Introduction to the Consumption Tax
In an effort to boost internally generated revenue, several State Governments have introduced various taxes targeting individuals and transactions within their respective jurisdictions. In 2009, the Lagos State Government, in the exercise of its fiscal authority, enacted the Hotel Occupancy and Restaurant Consumption (HORC) Tax Law ("the Law") on June 22, 2009, to regulate and tax services provided in the hospitality sector. The law imposes a 5% consumption tax on any person, corporate or otherwise who pays for the use of hotel facilities, event centers, or purchases goods and services in restaurants within the state. As an indirect tax, the burden is passed on to customers, but the obligation to collect and remit the tax rests with businesses. The consumption tax applies specifically to transactions in Lagos State and operates separately from the federally administered Value Added Tax (VAT).
This article provides businesses with essential information to ensure compliance with the law, clarifies how it differs from VAT, and addresses key legal issues around its constitutionality, helping businesses avoid penalties and legal disputes.
What is Consumption Tax?
Consumption Tax refers to a tax imposed on the use or purchase of goods and services. In FIRS v. A.G. Lagos & Anor1, Onyenkachi Aja Otisi, JCA, described it as "a tax on the purchase of a good or service," which can take the form of sales tax, tariffs, excise duties, or other charges on goods and services consumed.
Scope and Applicability
Consumption Tax applies to a wide range of transactions in Lagos State's hospitality sector. Businesses operating in this space are required to charge the tax on the following:
- Accommodation provided in hotels, guest houses, motels, and short-let apartments.2
- Use of hotel facilities such as meeting rooms, event halls, open space/fields, resource centre, auditoriums or other facilities where fees are charged.3
- Sale of food and beverages in restaurants, bars, inns, or cafes—whether or not they are located within hotel premises.4
Key Differences Between Value Added Tax (VAT) and Hotel Occupancy and Restaurant Consumption (HORC) Tax Law, 2009
There has been ongoing debate over whether VAT and Consumption Tax are essentially the same. This argument is based on the fact that both taxes are indirect in nature—they are borne by the final consumer and charged on goods and services. Critics also argue that Consumption Tax amounts to double taxation. While these observations hold some weight, VAT and Consumption Tax differ in several important respects, as outlined below:
| S/N | Provision | Value Added Tax (VAT) | Consumption Tax (HORC) |
|---|---|---|---|
| 1 | Administration and Jurisdiction | VAT is administered by the Federal Inland Revenue Service (FIRS) and applies nationwide. | Consumption Tax is administered by the Lagos State Internal Revenue Service (LIRS) and applies only within Lagos State. |
| 2 | Application and Focus | VAT applies to the supply of most goods and services, except those specifically exempted by law. | Consumption Tax applies only to services in the hospitality sector, including hotels, restaurants, bars, and event centers. |
| 3 | Rate | The applicable VAT rate is 7.5%. | The Consumption Tax rate is 5%. |
| 4 | Revenue Utilization | VAT revenue is shared among federal, state, and local governments, which can reduce its direct impact in any one location. | Consumption Tax goes directly to the Lagos State Government and may be used for state-specific development. |
| 5 | Compliance Requirements | VAT applies to a broad range of businesses across all sectors. | HORC compliance is limited to businesses operating in hospitality and related services. |
| 6 | Collection Authority | Collected by the FIRS from businesses across the country. | Collected by the LIRS and limited to businesses in Lagos State's hospitality sector. |
| 7 | Tax Structure | VAT involves input and output tax, allowing businesses to offset tax paid on purchases against tax collected on sales. | Consumption Tax does not operate a credit-offset system; there is no input or output tax mechanism. |
| 8 | Scope of Transactions | VAT applies to interstate, intrastate, and international transactions. | Consumption Tax applies only to transactions that occur within Lagos State. |
Chargeable Rate and Computation
The applicable rate for the Consumption Tax is 5%,5 calculated on the total bill for goods and services excluding Value Added Tax (VAT), which is a separate federal charge.
|
Illustration: A hotel guest receives the following bill:
The hotel is required to collect the ₦6,000 as consumption tax and remit it to the Lagos State Internal Revenue Service (LIRS). It's important to note that if a facility—such as the swimming pool in the example—is not complimentary but charged separately (especially for non-guests), the amount paid for its use is subject to the consumption tax. |
Registration and Compliance Requirements
Businesses that fall within the scope of the HORC Tax Law must register with the LIRS within thirty (30) days of the commencement of the Law or from the start of their operations—whichever occurs first6 The business operators are not taxpayers but collection agents for the government.
Operators are not regarded as taxpayers in the conventional sense but act as collection agents for the state government. As such, they are required to:
- Maintain accurate records of all taxable transactions;
- File monthly tax returns; and
- Remit the tax collected on or before the 20th day of each month.7
Penalties for Non-Compliance
Where a hotel, restaurant, or facility operator fails to comply with the HORC Tax Law, the LIRS is empowered to take enforcement action. This may include civil recovery proceedings, criminal prosecution; or both, depending on the severity and nature of the default. Specific consequences of non-compliance include a penalty of 10% of the unpaid tax8, accrued interest on the outstanding amount; and in serious cases, criminal liability, which may result in fines or imprisonment9. To avoid these sanctions, businesses must ensure timely registration, proper record-keeping, and prompt remittance of all taxes due.
Audits and Objections
The tax authority is empowered to conduct audits to verify compliance with the HORC Law. These audits may be carried out without prior notice. Businesses are therefore expected to maintain detailed and up-to-date transaction records.10 Any assessments made by the tax authority can be objected to within seven days of receiving the assessment. Upon review, the authority may either amend or affirm the assessment. Where the authority issues a Notice of Refusal to Amend (NORA), the business has seven (7) days from the date of the refusal to file an appeal in court. If no appeal is filed within this period, the assessment becomes final and conclusive.11
Jurisdiction of Court
Disputes arising from the administration or enforcement of the HORC Tax Law fall within the original jurisdiction of the High Court of Lagos State.12 The Tax Appeal Tribunal (TAT) has no jurisdiction over consumption tax matters, as the Federal Inland Revenue Service (Establishment) Act does not extend the TAT's mandate to cover state-imposed taxes such as the Consumption Tax. Where necessary, appeals from the High Court may be pursued at the Court of Appeal, and ultimately, the Supreme Court.
Transfer of Business and Compliance Benefits
When a business operating within the scope of the HORC Tax Law is sold or transferred, the incoming owner must verify that there are no outstanding consumption tax liabilities. Any unpaid taxes, penalties, or interest will be treated as if incurred by the new owner and enforced accordingly. Compliance not only helps avoid sanctions but also contributes to the development of Lagos State—by supporting investments in infrastructure, public services, and economic growth initiatives.
Power to Distrain for Non- Payment of Tax
Under the HORC Tax Law, the Lagos State Internal Revenue Service (LIRS) is empowered to enforce payment through a process known as distraint.13 The Chairman of the LIRS may issue a warrant authorizing any officer of the Service to execute a warrant of distraint against a defaulting taxpayer. Unlike Section 104 of the Personal Income Tax Act (PITA)—which requires a court order before distraint can be executed—the HORC Tax Law permits LIRS to carry out distraint without prior judicial approval, once specific conditions are met.
Constitutionality of the Power of Distrain.
The term "distraint" includes acts such as sealing business premises and seizing goods or property to recover tax debts. The process has been widely used by the Internal Revenue Service of the United States and by the Nigeria system as provided for in PITA.14
Though the process has faced criticism for allegedly violating the right to fair hearing, Nigerian courts have upheld its constitutionality. In Independent Television and Radio vs Edo State Board of Internal Revenue15 the Court affirmed that the procedure satisfies fair hearing requirements. The Court reasoned that the issuance of assessment notices, demand notices, and intention-to-distrain letters, followed by a 30-day window for taxpayers to object or appeal, is sufficient to ensure procedural fairness. If a taxpayer fails to act within this period, the assessment becomes final and conclusive, empowering LIRS to proceed with distraint.
The conditions precedent under Section 15(1) of the HORC Tax Law that must be met before distraint may be lawfully executed include:
- The tax assessment must be due;
- It must have become final and conclusive;
- A demand notice must have been properly served; and
- The taxpayer must have failed to pay within the time specified.16
S. 44(1) CFRN further strengthens the constitutionality of the process when it provided that
"44. (1) No movable property or any interest in an immovable property shall be taken possession of compulsorily and no right over or interest in any such property shall be acquired compulsorily in any part of Nigeria except in the manner and for the purposes prescribed by a law that, among other things."
Section 44(2) CFRN specifically provides that:
"Nothing in subsection (1) of this section shall be construed as affecting any general law (a) for the imposition or enforcement of any tax, rate or duty." This reinforces the legality of distraint, stating that the constitutional protection against compulsory acquisition of property does not restrict laws made for the imposition or enforcement of tax obligations.
While the power to distrain without court order under the HORC Tax Law is distinct from the process under PITA, its constitutionality has been upheld—though further legal and policy scrutiny may be warranted to ensure continued alignment with evolving standards of due process and taxpayer rights.
Conclusion
This article has outlined the legal framework, practical obligations, and enforcement mechanisms of the HORC Tax Law in Lagos State, highlighting its differences from VAT and the compliance responsibilities of businesses. Non-compliance carries significant legal and financial risks, making it essential for affected businesses to stay informed and compliant. For more information on understanding and fulfilling these obligations, reach out to us at info@scp-law.com.
Footnotes
1. (2022) LPELR-58021 (CA)
2. See, Section 1(a) and Section 17 of the Law.
3. See, Section 1(a) and Section 17 of the Law.
4. See, Section 1(b) and Section 17 of the Law.
5. Section 2 of the Law
6. Section 5 of the Law
7. Section 6 of the Law
8. Section 10 of the Law
9. Section 11 of the Law
10. Section 7 of the Law
11. Section 13(4) of the Law
12. Section 14 of the Law
13. Section 11 of the Law
14. Section 104 PITA.
15. (2014) LPELR-23215 or (2014) LCN/7241 (CA).
16. Section 15(1) of the Law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
