VAT IN NIGERIA
The Value Added Tax in Nigeria is the tax payable on goods and services consumed by any person, whether government agencies, business organization, or individuals. It can also be said to be a tax on spending or consumption levied at every stage of transaction but eventually borne by the final consumer of such goods and services.
Section 7 of the Valued Added Tax Act vests power of administration of VAT in the Federal Inland Revenue Service (FIRS), which acts as a Federal Tax Agency. The VAT is charged on most goods and services provided in Nigeria and also on goods imported into Nigeria.
Businesses add VAT to the sales price of the goods or services they offer in Nigeria and the tax is borne by the final consumer of goods and services because it is included in the tax paid. VAT is currently calculated at a flat rate of 7.5% of the cost of services and products and is charged on a wide array of goods and services.
Section 8 sub 1 of the VAT Act states that businesses are expected to register for VAT within the first six months of the start of the business. Businesses that want to do business with state, federal, or local government agencies are also required to show evidence of registration with VAT and past remittance. The registered person has to make regular VAT returns and either pays to or receives from the FIRS the difference of the input tax and the output tax. VAT returns are normally made monthly to the FIRS tax office.
SCOPE OF THE VAT ACT
The VAT Act under section 10 sub 1 also requires Non-resident companies to register with the VAT office using the address of the person or business that it is doing business within Nigeria. Correspondence related to VAT for this business will be sent to this address. A non-resident company is also required to include VAT in the invoices to the person or business it is doing business within Nigeria and the VAT is to be remitted in the currency of the contract. It is also to be noted that the VAT system in Nigeria has an in-built refund or credit mechanism, which eliminates the cascading effect.
HOW TO CALCULATE VAT
VAT is calculated at a flat rate of 7.5% on all goods and services sold in Nigeria; this is stipulated under section 4 of the VAT Act, except items that are on the VAT exempt list or zero-rated. An example of such is exported goods, all exported goods are zero-rated, that is such goods are VAT-able but at zero percent. This means that VAT is collected from the foreign buyer and at the same time any input tax is refundable.
Businesses are required to calculate the amount of VAT they received from customers in a month and offset that with the VAT they paid to suppliers for goods and services. If the amount of VAT paid is more than the VAT the business collected, then the business is owed a refund. If the amount paid is less than the VAT the business collected, the business must remit the difference. Note, only goods purchased or imported directly for resale and goods used for the direct production of any new product on which the output tax is charged can be used to calculate the offsetting tax. The VAT on overhead, services, and general expenses cannot be used to calculate the offsetting VAT. These expenses are expected to be deducted before arriving at taxable profits and so do not qualify.
A business is expected under section 15 sub 1 to remit VAT it has collected by the 30th day of the month following the month the goods or services were sold. For example, if a business sells a product on March 15th, VAT on the sale must be submitted by April 30th of the same year to avoid any penalties. The penalty for non-remittance of VAT to the FIRS is N5, 000 per month for every month that the amount is past due. Although VAT is a multiple-stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.
GOODS AND SERVICES EXEMPTED FROM VAT
There are some goods in Nigeria, which are specifically exempted from paying VAT as contained in the first schedule of the VAT Act, and such include medical and pharmaceutical products; basic food items; books and educational material; newspapers and magazines; baby products; commercial vehicles and their spare parts; agricultural equipment and products; and veterinary medicine.
Finally, to claim a credit for input VAT, a registered person must hold a tax invoice, also records and accounts have to be kept to aid VAT administration.
By Taxation Law Team at Resolution Law Firm