The issue of raise in value added tax (VAT) rate in Nigeria from the current five percent has reared its head again as it has been doing for the past 10 years. Anytime this issue hits the news, it is usually followed by claims and denials of support, with the quoted government source usually claiming they were misquoted. While this latest frenzy is not different, it is looking like there has been greater momentum on the call to increase the VAT rate in Nigeria.
Proponents of VAT raise easily point to the UK, with a standard VAT rate of 20 percent, to justify why Nigerian VAT rate is ridiculously low and must be raised. While it is true that the VAT rate in Nigeria is truly one of the lowest, the operation of VAT system in Nigeria is significantly different from the operation of VAT in other countries, especially those with materially high rates.
Actually, we do not have VAT in Nigeria, what we call VAT here is not true VAT. It looks more like the sales tax it sought to replace in 1993. VAT in Nigeria taxes revenue, rather than “value added”.
A true VAT system largely balances. Nigerian VAT is nowhere neutral, it is a huge business cost.
Under the UK VAT system, you can reclaim VAT on almost all your business expenses, whether goods or services. All you need to do is file your quarterly VAT return showing the VAT you suffered (i.e. paid to your suppliers – of goods and services – in the accounting period ) and the VAT you charged your own customers. If the former is higher than the latter, you claim refund from HMRC (the UK tax authority), and they refund you within 10 days, or a little longer. If the reverse is the case, you pay the net VAT to HMRC.
In Nigeria, VAT is not recoverable on services, and goods that don’t go directly into your production or goods bought for re-sale.
Let me give an illustration with an hypothetical Jarus Limited.
Let’s say Jarus Limited produces plastic from rubber. It buys rubber from (say)Lakatabu Plantation Limited and uses to produce the plastic which it sells to its customers.
If Jarus Limited were situated in the UK, it will reclaim the VAT on all its expenses (the VAT paid to rubber supplier, to the transporter, to the office computer supplier, to the official mobile phone supplier, on warehouse rent etc) from VAT it charges its own customers (plastic buyers). If the VAT on all those goods and services purchased is higher than the VAT on the sales it made, it is the government that will refund the balance. If higher, it pays difference to government. This is also the case in many other countries.
But under Nigerian VAT Act, Jarus Limited can only recover VAT on purchased direct material input (rubber). It cannot reclaim VAT it paid on transportation, computer, rent etc. Such costs are capitalized with the asset or expensed if it is a revenue item (i.e. added to the cost).
In other words, the Nigerian VAT system adds five percent to the cost of purchase of services and capital expenditure at multiple stages in the supply chain.
So merely looking at the VAT rates between Nigeria and the UK (and other countries) and concluding that VAT rate is low in Nigeria does not do justice to the system. With such narrow recoverable input VAT, what we have in Nigeria is not true VAT, it is largely a sales tax.
Despite the UK rate being 20 percent and the Nigerian rate five, a business in Nigeria will incur more business cost, over and above the value it added, in the name of VAT than a comparable one in the UK.
The devil, therefore, is not in the rate, but in the operation. The VAT system in Nigeria requires a major reform to bring it in line with international systems before any issue of rate raise arises.
Suraj Oyewale, ACA
Oyewale, an economist and chartered accountant, heads the Nigerian tax team of an independent oil and gas company
