Value Added Tax in Nigeria: A beginner’s guide

Value Added Tax in Nigeria: A beginner’s guide

If you purchase goods from a departmental store in Nigeria, you would notice that a certain amount, Value Added Tax, on your sales receipt. Typically, this is rarely an issue since the price is inclusive of Value Added Tax (VAT).  As a business owner or individual, it is important to know the VAT regime in Nigeria for proper planning. This guide addresses the most frequently asked questions on VAT and two illustrations.

What is Value Added Tax?

The Value Added Tax (VAT) Act, 2007, governs the administration of VAT in Nigeria. VAT is a tax levied on the supply of taxable goods and services. It is a multi-stage levy on value-added on each production or distribution stage of a good or service. Using a manufacturing company, the value added begins from the first stage, for instance, the purchase of raw materials, until the final stage, for instance, sale to final consumers. Even though a taxable person is accountable for VAT, it is an ‘indirect tax’ because the tax burden passes to the final consumers.

 

Who is a taxable person?

A taxable person is a person who produces or trades or supplies goods and services. Example of taxable persons are manufacturing company, construction company, service provider, consulting firm.

When should a taxable person register for VAT?

A taxable person shall register for VAT within 6 months of commencement of the Act or within 6 months of commencement of business; whichever is earlier. This implies that a taxable person that commenced business in June 2018 should have registered for VAT in 1993. It therefore seems that the registration clause did not consider taxable persons after 1994. The preferred option is to apply a registration timeline to “six months after commencement of business” or “upon commencement of business”.

In practice, FIRS recommends that a taxable person should register for VAT when business commences.

Section 2: Registration for Value Added Tax, rate of tax,...

How do I register my business for VAT?

You can register for VAT by submitting a duly completed Taxpayer Registration Form and supporting documents at Federal Inland Revenue Service(FIRS) office. Thereafter, FIRS would issue a unique Taxpayer Identification Number (TIN) as proof of registration.

What is taxable goods and services?

Taxable goods mean the supply of all goods and services except those items exempted under the VAT Act.

 

What is the VAT rate in Nigeria?

The typical rate of VAT in Nigeria is 5%. Nonetheless, there are two other rates which you should know as a business such as zero-rated VAT and VAT exempt. First, zero-rated VAT is the rate of tax on non-oil exports, goods, and services bought by diplomats and goods and services bought by humanitarian donor-funded projects. Even though no VAT is charged, a company still needs to record the supply of zero-rated goods and services on its VAT return. Second, exempted goods or services are also not subject to VAT. Examples of exempted goods include:

  • All medical and pharmaceutical products;
  • Basic food items;
  • Books and educational materials;
  • Baby products;
  • Fertilizer (locally manufactured), agricultural and veterinary medicine, farming machinery and farming transportation equipment;
  • Plant and machinery imported for use in the export processing zone or free trade zone; provided that entire produce from such company is for export;
  • All commercial aircraft and aircraft spare parts imported for use in Nigeria;
  • Amorphous pet chips

On the other hand, exempted services are

  • Medical services;
  • Services rendered by Community Banks;
  • People’s Banks and Mortgage Institutions;
  • Plays and performance conducted by the educational institutions as part of learning;
  • All exported services.

VAT exemption applies to goods and services of a company and not to a company.

Section 3: Input and output VAT

Input VAT is paid on raw materials or goods and services used for production purposes or goods for resale or goods imported directly for resale. Furthermore, any input VAT that can be expended through income statement or capitalised with an asset cannot be used to reduce output VAT. On the other hand, output VAT is charged on goods and services supplied. Where output VAT is higher than the input VAT, the balance is paid to FIRS. However, where input VAT is more than output VAT, the taxable person claims a refund.

Section 4: Deduction of VAT at source

When a company or individual issue VAT invoices to their customers, such customers are required to pay the contract sum as well as the VAT amount. For instance, Company ABC renders service to Customer X for NGN105,000 (Fee – 100k, VAT – 5k). Customer X will be required to pay the sum of NGN105,000. However, this pattern would be different if Company ABC issues a tax invoice to specific organizations. 

Under the VAT Act, companies operating in the oil and gas sector and government agencies, ministries or parastatals are required to withhold the VAT at source. This implies that these type of organization should pay their contractors the cost of the goods/services and withhold the VAT portion. Thereafter, the VAT should be remitted to the FIRS. We shall consider another illustration using Company ABC’s details above but with a new customer, that is, Government agency. The Government agency will be required to pay NGN100,000 to Company ABC and withhold VAT of NGN5k. The amount withheld will be remitted to FIRS. Therefore, the Government agency is the collection agent of FIRS.


Section 5: Returns and filing

How do I remit VAT?

FIRS uses designated banks as collection agents for payments into the VAT Pool Account. Two common means of payment are FIRS pay-in-slip at the bank and online bank transfer.

 

What are the documents required for filing VAT returns?

  1.   Evidence of payment from FIRS designated revenue collecting bank
  2.   Completed VAT Returns Form 002. Download here
  3.   Schedule of VAT collected showing the: Name, TIN of company or individual having VAT charge and the amount

I have no supply of goods and services. Am I still required to file?

Yes. VAT return is filed every month including months with no business transactions. This is a NIL return and the amount on the return would be zero.

 

What is the due date of filing VAT returns?

The 21st day of the month following the month of transaction.

Is there any consequence for:

Non-registration? A penalty of N10,000 for the first month in which the failure occurs and N5,000 for each subsequent month. FIRS may seal the business premises if the non-registration lingers.

Non-deduction? A penalty of 150% of the uncollected tax plus 5% interest above the CBN’s re-discount rate.

Non–remittance? A penalty of 5% per annum plus interest at a commercial rate. This is payable within 30 days of notification by FIRS

Examples - Calculation of Value Added Tax

Illustration 1: Manufacturing company

Company ABC bought raw materials at N73,500 (VAT inclusive) in August 2018.  The Company later converted these raw materials into finished goods which were sold for N105,000 (VAT inclusive) in October 2018. How much VAT is payable?

 

Solution 1:

N1,500 which is output VAT (N5,000) less input VAT (N3,500). The return is due on 21 November 2018.

 

Illustration 2: Professional service firm

Firm XYZ bought printer at N21,000 (VAT inclusive) in June 2018.  The Firm used this printer in creating several reports to clients at N36,750 (VAT inclusive) in October 2018. Assuming Firm XYZ invoice contains only fee and VAT, how much VAT is payable?

 

Solution 2:

N1,750 which is (5/105 * N36,750). Recall our explanation of input VAT in Section 3 above, so service companies such as Firm XYZ cannot claim input VAT. The return is due on 21 November 2018.

 

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