October 17, 2019
On 3 October 2019, the Federal High Court (“FHC” or “the Court”), sitting in Lagos, upheld the powers of the Lagos State Government to charge and collect Consumption Tax from hotels, restaurants and event centres within the state. The Court also restrained the Federal Government from collecting Value Added Tax (VAT) on goods consumed in hotels, restaurants and event centres. This decision was reached in the case between The Registered Trustees of Hotel Owners and Managers Association of Lagos (Hotel Owners) v Attorney General of Lagos State (AG Lagos).
According to the Court, Consumption Tax on hotels, restaurants and event centres is in the purview of the State Government based on the 1999 Constitution and the Taxes and Levies (Approved List for Collection) Act (Taxes and Levies Act). Thus, the provisions of the VAT Act in respect of consumption of goods and services in hotels, restaurants and event centres are inconsistent with the Constitution and the Taxes and Levies Act, and are therefore void.
The VAT Act was introduced in 1993 to impose and charge VAT at 5% on the value of goods and services supplied in Nigeria. The VAT Act is administered by the Federal Inland Revenue Service (FIRS). Consequently, Hotel Owners have been compliant with the provisions of the VAT Act and have been remitting VAT at 5% to the FIRS.
In 2009, the Lagos State Government enacted the Hotel Occupancy and Restaurant Consumption Law of Lagos State (Consumption Tax Law). The Consumption Tax Law imposes Consumption Tax at 5% on the value of goods and services consumed in hotels, restaurants and event centres within Lagos State. Thus, consumers of goods and services in hotels, restaurants and event centres suffer both Consumption Tax and VAT on the same tax base, amounting to double taxation.
Following this development, the Hotel Owners instituted an action in the FHC, seeking a declaration that the Consumption Tax Law of Lagos State is inoperable and of no effect because the VAT Act has fully covered the field on the subject of Consumption Tax.
The Court, however, ruled in favour of the Lagos State Government upholding the powers of the State Government to charge and collect Consumption Tax. In reaching this decision, the Court relied on the 1999 Constitution and held that Consumption Tax on goods and services consumed in hotels, restaurants and event centres is a residual matter which is within the exclusive legislative competence of a State Government.
The Court further held that under the Taxes and Levies Act, Consumption Tax arising from transactions involving the sale of goods and services in hotels, restaurant or event centres is to be collected by the State Government. The Court also stated that since the Taxes and Levies Act (as amended in 2015) was enacted after the VAT Act of 1993, its provisions have tacitly repealed any provisions of the VAT Act concerning hotels, restaurant and event centres and should thus prevail. The Court therefore restrained the FIRS from collecting VAT on transactions relating to the consumption of goods and services in hotels, restaurants and event places in Lagos.
This Judgment implies that transactions involving supply of goods and services consumed in hotels, restaurants and events centres should not be liable to VAT. However, such transactions should be liable to Consumption Tax at 5%, payable to the State Government.
It is important to note that the FHC, sitting in Abuja, reached a contrary decision in the case between Nigeria Employers Consultative Association & Anor v Kano State Inland Revenue Service in 2018. In that case, the FHC restrained the Kano State Government from imposing Consumption Tax on transactions involving goods and services which are already subject to Value Added Tax. Thus, the Judgment of the FHC, sitting in Lagos, in the Hotel Owners Case has created a clear conflict on the actual position of the FHC on the issue.
Notwithstanding, it is pertinent to note that the Supreme Court upheld the constitutional powers of the Lagos State Government to enact the Consumption Tax Law in the case between Attorney General of the Federation v Attorney General of Lagos State in 2013. However, while the FHC has taken a further step to restrain the Federal Government from collecting VAT on transactions which are covered by the Consumption Tax Law, the Supreme Court was silent on the validity of the VAT Act with respect to such transactions.
Given the apparent conflicts generated by the FHC’s decisions and the constitutional nature of the issues therein, we expect a higher court to provide additional clarification on this issue in order to curb incidences of multiple taxation in the Nigerian business environment and also to ensure consumers and businesses are clear about their obligations under the law. This is because multiple taxation and uncertainty in the application of our laws are major disincentives to investments and have an overall negative impact on the business environment. This issue therefore needs to be addressed speedily.
In the meantime, taxpayers are to be mindful of this development in the tax administration system and should engage with their consultants to evaluate the implications of this case on their businesses and take necessary steps to operate within the ambits of the applicable laws.