Value Added Tax (VAT) is a form of tax or levy imposed by the Federal Government on the purchase and consumption of goods and services in Nigeria. It is a tax that is charged on the value which a citizen derives from the purchase of goods and services as against a tax that is charged on the income of a citizen. 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.
The legal regime regulating the control, imposition and regulation of VAT on goods and services in Nigeria is the Value Added Tax Act (VAT Act) and the Finance Act (the Act). By section 7 of the VAT Act, the Federal Inland Revenue Service (FIRS) is the body charged with the administration, management and collection of VAT in Nigeria. The current rate of VAT in Nigeria is 7.5 percent of the total value of the goods or services purchased.
Any person or organization that carries out business in Nigeria either as a producer, wholesale trader and or supplier of taxable goods and services (goods and services subject to VAT) shall upon commencement of business register with the FIRS for the purpose of VAT correspondence. A person or business who registers with the FIRS for the purpose of VAT correspondence is called a taxable person. In the case of a non-resident company carrying out business in Nigeria, it is to register for VAT with FIRS using the address of the person with whom it has a subsisting contract as its address for the purpose of correspondence relating to VAT. Refusal or failure by a taxable person to register with FIRS upon commencement of business in Nigeria will attract a penalty of N50,000 for the first month within which the default occurred and N25,000 for each subsequent month for which the default continues.
A non-resident company is required under the VAT Act to include VAT on its invoice for the supply of taxable services and the person to whom the services are supplied is to remit the tax directly to the FIRS in the currency in which the transaction was performed. In the event that taxable goods or services are supplied to a person and no tax is charged on the invoice issued, he will be required to account for the tax payable and remit same to the FIRS.
Where a taxable person ceases to carry on business in Nigeria, such person is required to notify the FIRS of its intention to deregister for tax purposes within 90 days of cessation of business. If the person fails to give notification to FIRS of permanent cessation of business, it will attract liability of fine of N50, 000 for the first month and N25, 000 for each month the failure continues.
This is a company that is not registered or incorporated in Nigeria but which derives income or profits from Nigeria. It is pertinent to note that exemption from incorporation under the provision of the Companies and Allied Matters Act “CAMA” does not in any way discharge such corporation from its legal obligation of payment of tax by the company. Every company (resident and non-resident) is liable to pay tax in Nigeria if its income is subject to tax under the provisions of the extant tax laws in Nigeria. It follows that a non-resident company (whether exempted from registration under CAMA or not) is therefore liable to pay VAT.
Input and output VAT
Input VAT is a VAT that is charged on the purchase of goods or supply of services into a business by a taxable person (person or organization that is registered to pay VAT), while output VAT is a VAT that is charged by a taxable person on the sale of goods or services out of a business. Every business that is registered with the FIRS for VAT correspondence pays input VAT on the purchase of goods or supply of services into their business. The said business is also entitled to charge VAT on the sale of goods or supply of services out of the business.
At the point of remitting the VAT charged on the sale of goods or supply of services to the FIRS, a taxable person shall deduct the input VAT it paid on the purchase of goods and services from the output VAT that it received on the sale of such goods and services. If after deduction the output VAT exceeds the input VAT, it shall remit the balance to FIRS. If on the other hand the input VAT exceeds the output VAT it shall be entitled to a refund from the FIRS of an amount that is equal to the sum exceeded by the input VAT.
Government Ministries, Departments and Agencies shall deduct VAT from the invoice of any contractor at the time of payment for VAT charged on any contract. The said sum shall be paid immediately to the FIRS.
When VAT should be remitted
VAT is to be remitted to the FIRS on or before the 21st day of every month. The remission made shall be for supply of goods and services for the previous month. A taxable person who fails to remit VAT shall be liable to pay a fine of N50,000 for the month of default and a fine of N25,000 for every subsequent month which the default continues.
Goods and services subject to VAT
The law is that VAT shall be charged and payable on the supply of all goods and services in Nigeria except for those specifically exempted by the Act. For goods and services to be subject to VAT they must meet the following criteria:
In the case of goods:
- The goods are physically present in Nigeria at the time of supply.
- The goods are imported, assembled or installed in Nigeria.
- The beneficial owner of rights in or over the goods is a taxable person in Nigeria and
- The goods or rights over it is situated, exercisable or registered in Nigeria.
In the case of services:
- The services are rendered in Nigeria by a person physically present in Nigeria at the time of rendering the service.
- The services are provided to a person in Nigeria regardless of whether the service is provided within or outside Nigeria.
The above implies that save for the exceptions recognized by the Act, VAT is charged on all goods and services provided within Nigeria to a person in Nigeria or provided outside Nigeria (imported goods or services) to a person or business registered in Nigeria.
Goods and services exempted from VAT
The law exempts certain goods and services from being subjected to VAT charges under the Act. These goods and services include:
- Services exempted
– Medical services
– All exported services, that is, services rendered within or outside Nigeria by a person resident in Nigeria to a non-resident outside Nigeria.
– Services rendered by microfinance banks, mortgage institutions and people’s banks
– Plays and performances conducted by educational institutions as part of learning
– Tuition relating to nursery, primary, secondary and tertiary education
- Goods exempted
– Basic food items which covers staple foods obtained from land or water such as additives, bread, cereals, cooking oil, culinary herbs, fish of all kinds other than ornamental, live or raw meat and poultry, fruits, flour and starch, milk, nuts, pulses, roots, vegetables, salt for culinary use except industrial salt, water
– All medical and pharmaceutical products
– Books and educational materials
– Baby products
– Locally produced agricultural and veterinary medicine
– Farming machinery
– Farming transportation equipment
– All exports
– Plant, machinery and goods that are imported for use in the export processing zone or free trade zone, provided that 100% of the goods produced by the company is for export
– Plant, machinery and equipment purchased for utilization of gas in downstream operations
– Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes
– Locally manufactured sanitary towels
Also, consumers of the goods or services earlier stated are not to pay VAT in the event that a taxable person inadvertently adds VAT in its invoice for any of such goods or services.
We advise individuals, firms and organization commencing business in Nigeria to seek the services of lawyers and other professionals on tax-related matters and all other regulatory matters that are peculiar to the Nigerian business environment. This will aid due compliance with the law by businesses as well as promote their goodwill and reputation.
*Sunday Agaji is an Associate at the law firm of Giwa-Osagie & Co. He can be contacted on email@example.com
*Nnenna Ogakwu is an Associate at the law firm of Afe Babalola & Co. She can be contacted on firstname.lastname@example.org