Facts You Should Know about VAT
VALUE ADDED TAX
The Value Added Tax Act imposes value added tax (VAT) as a consumption tax on the supply of all goods and services (known as taxable goods and services) other than those which are listed as exempt goods and services in the Act. VAT, is imposed at each stage of the consumption chain and is borne by the final consumer. The VAT rate is 7.5% of the value of the supply or sale.
VAT is administered by the Federal Inland Revenue Service and is collected across the entire federation.
Taxable Persons to render returns
A taxable person who in the course of business, has made taxable supplies or expects to make taxable supplies, the value of which, either singularly or cumulatively in any calendar year, is N25,000,000 or more shall, render to service, on or before the 21st of every month in which this threshold is achieved and on or before the same day in successive month thereafter, a return of the input tax paid and output tax collected by him in the preceding month in such a manner as the Service may prescribe.
Registration for VAT
The Act requires all taxable persons to register for VAT upon commencement of business.
Ministries, Department and Agencies (MDAs) of Government are also required to registered for VAT. MDAs are agents of the FIRS for the collection of VAT on payments made for services and supplies received by them. Foreign (non-resident) companies which carry on business in Nigeria are also required to registered for VAT using the address of the person with whom they have a subsisting contract in Nigeria as their correspondence address.
Payment of VAT
The purchaser of goods or services is required to pay VAT over to the supplier when making payment for the goods and services. The supplier is required to provide a tax invoice to the purchaser showing the following:
• Taxpayers identification number;
• Name and address of the supplier;
• VAT registration number;
• Date of supply;
• Name of the purchaser;
• Gross amount of the transaction; and
• VAT charged and the rate applied, as VAT is an addition to the gross amount of the transaction.
MDAs and companies operating in the oil and gas sector are however required to deduct VAT at source and remit same to the FIRS. The returns provided by an MDA or a company in the oil and gas sector should be accompanied with a schedule showing the name and address of the contractor, invoice number, gross amount of invoice, amount of tax and month of return.
VAT returns
A taxable person is required to render VAT returns to the FIRS by the 21st day of the month following that in which the relevant purchase or supply was made. A taxable person is required to make payment of VAT if the output tax collected by such a person exceeds the input tax paid by him within the relevant period. Where the input tax paid exceeds the output tax collected, the person will be entitled to a refund from the FIRS.
INPUT and Output Tax
Input tax is defined as the tax paid by a purchaser to a supplier on taxable goods and services purchased by or supplied to that person. Output tax is defined as tax collected by a supplier on taxable goods and services supplied by him.
Under the Act the input VAT which is allowed as a deduction from output tax is restricted to input tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged.
Input tax on the following items is not allowed as a deduction from output tax:
(a) input tax on any overhead, service and general administration of any business which can otherwise be expended through the income statement (profit or loss account);
(b) input tax on any capital item and asset, which is to be capitalized along with the cost of the item and asset.
VAT exempt and Zero Rated Goods
Certain goods and services are exempted from VAT under the Act. These include:
Exempted Goods
(i) all medical and pharmaceuticals products;
(ii) basic food items;
(iii) books and educational materials;
(iv) baby products;
(v) fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment;
(vi) all export;
• plant, machinery and goods imported for use in export processing Zone or Free Trade Zone. Provided that 100% production of such company is for export otherwise tax shall accrue proportionately on the profits of the company;
• plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations;
• tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes; and
• such other exempted goods as provided in Federal Government VAT exemption Circulars.
Exempted Services
• medical services;
• services rendered by Community banks, People bank and Mortgage Institutions as part of learning; and
• all exported services.
Zero Rated Goods and Service
Zero rated status means that the VAT rate applicable on a good or service is 0%. The taxable person is therefore able to claim the input VAT incurred in the production of the zero rated goods and services in the form of refund from the FIRS. The zero rated goods and services under the Act are:
• non-oil expert;
• goods and services purchased by Diplomats; and
• goods and services purchased for use in humanitarian donor funded projects.
Offences
There are various offences under the Act and penalties as follows:
• Failure or refusal to register – N50,000 for the first month in which the failure occurs, and N25,000 for each subsequent month in which the failure continues.
• Failure to notify change of address or permanent cessation of trade or business – N50,000 for the first month in which the failure occurs, and N25,000 for each subsequent month in which the failure continues.
• Failure to submit returns – N50,000 for the first month in which the failure occurs, and N25,000 for each subsequent month in which the failure continues.
• Effect of non-remittance of tax – If a taxable person does not remit the tax within the time specified in section 15 of this Act, a sum equal to ten per cent (10%) of the tax not remitted and interest at the prevailing Central bank of Nigeria minimum rediscount rate shall be added to the tax not remitted and the provisions of this Act relating to collection and recovery of unremitted tax, penalty and interest shall apply.