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Tourism tax – killing tourists softly in Lagos

Written by editor

The report in THISDAY of Wednesday, January 2, 2008 calls for further explanation from Lagos State on the modalities, intention and expected yield from the new imposition contained in the Hotel Occupancy and Restaurant Bill which is before the State House of Assembly.

The report in THISDAY of Wednesday, January 2, 2008 calls for further explanation from Lagos State on the modalities, intention and expected yield from the new imposition contained in the Hotel Occupancy and Restaurant Bill which is before the State House of Assembly.

The report raises more questions than the answers in the explanation provided as the reasons for the introduction of the new tax.

According to the report, five percent is to be charged through sales tax and is to be paid by the patrons while the hotels, restaurants and event places would serve as collection agents. Also, hotels, restaurants and event places are to be given a separate legal structure.

The aim, it was stated, is to get the much desired revenue for maintenance of infrastructure in the state, to serve as a way of redistributing wealth in the state and that in any case this is a residual matter that the state can legislate on.

I confess to a personal bias for Lagos State firstly, because of my residence and secondly I am a “half” indigene of the state and so I do understand the need to capture all possible sources of internal revenue especially in the face of the derivation principle as applicable to Lagos State, but there is need, to make haste slowly.

However, it must be said that this new tax would simply add to the layer of the complaints about multiplicity of taxes in the state and the aim stated is not convincing enough. What has this tax got to do with maintenance of infrastructure in the state? Are the use of these infrastructure peculiar to hotels and restaurants or the tourism industry? Can tourism tax serve as a way of redistributing wealth? Or are hotels and restaurants only for the rich so that the tax paid would help in the redistribution of wealth? Tax laws should be made simple, why complicate it by introducing a new legal structure for hotels and restaurants?

There is need to commend the ingenuity of Lagos State in this matter but it should be noted that hotel rates especially in Lagos are already too high and unattractive to tourists when compared with a place like Accra. There is therefore the need to cast the net further to bring more tax payers within the tax net than introducing a new tax regime.

Overall, it is clear that Lagos State is in dire need of revenue but this must be measured against the price sensitivity of tourism and international competitiveness of the tourism industry must be considered.

It should be understood that taxes on tourism have often been hidden within the tax yields that have been obtained from goods and service purchased by both tourists and local residents, and that, whilst it is agreed that it is a residual matter on which the state can legislate, it would help in a better understanding of the issues if the following are made available; (i) The provision of data quantifying the expected yield from the tax as an indication of the scale of tax burden that the industry would face. (ii) Examination of the relative importance of the tax as an indication of the way in which the tax burden is to be distributed. (iii) Information about the appropriateness of the rate of tax that are to be levied. (iv) Whether Lagos State can legislate on this in view of Sections 8, 68 and First Schedule of the Federal Inland Revenue Service (Establishment) Act 2007 which purports to remove this power from the states.

Tourism taxes are not new and indeed numerous specific taxes are levied on tourism activities in many countries and are usually in two main categories, namely, those directly charged to tourists and those charged to User Businesses. Those that may be charged by Lagos State directly to tourists include Car Rental tax, Bednight tax, Expenditure tax and Environmental tax, whilst those that may be charged to User Businesses are Road tax, Land and Property taxes.

There are many instances where tourism taxes are desirable but in these circumstances it is better to tax products that are complementary to tourism activities, for example access to museums, artisan products and souvenirs, entertainment and night clubs as well as recreation centres such as the various beaches. These would enable Lagos to be competitive as a tourist destination.

Once the tourists are in place, the amount of tax desired can be reaped from their expenditure on complimentary products. Also, the amount of tax collected from income tax, in particular Pay as You Earn (PAYE) tax should not be understated in this instance as tourism generates indirect and direct employment through its multiplier effects. Therefore tourism’s contribution to tax revenue is spread across a wide range of economic activities and should not be ignored to the extent of introducing another tax regime.

Finally, the report that the full details of the Hotel Occupancy and Restaurant Bill would be made public after its approval by the law makers is unacceptable. No tax law is made this way. It is one of the cardinal principles of tax law design and implementation that the burden to be borne by taxpayers is made known in advance to all stake holders and debated before any legislative action to avoid a situation of taxation by ambush and this cannot be an exception. In the meantime, we await further explanations, information and details from Lagos State before the Bill is passed into law.