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 output VAT while 5% of the goods bought for resale is called the input VAT. The following principles must be observed in the computation:
(i) 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.
(ii) 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
(iii) 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).
(iv) There is no provision in the VAT Act for input tax claims on supplies of services.
(v) VAT on inputs for the production of exempt goods are written off to profit and loss accounts.
(vi) VAT on input for the production of zero-rated products are reclaimed from FIRS through refund claims application.
(vii) 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.
VAT Exempt Items
The Value Added Tax Act (VATA) specifically exempts certain goods and services from Value Added Tax (VAT). The list of exempt goods and services are:
Basic foods items
All medical and pharmaceutical products sold/ supplied
Books and educational materials
Locally produced fertilizer, agricultural and veterinary medicine, farming machinery and farming transportation equipment
Plant, machinery and goods imported for use in the free trade zones
Plant, machinery and equipment sold to oil and gas companies in the downstream sector for utilization of gas.
Tractors, ploughs, agricultural equipment and implements sold to farmers
(a) Medical services
(b) Services rendered by community banks, people’s bank and mortgage institutions
(c) Plays and performances conducted by educational institution, as part of learning
(d) According to the VAT modification order gazette of January 2012, all government bonds, government securities and corporate bonds
Zero-Rated Goods and Services
(a) All non-oil exported goods and services1
(b) Goods and services purchased by diplomats or embassies
(c) Goods purchased for use in humanitarian donor funded projects
The law requires that a taxable person who makes a taxable supply shall in respect of that supply, furnish the purchaser with a tax invoice containing the following: the taxpayers tax identification number, name and address, VAT registration number, date of supply, name of client or customer, gross amount of transaction and tax charged.
Where goods and services are supplied to government ministries, departments or agencies, or companies operating in the oil and gas sector, the VAT charged which should ordinarily be paid to the supplier is required to be withheld by these organizations and remitted by them on behalf of the taxpayer in the prescribed format.
VAT on imported goods are levied at the point of importation and payment of customs duties is based on the original costs of such goods plus all costs incurred in bringing the goods to the port or place of importation into Nigeria. These costs include all other taxes, duties, levies, transportation, shipping, insurance, parking and commission.
VAT on imported services are to be withheld by the Nigerian company having a subsisting contract with the foreign company (which carries on business in Nigeria) and remitted on behalf of the non-resident company using the Nigerian company’s own address and in the currency of the transaction.
VAT returns are done on VAT form 002, available in all FIRS tax offices.
There are several penalties for the different non-compliance offences under the Value Added Tax Act. Taxpayers are therefore urged to embrace voluntary compliance to the obligations of VAT, which holds significant potential for raising government revenues.
1 Exported service in this case, means a service performed by somebody or company residing in Nigeria to a person outside Nigeria. Note the condition of residency for the service supplier, and the condition that the service must be rendered to a person outside Nigeria. Services performed and consumed in Nigeria, on the order of non-resident persons, therefore, do not qualify as exported service.
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