Lagos seeks 200% consumption tax boost with new electronic system
by LOLADE AKINMURELE
March 14, 2018 | 1:40 pm| | | Start Conversation
The Lagos state government expects to raise around N1 billion by the end of the year when a new electronic system of aggregating consumption taxes is in full swing in Nigeria’s commercial city.
That estimate works out to a 200 percent increase compared to previous collections of around N300 million monthly, according to data provided by the Lagos Inland Revenue Service (LIRS).
The so called Electronic Assurance System (ERA) will engender automatic compliance with the Hotel Occupancy and Restaurant Consumption Tax Law which imposes 5 percent tax on all sales/purchases of products and services at hotels, restaurants, night clubs and other hospitality outlets.
The system will drive efficiency and bring untaxed amounts into the revenue base of Africa’s fifth largest economy, according to Ayodele Subair, chairman of the Lagos Inland Revenue Service (LIRS).
“Last year, we collected between N200 million and N400 million on average in consumption taxes monthly, but we anticipate raising between N800 million and N1 billion with the ERA system,” Subair told BusinessDay in an interview at his Alausa office at the weekend.
Subair said they had not been “excellent in collection of consumption taxes due to sharp practices that some hotel and restaurant owners have applied over the years.
“In order to increase efficiency and reduce leakages in the system, we decided to apply technology and that is why we are launching this initiative,” Subair said.
The devices are already being installed at affected companies without any resistance, he said, with a focus on big enterprises for now, before gradually spreading out.
A Public Private Partnership (PPP) with one “AITL” means Lagos will incur next to nothing in terms of the cost of purchasing and the deploying the electronic devices under the ERA system. Subair said “the company will handle 100 percent costs,” with the option to recoup incurred spending from future earnings.
Google searches on AITL gave no details of the company.
Lagos, Africa’s fifth largest economy with Gross Domestic Product (GDP) of $136 billion, raised N284 billion in taxes last year. There are 8 million people in the tax bracket but only 4.1 million are captured in the tax net.
Lagos has built quite a reputation for itself as a tax economy and that has reflected in higher revenues and helped the state rely less on federal cash handouts.
Largely dominated by tax receipts, the state’s internally generated revenue was N302 billion in 2016. That was more than the revenue generated by 31 states combined. Only Ogun state joined Lagos as the two states whose IGR were higher than federal allocations in the period.
The state plans to spend N1.04 trillion this year with 60 percent expected to fund capital projects from road to rail and power, according to budget documents seen by BusinessDay.
Higher tax earnings will help the government in its quest to develop infrastructure, Subair said, as he explained the rationale for turning to technology to plug consumption tax revenue leakages.
However, a raging debate has ensued in the past week over the state’s 500 percent increase in Land Use Charges. That has led to protests from Lagosians questioning the review and bemoaning its implications on household income and the cost of doing business.
How ERA works
The ERA system is a software application that issues invoices and receipts to consumers with a unique quick response (QR) code, detailing the items and/or services ordered and an embedded automation of consumption tax remittance in real time.
The system, similar to electronic cash registers, has been successful in Belgium, Hungary, Canada, Sweden and in African countries like Rwanda.
Initial comparisons in Belgium shows an 8 percent increase in restaurant sales reported after installation of electronic cash registers compared to sales reported before.
In Quebec in Canada, CAD 1.2 billion ($USD 924 million) in taxes was recovered following the introduction of sales recording modules into the restaurant industry as of March 31, 2016. Projections are that by 2019, this will cumulatively amount to CAD 2.1 billion ($USD 1.6 bn). That works out to a 75 percent increase.
After the first year of deploying electronic cash registers in Hungary, VAT revenue increased by 15 percent in the concerned sectors. The increase in VAT revenues has exceeded the overall costs of the project of introducing the new systems.
In Rwanda, electronic cash registers were introduced in March 2013. In 2015, VAT collected on sales had increased by 20 percent.
To forestall non-compliance, LIRS intends to track and monitor payments and receipts in order to verify the authenticity of receipts issued to consumers. There will also be a reward scheme for taxpayers who request for receipts generated under the ERA system.
Sensitisation schemes are being worked out to educate affected companies and consumers about the new system.
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