Synopsis of Value Added Tax Administration in Nigeria
What Is Value Added Tax?
Value Added Tax (VAT) is a tax levied on goods and services consumed. It is an indirect tax wherein the burden of the payment is borne by the final consumer of the goods and services. The tax was created by the VAT Act No. 102 of 1993 which became effective from January, 1994. The tax is collected only by Federal Inland Revenue Service at the rate of 5% of the value of the goods and services supplied. The VAT rate in Nigeria of 5% is said to be among the lowest in the world and has remained unaltered from commencement of the Act till date. From inception to date, the tax has proven to be a strong source of revenue to the government. Consequently, few attempts had been made to push up the rate to about 10% but were jettisoned by the public resentment against the proposed increase.
All proceeds of VAT flow into the VAT pool account which are distributed monthly to the Federal, States (including Federal Capital Territory) and Local governments in the proportion of 15%, 50% and 35% respectively (with consideration for derivation principle).
Importance of Value Added Tax
The drop in oil prices, which has led to dwindling revenues for Government in Nigeria, has once again brought into sharp focus the need to diversify the source of Government revenue away from oil and more toward taxation. This is because, apart from being a major source of revenue for Governments world over, taxation has the remarkable effect of stimulating economic growth and job creation through its impact on investment and capital formation in the economy. In other words, the more tax revenue a country generates, the greater developmental growth it attains.
Federal Inland Revenue Service, (FIRS) recently released its proposed tax collection targets for 2016, showing that Value Added Tax (VAT) will account for N2 trillion (40%) of the N4.957 trillion target for the year. This informs the importance both the Service and Federal government place on VAT as a dependable source of government revenue.
Furthermore, VAT is designed to be borne ultimately by the final consumers of the goods and services. The operating mechanism therefore allows for output-input adjustment to take care of taxpayers in the chain of distribution that are not consumers of the goods they deal in.
Another unique feature of this tax type is that its cost of collection is low as an indirect tax. Business owners are made compulsory agents (non-commission-earning agents) to the Federal government in the collection and rendition of the returns.
How is VAT Computed and Paid?
The VAT Act (VATA) requires all taxable persons to register for VAT within six months of the commencement of the Act (in 1993) or within six months of the commencement of business, whichever is earlier, with the Board for the purpose of the collection of the tax. All taxable persons are required to register for VAT notwithstanding that they may be dealing in exempt items. In this connection, it should be pointed out that exemption status as contained in the VAT law are conferred on goods and services and not on persons or institutions.
The 5% of the value of goods and service sold is called the input VAT while 5% of the goods bought for resale is called the input VAT. The following principles must be observed in the computation:
The input VAT to be allowed as deduction from the output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the production of any new product on which output tax is charged.
VAT incurred on administrative expenses or overheads does not qualify as allowable input VAT. Such VAT are expensed in the profit and loss account with the related expenditures
VAT paid on purchases of capital items or assets does not qualify as input VAT, rather they are capitalized (taken as part of the capital expenses of the business and capital allowances claimed).
There is no provision in the VAT Act for input tax claims on supplies of services.
VAT on inputs for the production of exempt goods are written off to profit and loss accounts.
VAT on input for the production of zero-rated products are reclaimed from FIRS through refund claims application.
Reimbursable expenses (where applicable) not forming part of the fees should be clearly and separately disclosed on the invoice and VAT would not be applicable to it.
VAT rendition and payment is monthly and this has to be done not later than the 21st day of the month following the month in which the transaction occurred. In any month there is no transaction, the law requires that a nil return is rendered.
VAT is invoiced-based. That is, the computation and payment of VAT is not done on cash receipt but rather on the total invoices raised with other cash receipts. If any portion of the invoices are not received ultimately, adjustments are done for bad debts.
Nigeria operates a VAT exclusive system. This system requires that the VAT element of transaction is openly stated on the face of the invoice. The tax authority frowns at anything to the contrary notwithstanding that VAT is being paid.
Babatunde Fowler is the Executive Chairman of the Federal Inland Revenue Service (FIRS) and this article is part of FIRS’ Tax Discourse series, initiated to enlighten and educate taxpayers on important tax technical topics. It is designed to be an interactive platform where readers are encouraged to send in their comments/enquiries to firstname.lastname@example.org. Vi-M Professional Solutions is the official partner to FIRS on the Tax Discourse series and enquiries can also be sent to email@example.com. Archives of publications are available on www.firs.gov.ng or on www.taxdiscourse.vi-m.com/FIRS
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