• Friday, December 08, 2023
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Smaller hotels, restaurants hardest hit as states introduce consumption tax

Why hotels fail in Nigeria

Lagos is the latest, behind Kano and Ogun States, to impose a consumption tax on hotels, restaurants and event centres.

This is after Nigeria’s commercial capital won a recent case in court upholding its statutory authority to introduce the tax, and experts say this will impact smaller brands the most.

“The smaller hotel brands will be the hardest hit. Bigger international hotel brands can easily take this in because they cater for the upper-middle-class consumers,” said Victor Edosomwan, founder and the chief executive officer, Vicwan Limited, a hospitality and lifestyle consulting firm.

“Besides, customers of the big hotel chains make bookings online, and the new consumption tax will be factored in,” Edosomwan said.

Kano State passed a law in 2017 that imposed a consumption charge of 5 percent on goods and services purchased in any hotel, restaurant, fast food outlet, bakery, takeaway, suya spot, shopping mall, store, event centre and other similar businesses within the state. Ogun State also promulgated a consumption tax law in 2017.

Ruling in the case between The Registered Trustees of Hotel Owners and Managers Association of Lagos (RTHMAL) and the Attorney-General of Lagos State and the Federal Inland Revenue Service (“the Defendants”), the Federal High Court on October 3 held that the Hotel Occupancy and Restaurant Consumption (HORC) Law and Regulations issued by Lagos State is valid and must be complied with by RTHMAL.

The court, relying on the provisions of the Second Schedule to the Constitution of the Federal Republic of Nigeria said that consumption tax neither falls under the exclusive legislative list nor the concurrent legislative list. Rather, it is a residual matter on which states are empowered to legislate. This is contained in the Schedule to the Taxes and Levies (Approved List for Collection) Act (Amendment) Order, 2015, which includes “Hotel, Restaurant or Event Centre Consumption Tax” as one of the taxes that may be collected by the state governments.

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 percent) along with the federally applied Goods and Services Tax of 5 percent (akin to Nigeria’s value-added tax).

But the new consumption tax of 5 percent may not serve the hospitality industry well given that there are already multiple taxes and everyday Nigerians are so price-sensitive that brand loyalty is low and a difference of N1, 000 can make a customer patronise a different hotel, particularly in Lagos where competition is intense, analysts say.

November-December 2017 was the best for a long time for the hospitality sector in terms of occupancy rate and revenue generation, according to a BusinessDay report of May 31, 2018, but the sector had posted an impressive first-quarter result for 2018.

Despite marginal growth in occupancy rates, Nigerian hoteliers are battling with the challenges of doing business in Nigeria, especially with regard to multiple taxations that some of the operators have decried for gulping as much as 10 percent of profit.

At present, there are over 24 different taxes and levies paid to the three tiers of government across the country amid high cost of daily operations. Some of the taxes include company tax, consumption tax, value-added tax, and hotel licence, personal income tax, parking permits, wastewater request, Land Use charge, radio and TV permit.

But the court in its ruling “issued an injunction restraining the FIRS from imposing a value-added tax on goods and services consumed in hotels, restaurants and events centres in Lagos State”, a KPMG Nigeria Tax-Newsletter of October 03 said. “The injunction was issued on the premise that Lagos State is the appropriate authority, under the law, to assess such goods and services to consumption tax,” it said.

People familiar with the hospitality industry in Nigeria have also said that a lack of basic infrastructure is making the cost of operations spike. “The hotels have to provide their own power and evacuate sewage on their own; these should be provided by the government,” Edosomwan said.

The implication of this latest court ruling would be that goods and services consumed within a state would be liable to a State Consumption Tax Law whereas any inter-state consumption or sales should be liable to value-added tax.

With the High Court ruling, which is in favour of Lagos State, most hotels that have not been collecting and remitting the Consumption Tax are now forced to do so as the Lagos State government is going to ensure full compliance and enforcement, including sealing the premises of the hotels.

However, most hoteliers in Lagos think that the FIRS will not obey the High Court injunction, which is restraining it from further collection of VAT from hotels. This means that the multiple taxation hoteliers have been decrying will persist.

“It will be difficult for the FIRS to pull back now from collecting VAT from hotels because they have huge revenue target from the Federal Government. Again, hotels are going to get it rough as the state enforcement agencies will stop at nothing to shut down any hotel that refuses to collect or remit revenue from Consumption Tax,” an anonymous hotel general manager said.

Explaining the impact of the court ruling on the guests and hotel business at large, the general manager said that the status quo remains the same as Consumption Tax replaces VAT. But in the case where both taxes are collected, he said that the guests would bear the brunt.