An Overview of Value Added Tax (VAT) in Nigeria

The history of Value Added Tax (VAT) in Nigeria can be traced to as far back as 1993 when it was introduced by the Nigeria Military Government.

Right before then, the history of taxation in Nigeria had it that sales tax was administered by the state, and this left a next to nothing contribution to the revenue of the government. You will observe that for many countries, the idea of starting a VAT system of tax was borne out of the dissatisfaction with the existing system of taxation.

In 1991, the Federal Government decided to set up a study group to look into the possibility of replacing sales tax. Sales tax was operated in Nigeria under Decree No. 7 of 1986.

It was then argued that the narrow base of sales tax completely negated the fundamental principle of what sales tax stands for, CONSUMPTION TAX, and since the sales tax was not broad enough to cover the expanding consumption industry in the country, there was a need for an immediate review and replacement for the sales tax.

After much back and forth during the feasibility studies and further discussions and meetings, the 24th of August 1993 birthed the Value Added Tax in Nigeria with Value Added Tax Act 1993, No. 102, 1993 by the Value Added Tax Decree.

It is noteworthy to state that the introduction of Value Added Tax in Nigeria has contributed exceedingly to government revenue. This is to tell you that the purpose of the introduction of the Value Added Tax in Nigeria was achieved and is still being achieved.

Originally, the VAT act consisted of 42 sections and 3 schedules, and there was a continuous amendment in 1996, and the amendments of the VAT Act led to consolidation into Value Added Tax Act, Cap V-1, Laws of Federation of Nigeria 2004. VAT Act was just in recent times amended by the Value Added Tax (Amendments) Act 2007.

Now the VAT Act consists of 47 sections, with a schedule that contains goods and services that are exempt from VAT. There have been many issues about the ambiguity and clarity of the VAT Act, which further led to the Federal Government through the Federal Inland Revenue Service publishing information circular to further provide clarifications on certain provisions of the VAT Act.

The sufficiency of the various circulars as it isn’t a binding legal document is still a subject of debate between all stakeholders; government, tax payers, and tax consultants to date.

Definition of Value Added Tax (VAT)

First thing you need to know is that VAT is not levied directly on your profits, as the case of some other forms of taxation, this is to say that it isn’t a direct form of taxation. As the name implied, it is a tax on the value added to goods and services.

Now you have consumed a good or service, by consumption, it means you have used that particular good and service. Know that there was a process in the provision or production of the goods and services. In the whole of these stages, value must have been added. Therefore, the VAT is charged on the amount of value to the goods and services thus provided. This is the reason why you see many organizations include VAT on their invoices.

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The definition of the value added on VAT was quite correct except for the fact that it failed to bring out the important features of the tax, making the definition incomplete.

As stated in the VAT Act, VAT is imposed on all goods and services other than those listed in the first schedule of the Act. This can further be explained as the tax payable on the goods and services ‘consumed’ by any ‘person.’ Consumed means used up in this context and ‘any person’ implies whether you are as an individual, business, government.

Other than those listed in the first schedule of the Act, what does this mean?

At the commencement of VAT and based on the original design, there were only 17 chargeable goods and 24 chargeable services in the Act. However, following the various amendments and the subsequent increase in the tax base, the new design brought into scope all goods and services apart from those that have been listed in the Act specifically as exempt or zero-rated.

It means that there are certain goods and services that are not chargeable and subject to VAT, or goods and services that are chargeable, but the rate of VAT is zero. As along as the VAT Act is bringing ‘all’ goods and services into the tax net, not all the goods and services are taxable.

I will, therefore, define VAT as a fixed charge on the supply of chargeable goods and services, which is borne ultimately by the final user of the proposed goods and services but collected at each stage of production and distribution of that particular goods and services.

This definition for me brings out the fact that VAT is a CONSUMPTION tax, which is to tell you that the liability of the eventual payment of VAT falls on the final consumer, right?

VAT Rate in Nigeria

The standard fixed VAT rate is 7.5% unless for the goods and services classified as exempt or zero-rated in the VAT Act. VAT being charged at the various stages; consumption – distribution – final payment makes it a Multi Stage tax.

The Multi Stage might further be a little confusing to you, but I will explain that under the features of a VAT system

Features of a VAT System

As mentioned earlier, VAT is a Multi-Stage tax which is imposed from the production of a good right to the distribution of the said good. Vat is levied on every stage of the production process right from when there is the purchase of raw materials. Tax is imposed on the purchase which is otherwise known as INPUT TAX which will be deducted from the VAT charge on the sale of the goods (OUTPUT TAX). You know at the stages of production of the goods, value must have been added to the goods, which could be as a result of further production costs, the analysis of the contribution and some other features of value that helps in suitably determining the sale price of the product.

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The mechanism works in such a way that the deduction of the input tax from the output tax leaves the final burden to the consumer of the goods. In a case where the output VAT is higher than the input VAT, there is a VAT liability, where the excess net VAT is then remitted to the government. Although the VAT is a multi stage tax, the effect on the final consumer is simple and single, and does not in any way add to the tax burden to be borne, since the VAT rate is fixed at 7.5%.

Tax Invoice and VAT

There is no difference from a normal sales or purchase invoice to that of a tax invoice unless there is more information on the tax details of the tax payer on the invoice produced.

In the tax invoice, it is expected to have information such as the tax identification number (TIN) of the tax payer, VAT registration number and the tax rate included in the total payment to be received or paid. The VAT Act states explicitly that every taxable person should include the VAT in every taxable transaction that his or her business carries out.

As an SME that does a vatable business, it is, therefore important to charge VAT on every single vatable transaction carried out by your business. There is always a penalty for failure and negligence. Ignorance is not an excuse!

Other information contained in the Tax Invoice includes:

  • The name, address of the tax payer
  • Customer’s name and address
  • Type of supply
  • A short description of the goods and services supplied
  • Cash discount offered
  • Total amount of tax paid
  • The size of goods provided
  • The scope of services offered
  • Goods that VAT is charged on

VAT is charged on goods and services produced in Nigeria except for those that have been specifically exempted in the Act.

VAT is also charged on certain vatable imported goods in Nigeria regardless of whether the goods have attracted the necessary import duties or whether or not the person importing the goods is registered for VAT in Nigeria.

VAT is also charged on the supply of services received from outside Nigeria, provided the services are supplied to a Nigerian customer in Nigeria.

Exported goods are zero-rated based on the VAT Act, which means there is no output VAT charged to a foreign buyer while all input TAX paid is recovered since there is no output VAT to net the input tax off.

Section 3 of the Value added tax in Nigeria Act has, therefore, exempted certain goods and services from VAT. This was further divided into two parts :

Exempt Goods:

All medical and pharmaceutical products, Basic food items, Books and educational material, baby products, locally produced fertilizers, plant and machinery imported to be used in the export processing zone, plant, machinery and equipment purchased for gas utilization in the downstream petroleum operations, agricultural equipment purchased for agricultural purposes.

Exempt services

Services rendered by community banks, people’s banks and mortgage institutions, plays and performances conducted by educational institutions as part of learning and all exported services.

A lot of arguments have arisen in recent times as to the extent and scope of what is applicable to which under the exempt goods and services.

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As you can see here, the Act was not clear on what it means as basic food items. What is basic to me may not be basic to you! It is still hoped that the tax authorities will provide further clarifications in order to remove all ambiguities in Value Added Tax in Nigeria.

VAT Registration

A taxable person is required to register for tax within six months of commencement of business, or within six months of commencement of the Act, whichever is earlier.

Without prejudice to the above statement of registration, the taxable person who refuses to register within the specified period will be liable to the payment of a liability N10,000 in the first of month of failure to register, and N5,000 in the subsequent month of failure to register.

For non-resident companies carrying on business in Nigeria, the Value Added Tax Act also imposes registration on them. They have been mandated to register using the address of the person with whom it has an existing contract.

The law also mandates all government ministries, statutory bodies and other agencies of the Federal State and Local government are also expected to register as agents of the board for the purpose of collecting tax.

Upon registration for Value Added Tax in Nigeria, it is also expected that proper records of VATable transactions are kept for easy audit and reconciliation.

For every ministry or other bodies of government, Vat due to contractors is deducted and remitted to the nearest tax office. As against the case where VAT is paid as part of total payment due to a contractor.

The basic framework of Value Added Tax in Nigeria is easy to understand. The computation is not just open to lawyers and accountants alone but also SMEs who are required by law to deduct and remit VAT.

Please take note of the following when trying to understand VAT and how it works in Nigeria:

  • It is a tax on consumption, which means a tax on spending. The ultimate bearer of the tax is the consumer.
  • The rate is at 7.5% flat
  • The 7.5% VAT is included on all tax invoices of goods and services supplied by a registered person
  • SMEs registered for tax are known to be registered persons
  • Supplies mean any transaction to be it sales of goods or the performance of a service for a given consideration whether for money or money’s worth
  • Taxable goods and services are the goods and services that are chargeable under the VAT Act and they are not taxable stated as exempt in the First Schedule of the VAT Act
  • A person is a person who carries out in any place activity of economic value as a manufacturer, supplier of goods or services, or any other person using tangible or intangible property with the intent to obtain income by way of trade or business; and includes any agency of government acting in that capacity.
  • Records and accounts of all taxable transactions must be kept properly.