The judgment of the Federal High Court confirming the powers of states to impose consumption taxes and declaring some sections of the VAT Act as unconstitutional will certainly boost states’ revenue, writes Davidson Iriekpen
At a time, when state governors are desperately devising strategies to boost their internally generated revenue (IGR), the judgment of a Federal High Court in Lagos has come handy for them to rely upon. Penultimate week, Justice Rilwanu Aikawa upheld the rights of Lagos State government and by implication, other states, to enforce the collection consumption tax in hotels and event centres. He barred the Federal Inland Revenue Service (FIRS) from enforcing value-added tax (VAT) provisions on goods and services consumed in hotels, restaurants and event centres.
Prior to the current suit, controversies had often surrounded consumption taxes between the federal and state governments on one hand, and government authorities and operators of businesses that act as collecting agents, on the other hand.
In 2001, the Lagos State Internal Revenue Service (LIRS) demanded from Eko Hotels Limited, remittance of money due as the tax on sales to its customers. Before this time, Eko Hotels used to remit VAT to the Federal Inland Revenue Service (FIRS), an action the LIRS faulted, insisting that the hotel was not exempted from collecting and remitting taxes under the Sales Tax Law.
With the continued harassment, on March 5 2004, Eko Hotels filed a suit against both the Attorney General of Lagos State and the FIRS and asked the Federal High Court to determine which body it ought to remit the tax collected to as it took the view that it would be inappropriate for it to remit the tax to both FIRS and LIRS.
On the substance of the suit, the Federal High Court held that the VAT Act as a federal enactment had covered the field which the Sales Tax Law sought to legislate on. Consequently, Eko Hotels was obligated as a taxable person to remit the tax deducted on sales to its customers to only one agency, namely the FIRS.
Dissatisfied, the Lagos State government appealed to the Court of Appeal which dismissed the appeal and upheld the decision of the Federal High Court. It proceeded to the Supreme Court with an appeal.
In its decision on July 13, 2007, the Supreme Court held that VAT Act covered the field of the Sales Tax Law of Lagos State and therefore takes precedence until such a time when the federal legislature repeals the VAT Act.
But while the appeal was pending, Lagos enacted the Hotel Occupancy and Restaurant Consumption Law of 2009 (Hotel Consumption Law). Section 2 of the law imposes a tax of five percent on any person who pays for the use or possession or for the right to the use or possession of any hotel facility or events centre; or purchases consumable goods or services in any restaurant whether or not located within a hotel in Lagos State.
Shortly after its enactment, the validity of the Hotel Consumption Law became the subject of litigation in several courts, resulting in conflicting decisions by the state and Federal High Courts. The argument was that the goods and services covered by the Hotel Consumption Law are already liable to VAT because the VAT Act imposes VAT on all goods and services unless specifically exempted by the VAT Act, and the goods and services covered by the Hotel Consumption Law are not so exempted.
In 2010, the federal government filed an originating summons at the Supreme Court against the Attorney-General of Lagos State challenging the validity of the Hotel Consumption Law and the Hotel Licensing Law 2003 on the basis that the said laws were inconsistent with the 1999 Constitution and the Nigerian Tourism Development Corporation Act (Tourism Act).
Before the hearing of the federal government’s suit, the Attorney-General of Lagos State also filed a suit at the Supreme Court challenging the validity of the Tourism Act. In two unanimous decisions, a full panel of the Supreme Court on July 19, 2013, decided in favour of the Lagos on the grounds that the licensing and regulation of hotels and tourism are residual matters in the 1999 Constitution in respect of which the state houses of assembly may legislate without interference from the federal government. Although this decision effectively endorsed the power of the state to exclusively regulate hotels and tourism in the state, the validity of the tax imposed by the Hotel Consumption Law was not an issue before the Supreme Court and no pronouncement was made thereon.
But on December 8, 2017, the Supreme Court upheld the July 13, 2007 decision of the Court of Appeal in Attorney-General of Lagos State v. Eko Hotels Limited & Anor which was to the effect that the VAT Act has covered the field of the Sales Tax Law of Lagos State and therefore takes precedence until such a time when the federal legislature repeals the VAT Act. Though the apex court also decided that it would amount to double taxation for two different laws to impose consumption tax twice on a consumer for the same good or service, it concluded that the Hotel Consumption Law was not an issue before it.
Coming from the apex court of the land, this decision ought to have resolved some of the controversies surrounding the VAT Act. However, it raised a set of issues that were of concern to relevant stakeholders and tax practitioners. These issues included the effect of the decision on other extant sales and consumption tax laws in force in the states of the federation; the applicability of the ‘doctrine of covering the field’ to the case; and the legal basis for the decision that the imposition of VAT and sales tax would amount to ‘double taxation’.
Since there was no categorical and specific pronouncement on the Hotel Consumption Law, by all the courts, the law as still trailed by controversies. This was why, in 2017, when former Governor Akinwunmi Ambode, in his quest to boost the internally generated revenue of the state government, issued regulations to ensure greater transparency of hotels and restaurants in reporting collection of consumption taxes on their premises.
To simplify the process, Ambode had told stakeholders at a sensitization meeting in Alausa, that automation of the system had been introduced to address the high level of under-payment and non-remittance of what is due to the government.
This was, however, vehemently opposed by the Registered Trustees of Hotel Owners and Managers Association of Lagos (HOMA), which immediately challenged the policy in court. In their originating summon filed at the Federal High Court in Lagos by its counsel, it sought to nullify the regulations on the grounds that the FIRS was already imposing VAT and was the only authorized body to impose consumption taxes in any guise. It also argued that the fiscalisation regulations were inoperable and unconstitutional as VAT had covered the field.
The HOMA asked the court to declare that by virtue of Section 7 of the VAT Act, the second defendant (FIRS) was the only lawful and constitutional agency charged with the administration and management of consumption tax generally and particularly in Lagos State. It asked the court to determine that the VAT Act regulating the imposition of tax on consumption of goods and services has not covered the field on taxation of goods and services consumed in hotels, event centres, and restaurants in Lagos. They also asked that by virtue of Section 7 of the VAT Act, the second defendant (FIRS) is not the only lawful and constitutional agency charged with the administration and management of consumption tax generally and particularly in Lagos State.
Lagos State Government
But the then-Attorney General of Lagos State, Adeniji Kazeem, opposed the suit and counter-claimed. He contended amongst other things that the only constitutional and lawful body empowered to assess, impose and collect tax from customers of the plaintiff for goods and services consumed in hotels, restaurants and event centres in the state is the LIRS.
The state government also sought the court to determine whether Sections 1,2,4,5 & 12 of the VAT Act under which the FIRS was relying upon to impose tax on customers for goods and services consumed in hotels, restaurants and event centres in the state were not inconsistent with sections 4(2), 4(a) & (b) and 4(7)(a) & (b) of the 1999 Constitution.
It urged the court to determine that the provisions of Sections 1, 2, 4, 5 & 12 of VAT Act were inconsistent with the provisions of Sections 4(2), 4(a) & (b) and 4 (7) (a) & (b) of the 1999 Constitution (as amended) and therefore unconstitutional and invalid.
It also asked the court to determine that by the provisions of Section 4 (7) of the 1999 Constitution, the provisions of the Taxes and Levies (Approved List for Collection) Act Cap T2 Laws of the Federation of Nigeria as amended by the Schedule to the Taxes and Levies order 2015) and the provisions of HORC Law 2009 was lawful. It further asked that the counter-claimant is the only constitutional and lawful body empowered to assess, impose and collect taxes from customers of the plaintiff for goods and services consumed in hotels, restaurants and event centres in Lagos State.
Judgment on Consumption Tax
Since the present dispute was specifically on Hotel Consumption Law, stakeholders were anxiously waiting to see how the court would resolve it.
In his judgment, Justice Aikawa dismissed the suit and held that it was lacking in merit. He added that the plaintiff is obliged to comply with the HORC Law 2009 and the HORC Regulations 2017. The judge struck down Sections 1, 2, 4, 5 & 12 of VAT Act, adding that there were inconsistent with the provisions of Sections 4(2), 4(a) & (b) and 4 (7) (a) & (b) of the 1999 Constitution (as amended) and therefore unconstitutional and invalid.
The court also raised two issues by itself: That the Federal High Court has the jurisdiction to pronounce on the constitutionality of VAT. It resolved that it has jurisdiction, and held that the issue of the powers of the minister to amend the schedule to the Taxes and Levies (Approved List for Collection) Act was not in dispute before the court and therefore no pronouncement could be made on it.
The court submitted that consumption tax is not stated in either the exclusive and concurrent legislative list in the 1999 Constitution and that its absence on the concurrent and exclusive lists, puts it on the residual list which is within the legislative competence of state governments. It equally held that VAT Act can’t cover the field over what the federal government has no power to legislate upon under the constitution. It submitted that the determinant factor in the issue of covering the field was whether there is the power to make the law, adding that the provisions of VAT Act relating to consumption tax are inconsistent with the Nigerian constitution.
Justice Aikawa held that the minister of finance had corrected the anomaly by including consumption tax in the list of taxes collectible by the state government, noting that the responsibility for collecting consumption tax lies on state governments. He ordered the plaintiff to comply with the Hotel Occupancy and Restaurant Consumption Tax Law 2009 and Hotel Occupancy and Restaurant (fiscalisation) Regulations 2017
He said: “That consumption tax is not stated in either the exclusive and concurrent legislative list, in the Constitution of Nigeria, therefore, the absence on the concurrent and exclusive lists, puts consumption tax on the residual list, which is within the legislative competence and powers of state governments. That VAT Act can’t cover the field over what the federal government has no power to legislate upon, under the constitution, therefore the determinant factor in the issue of covering the field, is whether there is the power to make the law. The provisions of the VAT Act relating to consumption tax are inconsistent with the Nigerian constitution.
“The Minister of finance has corrected the anomaly, by including consumption tax in the list of taxes collectible by state governments, therefore, the responsibility for collecting consumption tax lies on the state government.
“The provisions of Sections 1, 2, 4, 5 & 12 of VAT Act are in breach of the 1999 Constitution and the plaintiffs are obliged to comply with the HORC Law 2009 and the HORC Regulations 2017. FIRS are barred from enforcing VAT provisions as it relates to a consumption tax on goods and services consumed in Hotels, Restaurants and Event Centres in Lagos State.”
Many analysts have concluded that the judgment is unarguably one of the most important decisions in recent times on the issue of fiscal federalism and the power of the state governments to control their revenues. They were of the view that decision would no doubt boost the internally generated revenues of Lagos State that has once again taken the lead in proactive legislation and litigation. It will also help other states of the federation to drive its revenues so as to rely less on the sharing of federal receipts from the centre.
An official of the Lagos State government who spoke to THISDAY off the record said Governor Babajide Sanwo-Olu is expected to aggressively begin the deployment of the fiscalisation equipment in all hotels, restaurants, and outlets in order recover huge revenues that have been lost due to under-declaration by some of these hotels and outlets.