a N6600 bill. I requested that she went over the calculation again, thinking she made a mistake. But instead, she directed me to thoroughly peruse the bill, which showed that the N600 difference was because Consumption tax and Value Added Tax (VAT) charges were included.”

Adedipe said though he paid the amount, he was unhappy about the whole matter, pondering why he should pay VAT and Consumption tax on food at the same time.

So, as the current tussle rages between Lagos State Government and the Federal Government over collection of VAT, he is joining many others to ask if Lagos State government will continue to collect consumption tax, with the signing into law the state VAT. This is more so, when taken into consideration the fact that a court ruling, which empowered the state to collect Consumption tax, had stopped VAT collection in places where the former is paid.

Following a court ruling in Rivers State, Lagos State House of Assembly passed a bill to empower the executive arm to collect VAT through the Lagos State Internal Revenue Service (LIRS), which was subsequently signed into law by Governor Babajide Sanwo-Olu. This is aside the fact that the state government has asked to be joined in the suit filed by Rivers State government, challenging the FIRS and Federal Government’s power to collect VAT in states. 
 
It is not the first time the state government would travel this road. In 2009, Lagos State promulgated a law that imposed five per cent consumption tax under its Hotel Occupancy and Restaurant Consumption Law. This charge was on goods and services consumed in hotels, restaurants and event centres.

As a result of the law, hotels, restaurants and event centres had been at loggerheads with the state government, as they went to court to contest the state’s power to collect Consumption tax, since goods and services to be taxed for Consumption are already covered by the Value Added Tax (VAT).

The state government, however, got a federal backing to collect Consumption tax, when in 2015, the Taxes and Levies (Approved List for Collection) Act, a law of the National Assembly, was amended to include ‘Hotel, Restaurant or Event Centre Consumption Tax’ as one of the taxes states can impose and collect.

In May 2018, the Federal High Court had restrained Lagos State government from enforcing both the Consumption Tax Law and Regulations. But in 2019, a Federal High Court sitting in Lagos empowered state government to collect consumption tax, while restraining Federal Government from collecting VAT on goods consumed in hotels, restaurants and event centres in the state.
 
So, the questions on many lips are: “What is consumption tax? Should the state continue to collect consumption tax with the state VAT law?”

The President of Chartered Institute of Taxation Nigeria (CITN), Adeshina Adedayo, explained that Consumption Tax is paid upon consumption of goods and services in an economy. “It is an indirect tax. One must purchase a good or service to pay the tax. In actuality, there is hardly anyone that does not make purchases; hence it is inescapable. It is the generic name for taxes imposed on sales, tariffs, and excise, with respect to goods and services.”

On whether Consumption tax and Valued Added Tax (VAT) can be applied to the same goods or services, he said it is possible, though it will amount to double taxation. “For instance, the Hotel Occupancy and Restaurants Consumption Tax of Lagos State is a Consumption Tax for which event centres, hotels and restaurants pay five per cent to Lagos government. The same entities pay 7.5 per cent to Federal Inland Revenue Services (FIRS) as Value Added Tax, making it a total Consumption Tax of 12.5 per cent. There are arguments by some persons that the two are different, but I think it is just semantics.”

Responding to those querying the moral aspect of the development, , he said unfortunately, morality has no place in taxation, which is firmly rooted in the legal space, and not in the realm of moral rectitude. “As an Institute, CITN follows the law wherever it leads us,” Adedayo stated.

Similarly, a tax consultant and Managing Partner, Fortified Professional Services, Mr. Adeboye Adeyemi, stated that VAT is the same as Consumption tax. He asserted that if the state government collects both taxes, it would amount to double taxation.

Providing insight on what Consumption tax is, the Social Mobilisation Manager, ActionAid, Mr. Adewale Adeduntan defined Consumption tax as one imposed on goods, services, and other items sold, exchanged, or utilised. He noted that unlike income taxes, which are imposed on earnings, including savings, consumption taxes are imposed basically on consumables.

He said: “Consumption taxes can come in many forms. The most common forms are “indirect” taxes, such as retail sales tax, or value added tax. Consumption tax is levied on the “value added” to goods and services from the production stage to the final consumption stage. The Hotel Occupancy and Restaurant Consumption Tax Law, for instance, imposes a five per cent tax on goods and services consumed in hotels, event centres and restaurants within Lagos State.

“These include food, drinks, consumables, rental accommodation, and other transactions. Notably, consumption taxes are regressive, as both the rich and poor pay the same rate. Good tax systems emphasise less on consumption taxes and more on income, profit, and wealth taxes, which are known as direct taxes.

He explained that VAT tax is a consumption tax, as it is ultimately borne y by the final consumer. “Essentially, everybody pays Value Added Tax because we are all consumers of different goods and services. It is not a charge on businesses paid to the revenue authorities by the seller of the goods, who is the “taxable person.” Rather, it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax. Thus, Consumption tax is borne by any person, corporate or otherwise who pays for the use or possession of any hotel facilities, consumables, or personal supplies to consumers by or on behalf of the hotel, restaurant, and event centres. The owners and operators of hotels, event centres and restaurants are regarded as collecting agent for the government.” 

So, is it proper to take both Consumption tax and VAT on the same product or service? He stated that it is already happening and will continue to happen, if the framework for the administration of tax is not critically defined to address areas of such overlap.

“The FIRS is still collecting VAT and similarly, in the exercise of its fiscal legislative powers, Lagos State government has also enacted and imposed tax on the consumption of services and goods arising from hotels, event centres and restaurants. The tax, as stated earlier, is levied on the food, drinks, consumables, rental accommodation and other transactions in the hotel facility or event centres and restaurants. It is important to note that this is excluding VAT and other service charges. Thus, same product or service is currently being taxed for consumption tax and Value Added Tax (VAT).”

Taking the same posture as Adedayo, he said issues concerning tax are of the law and in the face of the law, what is moral could not be legal and vice versa. 

He said: “Going by the Hotel Occupancy & Restaurant Consumption (HORC or “Consumption”) Law of Lagos State, many issues of revenue drive concerns have been taken care of already. However, it is important for Lagos State Inland Revenue Service to critique the consumption law and benchmark it with the new Value Added Tax (VAT) Law passed on the September 9, 2021 to ensure there are no cases of overlap or double taxation. Overtime, there might be need to focus more on incomes, profits and wealth on individuals and entities, as such taxes are more progressive than consumption taxes that are regressive.”

He declared that the only way residents can get reprieve will happen, when litigation crises around who administers VAT are finally laid to rest. “For now, residents should drum up advocacy and campaigns for the duty bearers to understand the burden of tax they bear. Residents should hype the retrogressive impacts of Consumption tax and VAT,” he said.