Consumption Tax: LIRS Introduces Electronic Revenue Assurance System

A few days ago, the Lagos State Internal Revenue Service (LIRS) announced plans to introduce an Electronic Revenue Assurance (ERA) system to enable automatic compliance with the 5% consumption tax imposed by the Hotel Occupancy and Restaurant Consumption Tax Law of Lagos State (Consumption Tax Law). According to the Executive Chairman of LIRS, ERA would be implemented through Electronic Fiscal Device – a software that would issue consumers with invoices and receipts bearing a unique code, detailing the transaction while at the same time automatically remitting the corresponding consumption tax.

Compliance to ERA would depend a great deal on consumers who are expected to demand to be issued receipts based on the ERA system. Thus, where the service provider does not use an ERA system and the consumer does not insist on an ERA issued receipt, the consumption tax on the transaction may be evaded.

Nonetheless, this is a positive development in tax compliance by automating at least one step in the compliance process.

However, this development has again brought to the fore some unresolved issues in the administration of consumption tax.

Double Taxation

Since 1993, the Federal Inland Revenue Service (FIRS) has administered the Value Added Tax (VAT) which imposes a 5% tax on the supply of specified goods and services. The tax is borne by the final consumer of affected goods/services thus making it a tax on consumption. Proceeds from this tax is shared among the different tiers of government using various criteria. The enactment of the Consumption Tax Law by Lagos State and some other States has created a legal conundrum: is consumption tax/sales tax not double taxation in view of the already existing (VAT).

Until 2013, the most recent judicial pronouncement on this issue were the Court of Appeal decisions in AG Lagos v. Eko Hotels Limited (2009) 1 TLRN 193, and LSBIR v. NBC (2009) 1 TLRN 294 where the Court of Appeal set aside a Sales Tax (similar to consumption tax) imposed by Lagos State. These decisions relied on the Supreme Court decision in AG Ogun State v. Aberuagba (2009) 1 TLRN 82 which invalidated the Sales Tax Law of Ogun State and held that since the Constitution enabled the FG to regulate inter-state commerce, a similar law by any state government on the same activity was in breach of the Constitution.

Initially, it was assumed that since the principle was similar, the consumption tax would eventually be set aside once challenged. However, in Attorney General of the Federation v. Attorney General of Lagos State (2013) 12 TLRN 55, the Supreme Court validated the Hotel Occupancy and Restaurant Consumption Tax Law of Lagos State. In that case, Lagos State sought an order upholding its power to regulate tourism or licensing and grading of hotelsrestaurants, fast food outlets and other hospitality establishments through the Consumption Tax Law. The Supreme Court held that the subject matter of the Consumption Tax Law was the licensing and grading of hotels, restaurants, fast food outlets, etc. Since these matters are not contained on either the Exclusive Legislative List or the Concurrent List, only State Houses of Assembly can enact laws thereon..

Unfortunately, parties in that case did not invite the Supreme Court to rule on the validity of consumption tax vis-à-vis the VAT. Thus, without expressly ruling on the issue of double taxation arising from these laws, the Supreme Court may have overruled its decision in the Aberuagba case.

Nevertheless, it must be noted that consumption tax is levied on transactions which are already liable to VAT thus creating double taxation. This view is further strengthened by the fact that the same States which enacted Consumption Tax Laws still benefit from the proceeds of VAT. This means that a single tier of government (State Governments) has subjected a class of transactions/individuals to the same class of tax twice thus offending equity principle of taxation.

The uncertainty has been further compounded by Part II of Schedule to the Taxes and Levies (Approved List for Collection) (Act Amendment) Order 2015 (the Order). In the Order, the Minister of Finance listed Hotel, Restaurant, or Event Centre Consumption Tax as one of the taxes which States can now collect. Though the Taxes and Levies (Approved List for Collection) Act is not an authoritative basis for the validity of tax, it is a valuable reference point on such issues.

As it stands, questions surrounding the validity of consumption tax vis-à-vis VAT will not be fully laid to rest until the Supreme Court expressly pronounces on the issue of double taxation and sets aside or validates its decision in AG Ogun State v. Aberuagba (supra).

Depressing Demand

The increasing number of States which are adopting the Consumption Tax Law means that the affected industry sectors will have to increase their prices in order to accommodate this new cost. Where demand for affected goods/services is elastic and sensitive to price changes, it may lead to reduced/depressed demand particularly in a bad economy which will in turn lead to lower tax revenue. Thus the consumption tax may turn out to be a double edged sword by reducing revenue accruing to the States on the affected transactions while driving some operators out of business.

Existence/Operation of Input/Output Mechanism

Unlike VAT which has an input/output mechanism to prevent multiple imposition of VAT on the same good/service, consumption tax does not yet have a similar mechanism. Thus, transactions in which a service provider purchases an item/service subject to consumption tax and then sells it to another person while including his own consumption tax, the final consumer finds himself paying consumption tax twice, mostly because the 2nd service provider has no means of recovering the initial consumption tax.


In view of the recently reviewed National Tax Policy which seeks to streamline our tax laws and entrench equity in the tax system, we believe that the position of consumption tax vis-à-vis VAT should be reviewed to protect the interest of taxpayers.


For more information contact:

Maxwell Ukpebor
Adebiyi Tax & Legal
House 20 Wema Terrace
Udi Street Ikoyi


This Legal Alert contains information on tax /legal issues. It does not constitute legal or professional advice on such issues. Where specific legal advice is needed, the services of a solicitor/tax adviser should be sought.

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