Consumption Tax: A Win-win for Govt and Businesses
A Lagos–based business analyst and entrepreneur, Ndubuisi Adaba consumption tax can benefit state governments and businesses writes on how
A consumption tax is essentially a tax on the purchase of a good or service. It may take different forms such as sales taxes, tariffs, excise or other taxes on consumed goods and services. It has the distinct feature of not penalising savings unlike income taxes.
Consumption tax is charged in different forms in several parts of the world. For instance, in Canada, most provinces charge a consumption tax (Provincial Sales Tax, which can range from 0 to 10%) along with the federally applied Goods and Services Tax of five per cent (akin to our value added tax). On its part, Japan charges a consumption tax of eight per cent (1.76 per cent charged locally while the balance is federal) and Singapore has a consumption tax of seven per cent while in Australia it is a national Goods and Services tax rate of 10 per cent.
In Nigeria, Kano State passed a law in 2017 that imposed a consumption charge of five per cent on goods and services purchased in any hotel, restaurant, fast food outlet, bakery, takeaway, suyaspot, shopping mall, store, event centre and other similar businesses within the state. Apparently it is applicable to all sales of goods and services in the state. Ogun State also promulgated a consumption tax law in 2017.
While many may not know, Lagos State, Nigeria’s commercial hub, does indeed have a consumption tax. The Lagos State Hotel Occupancy and Restaurant Consumption Tax Law, which was signed into law on June 22, 2009, imposes a tax on goods and services consumed in hotels, restaurants and event centres within the territory of Lagos State. It is charged as five per cent of the value of the goods or services consumed.
According to this law, the term hotel is defined as including motels, guest houses and apartments for short-time letting, while a restaurant is defined to include any food sale outlet, bar tavern, inn or café, whether or not located within a hotel. Event centres include halls, auditoriums, fields, and places designated for public use for a fee. They will charge it along with but separately from the Value Added Tax (VAT).
As regular consumption of goods and services (from shopping malls, supermarkets, stores markets boutiques, sundry traders and service providers) are not included, the Lagos State Consumption Tax is thus asymmetrical on its effects on citizens. This means that the not-so-wealthy that use hotels, restaurants and events centres sparingly pay a lot less than the rich who frequent these facilities. Furthermore, the tax is also on what is consumed.
Although the Lagos State consumption tax is in force, enforcement has so far not been very efficient. The tax is actually charged to the consumers of goods and services, meaning that the operators of hotels, restaurants and events centres act merely as collecting agents on behalf of government and do not bear the cost of this tax.
Inefficient enforcement has resulted in situations where several operators have not been brought into this tax net or are not collecting the tax. And where some operators are collecting the tax, they fail to remit same to the government. Therefore, only a small proportion of operators are actually making remittances to the state’s coffers, thereby denying Lagos state the wherewithal to actualise its growth plans.
Lagos, with over 20 million inhabitants is particularly shortchanged in this regard. At this time of dire need of funds to bridge the huge infrastructure deficit in Lagos, the state can least afford such leakages. This is coupled with a rising population and reduced funding from the federation account.
To check this, and ensure an efficient consumption tax regime, Lagos State must pursue its administration differently from the way it has been done thus far. A new approach would be to engage in massive and repeated sensitisation of operators as well as all citizens on the imperative of taxation in general and consumption tax specifically. The relevant agencies of government must also ensure complete identification, enumeration and registration of all operators in a continuous process.
The government must also explore innovative ways that will make the due tax easier for operators to collect, separate and remit to government. This will entail the installation of new technology at the operators’ paypoints as being proposed. The installed software will in turn enable government monitor and track remittances more efficiently.
It is incumbent on government to ensure timely remittances by operators. Conversely, it is easier on operators when they make timely remittances of collected taxes. A situation where unremitted taxes cumulate to hundreds of millions and government agents resort to the sealing of operators’ premises is counter-productive or inefficient at best.
Since government will be employing moral suasion along with strict enforcement, it is critical for the government to demonstrate enhanced efficiency and transparency in spending. For instance, by outlining projects under consideration or execution and dedicating proceeds from taxation to execute such projects will help in stemming the belief that government is not accountable to anyone. In a nutshell, the government must show increased transparency in matters relating to spending.
Looking at this issue purely from a business standpoint, it is my opinion that it is in the interest of entrepreneurs and business owners that this tax is enforced efficiently. I will give some reasons. Efficient enforcement and collection will contribute to the growth of the internally generated revenue IGR of the state and a huge chunk of it is projected for the improvement of physical and social infrastructure. Improved Infrastructure will result in a more competitive environment for companies and industries as a result of lower operating costs (power, transportation, maintenance, insurance etc) and higher operational efficiencies and profitability. This improvement in the ease and cost of doing business will also attract a lot of investments into Lagos, further improving the economic activity which all point to increased patronage of the hospitality industry.
It is in recognition of its huge potential to enhance the state’s revenue base that I welcome the recent passage of the Hotel Occupancy and Restaurant Consumption (Fiscalisation) bill by the Lagos State House of Assembly. The inclusion of such provisions as registration of electronic fiscal devices, installation of software and hardware, as well as the power to enter and inspect points of sale in the hotels and restaurant, among other requirements, would definitely reduce evasion of taxes by these business concerns.
An improvement of the state’s infrastructure will also result in more productive citizens. As less time is spent in traffic for instance due to the availability of better roads as well as alternative means of transportation such as light rail systems and the waterways; leads to lower levels of employee downtimes because of better healthcare systems; higher employee motivation levels due to availability of recreational parks, etc. The resulting inefficiencies will also free up time to enable people keep multiple jobs more easily. Improved family incomes by the way also means improved patronage of hotels, restaurant and events centres.
Lastly, it is instructive to note that the infrastructural development and improvement initiatives of Lagos State also aim at exploiting and advancing her tourism potential. Governor Akinwunmi Ambode proclaimed at the One Lagos Fiesta in December 2017, that his administration is committed to making Lagos “a must-visit and Africa’s best tourism destination”.
Current initiatives such as the transportation masterplan; waste management masterplan (cleaner Lagos Initiative); preservation of the state’s historical and cultural heritage; and the creation of more recreational centres and parks are all key drivers of tourism as they have a pull effect on tourists.
Tourism opens up a place further to foreign investments while local businesses and service providers are able to attract offshore funds through the influx of tourists. For instance, certain businesses in Egypt were set up to service tourists. Accommodation, feeding and entertainment, which are provided by the hospitality industry, usually constitute the tourist’s biggest spend. Therefore, hotels, restaurants and events centres may yet be the biggest beneficiaries of consumption tax, which they collect from their clients on behalf of the government.
- Adaba is a Lagos-based entrepreneur