VALUE ADDED TAX (VAT): 26 Facts You Should Know

1. Value Added Tax – VAT is a consumption tax. It is an indirect tax with the tax liability being paid by the final consumer of goods and services because it is included in the price paid.
2. The tax was created by the Value Added Tax Act No. 102 of 1993 which became effective from January 1994
3. The tax is at a flat rate of 5%.
4. The tax is collected on behalf of the Federal Inland Revenue Services by individuals, enterprises, businesses, and organizations that have registered with the Federal Inland Revenue Services (FIRS).
5. The Value Added Tax Act requires all taxable persons to register for VAT within six months of the commencement of the Act (in 1993) or six months of the commencement of business, whichever is earlier, with the FIRS for the collection of the tax.
6. Not all goods or services are liable to pay VAT. The following are exempted from paying VAT: -All exports
   • All medical and pharmaceutical products
   • Basic food items
   • Baby products
   • Fertilizer, locally produced agricultural and veterinary medicine, farming machinery, and farming transportation equipment.
   • All plants, machinery, or equipment purchased for utilization of gas in downstream petroleum operations
   • Plant and machinery for use in the export processing zones.
7. All taxable persons are required to register for VAT notwithstanding that they may be dealing in exempt items.
8. It should be noted that exemption status as contained in the VAT law is conferred on goods and services and not on persons or institutions.
9. A business or organization which has registered for Value Added Tax is classified as a “registered person”. Such persons will pay 5% VAT on goods and services purchased but can claim credit for this tax (called input tax) when sold.
10. The 5% of the value of goods and services sold is called the output VAT while 7.5% of the goods bought for resale is called the input VAT.
11. 5% VAT (called output tax) is included in the price of all goods and services supplied by registered persons.
12. The input VAT to be allowed as a deduction from the output tax shall be limited to the tax on goods purchased or imported directly for resale and goods that form the stock-in-trade used for the production of any new product on which output tax is charged.
13. Value Added Tax incurred on administrative expenses or overheads does not qualify as allowable input VAT. Such Value Added Tax is expended in the profit and loss account with the related expenditures
14. Value Added Tax paid on purchases of capital items or assets does not qualify as input VAT, rather they are capitalized (taken as part of the capital expenses of the business and capital allowances claimed).
15. There is no provision in the VAT Act for input tax claims on supplies of services.
16. VAT on inputs for the production of exempt goods is written off to profit and loss accounts.
17. VAT on input for the production of zero-rated products is reclaimed from FIRS through refund claims application.
18. Reimbursable expenses (where applicable) not forming part of the fees should be clearly and separately disclosed on the invoice and VAT would not apply to it.
19. VAT rendition and payment is monthly and this has to be done not later than the 21st day of the month following the month in which the transaction occurred. In any month there is no transaction, the law requires that a nil return is rendered.
20. Value Added Tax is invoiced-based. That is, the computation and payment of VAT is not done on cash receipts but rather on the total invoices raised with other cash receipts. If any portion of the invoices are not received ultimately, adjustments are made for bad debts.
21. Nigeria operates a value-added tax-exclusive system. This system requires that the VAT element of the transaction is openly stated on the face of the invoice. The tax authority frowns at anything to the contrary notwithstanding that VAT is being paid.
22. The registered person has to make regular Value Added Tax returns and either pays to or receives from the FIRS, the difference of the input tax and the output tax.
23. VAT returns (and payments) are normally made monthly to the FIRS on or before the 21st day of the month next following that in which the supply was made.
24. To claim a credit for Input VAT, a registered person must hold a “Tax Invoice”.
25. Records and accounts have to be kept to aid Value Added Tax administration and as support documents in the event of an audit.
26. There are various offenses and penalties for not complying with the provisions of the Value Added Tax Law:

• The penalties vary from the payment of monetary fines to paying two times the amount that ought to have been paid as Value Added Tax.
• The most severe offense appears to be the failure to collect the tax by a taxable person. The penalty is a fine equivalent to 150% of the uncollected tax plus a 5% interest surcharge above the Central Bank of Nigeria’s re-discount rate.
• Terms of imprisonment include 3 years for tax evasion, 6 months imprisonment with a fine for resisting, hindering, or obstructing the Value Added Tax administration, etc.

Value Added Tax is common to all forms of organization including individual trading under their names.  Every form of business organization is an agent of collection for this tax.  As such the tax requires good and proper documentation, and monitoring in order not to run foul of the law.