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Consumption tax takes off in Lagos

By OMOH GABRIEL,  Business Editor
LAGOS State government in its quest to bring development to the door steps of the people and free some part of the state for further development has introduced some local taxes. One of these taxes is the consumption tax which is aimed at replacing the earlier sales tax which has become a subject of litigation.


The state tax authority has started the implementation of the consumption tax which is meant to enhance the state revenue generation effort to sustain the ongoing development of infrastructure as well as maintain the social services being provided to Lagosians.  Since the inception of the Fashola administration, far reaching measures have been introduced which have brought about some relative peace to the state. Now the state is wearing a new look as a result of the take over of the open spaces which were hitherto hideouts for criminals.

The state beautification exercise, the new street lights, the dualisation of several of the state roads that have eased traffic a little bit, the strengthening of the KAI Brigade to ensure sanitation and clean environment and the employment of several youths into the state traffic management outfit, among others, have generated employment for youths and brought down crime rate in the state.

The state government has invested so much in security through the provision of vehicles, allowances and bullet proof vests to security agencies. This has made Lagosians to sleep with their two eyes closed. The big question is how long can Lagos State finances hold out on these facilities being put in place? One thing Nigeria is known for is lack of continuity and maintenance. Can Lagos State maintain this pace with dwindling resources as a result of the current global melt down which has seen revenue from the federation account  dropping by the day.

Speaking to journalists in Lagos, special adviser to the governor on taxation and revenue, Ade Ipaye, urged Lagosians to see the consumption tax as a price “we all have to pay to keep the pace of development in the state”. Individuals in the state have expressed privately their support for what Fashola is doing in Lagos. But the state governor wants  this expression of support in concrete terms through the payment of taxes by residents in Lagos,” he stated.

According to Ipaye “After due passage by the state House of Assembly, the Lagos State Hotel Occupancy and Restaurant Consumption Bill was signed into law by the governor on June 22, 2009. This law imposes a five  per cent charge on goods and services consumed in hotels, restaurants, events centers and short let apartments throughout Lagos State with effect from August 1, 2009.” Giving reason for the additional tax measure,  he said: “Simply put, governments raise taxes when public revenue projections are incapable of meeting their essential obligations. All over the world, the power to tax is an attribute of sovereignty.

The only precondition now attached is that it must be consented to by the people through their elected representatives.
“The theory of fiscal federalism concerns the division of public sector functions and finances in a logical way among multiple layers of government.

The main analytical task is to define the appropriate functions and finances of the various tiers as efficiently as possible, i.e., in such a way as to maximize community welfare. Each jurisdiction would then be most efficiently mapped in terms of the spatial dimension of the services it provided. Thus, there would be ‘local public goods’, ‘state public goods’ and ‘national public goods’, with the presumed beneficiaries of each financing their provision in an appropriate way.

This kind of analysis was last made in Nigeria by the Constituent Assembly which produced the 1979 Constitution. The provisions of that Constitution on taxing powers and functions of the three tiers of government were however reproduced in the 1999 Constitution. In the course of discussions at the Constituent Assembly in 1978, tax on sales and consumption was removed from the exclusive list of the Federal Government and left as a residual matter for states.

Meanwhile, taxes on incomes, profits and capital gains, stamp duties, import, export and excise duties were left on the exclusive list to be controlled by the federal legislature. But with privatisation which has removed the burden of appropriating huge sums of money to parastatals  under the Federal Government, its share of the federation account keeps  rising with huge unspent budget every year while states are starved of funds.

“In developed and developing countries nothing else has proved to be a viable substitute for taxation as a public revenue provider. This, and no more, is the secret of the so-called better societies. For example, eating out in Chicago is taxed at 11.25 per cent. In Ontario, it is 13 per cent; in Johannesburg or Cape Town, it is 17 per cent; in Accra,  12.5 per cent and in London,  17.5 per cent. In Cairo, it is 19 per cent while in Kenya, 16 per cent, Lagos is only 10 per cent when the five per cent VAT is added to the consumption tax.

Within the limits of  available resources,    Lagos State Government has demonstrated clearly that the new Lagos is not just  a dream. It is reality well within our reach. By recovering and beautifying public spaces, the state has promoted the growth of businesses, especially in the hospitality sector. By banning street parties, it has compelled Lagosians to more edifying and more organised function halls provided by the same industry.

By driving down  crime rate, it has promoted patronage of hotels, clubs and restaurants. By improving transportation and sanitation, the state government has made Lagos a more attractive destination for business and pleasure. By using tax money to initiate several infrastructure projects, it has created employment opportunities and continue to put money in circulation, in spite of the gloomy economic climate pervading the world now. Consumption tax being levied by the state  is not an accidental matter.

In public taxation, this revenue source measures the level of development or otherwise in the local economy and rewards the state government appropriately, enabling it to cope with the attendant pressure on infrastructure and services. With  consumption tax, public revenue will grow in a booming economy and fall in depressed time. It tells the story most accurately because  while income is hard to track in an informal economy such as Nigeria’s, consumption is easily detected. Also, it is an indirect tax whereby sellers act as collection agents and consumers are not necessarily conscious of the additional charge. Perhaps, more importantly, it is a tax that targets the richer ones to achieve an income redistribution objective. This is moreso when it is imposed on relatively luxurious items such as goods and services purchased in hotels and restaurants.

A consumer buying a few dough and drinks for N500 only pays N25 extra while another one who incurs a bill of N500,000 in a hotel will pay N25,000 extra. As compared to the total charge, the tax in both cases is  quite insignificant. Lagos State said it adopted consumption tax to distinguish the phraseology and administrative process from VAT, which has a multi level, input-output mechanism, and sales tax which may be charged at every point of sale. Consumption tax does not target the resale market as it is charged at the point of final consumption. It is, therefore, always an intra state affair”.

Ipaye said there is a clear roadmap for every one to see, to make Lagos a model megacity and a conducive place for both residents and visitors. “Some readily attribute the pressure to the bigger projects like the ten lane highway to Badagry; with a light rail corridor coming all the way from Agbado through Marina; a bridge from Lekki to Ikoyi and another from Lekki to Ikorodu are major landmarks, but they are not at all exhaustive. Truly, even when implemented in phases, these massive undertakings that would give Lagos the decisive forward movement could well eat up the budget and leave other projects starving.

Deterrent factor
However, for the Fashola government, the inability to find ready money to complete them is simply not a deterrent factor. As is the case when the various commissioned model city plans were unveiled, the governor insists that it cannot be his lot to get everything done. He would simply do what he can and leave the rest for governors to come.

The main complaints by the operators of hotels and restaurants had been that they already charge and collect VAT for remittance to the Federal Inland Revenue Service. They also say that public power supply is almost nil and they have to bear the cost of arranging their own utilities. Against this background, they consider a cumulative charge of 10 per cent, i.e. VAT + consumption tax as double and unfriendly taxation.

Lagos State Government admits that it is very conscious of these complaints. However, it believes that payment of this tax is a sacrifice that all of us, consumers and proprietors, must make for the future of Lagos State. To the discerning mind, the real issue for Lagos State and for Nigeria is how tomorrow will be better than today. It is how the government hopes  to sustain and improve upon the level of security attained in Lagos today, so that every resident and visitor can enjoy the Lagos nightlife without any fear. The issue is how the state can extend the new standards of road construction, signified by solid drains, pedestrian walkways and functional street and traffic lights to all parts of Lagos State.


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