The current Value Added Tax in Nigeria has been a cause for concern for many Nigerians as most of them do not have an adequate understanding of what the Value Added Tax is all about.
If you have ever purchased anything at a supermarket, you will notice a Value Added Tax on your receipt, which you might ignore because the amount is usually small and included with your purchase. However, some people might still ask questions like: what is VAT? Therefore, this guide will show you all about the current Value Added Tax in Nigeria.
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What is a Value Added Tax (VAT)?
A Value Added Tax is a certain amount of money paid as TAX on the consumption of goods and services by individuals, business organisations, or government agencies in Nigeria.
The current Value Added Tax in Nigeria is a multi-level tax. It is charged on all goods manufactured within and outside the country except those specifically exempted by the VAT Act. Certain goods and services such as medical and pharmaceutical products, medical services, basic food items, books, educational materials, exports, e.t.c. are exempted from the Value Added Tax in Nigeria, and they are all listed in the VAT Act.
In the Value Added Tax Act section 7, the authority to administer and allocate VAT across the country was vested in the Federal Inland Revenue Service (FIRS), which now functions as the Federal Tax Agency. Value Added Tax is charged at 7.5%, while other goods and services like non-oil exports are zero-rated.
In addition, every taxable individual is expected to document their Value Added Tax every month for returns, and it should not be more than 21 days after the month that the transaction was made.
The Extent of the Current Value Added Tax Act in Nigeria
Section 10 sub 1 of the Value Added Tax Act requires all companies not based in Nigeria to register with the Value Added Tax office using the address of the people or companies they are affiliated with in the country. So all correspondence related to these companies will be sent to the addresses provided.
In addition, all non-resident companies are also expected to include VAT in the invoices to the people or companies they are affiliated with in Nigeria. The Value Added Tax will be charged in the currency of the contract. Furthermore, it is essential to note that the current Value Added Tax in Nigeria has a built-in credit or refund mechanism that helps to eliminate the cascading effect.
What is the rate of Nigeria’s Value Added Tax?
The rate of the current Value Added Tax in Nigeria is 7.5%. However, there are other specific rates for exempt and zero-rated items. The services that are exempted from the Value Added Tax in Nigeria include.
- Public transport services.
- Tuition fees at all levels.
- Medical services.
- Services of banks and mortgage institutions.
- Residential accommodation rent or lease.
- Learning institutions’ performance and plays.
- All export services.
Apart from goods and services, there are still other exemptions in Nigeria’s VAT system. one of the exemptions is for small businesses. If you run a small business with an annual turnover of below NGN25M, your business will be exempted from accounting for VAT. This means that a small business can issue an invoice without including VAT. However, on purchasing taxable goods and services, the company/business will still be required to pay VAT.
Taxable Goods and Services
The law governing Value Added Tax in Nigeria is that tax will be charged and paid on the supply of all goods and services except those exempted by the VAT Act. For goods and services to be accountable to VAT, they must meet all of the following requirements.
- Be physically present in Nigeria at the time of supply.
- The goods are either imported, assembled, or installed in Nigeria.
- The profitable owner of rights must be a taxable person in Nigeria.
- The goods and rights are located and registered in Nigeria.
Nigerian Value Added Tax Compliance
Value Added Tax invoices in Nigeria must include the following information:
- Name, address, and tax identification number of the supplier.
- Date of supply.
- Description of the goods or services provided.
- Name, address, and tax identification number of the customer.
- VAT number of the supplier.
- VAT rate-the gross amount of the invoice and amount charged.
- Unique Value Added Tax number.
Credit notes are not given under the Value Added Tax Act but are accepted. They should, however, maintain a specific invoice number that refers to the invoice being reversed or corrected. Also, the tax authorities do not require electronic invoices, and there may be a 50% penalty for failing to issue VAT invoices.
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How to Calculate the Current Value Added Tax in Nigeria
VAT is calculated on all goods and services offered in Nigeria at a flat rate of 7.5%; this is stated in section 4 of the VAT Act. As a business owner, you are expected to calculate the amount of Value Added Tax you have received from your customers in a month and deduct it from the VAT you paid to your suppliers for the goods and services you purchased.
You should remit the difference to FIRS as the VAT from your business if the amount of VAT you paid is less than the amount you received. However, if the VAT you paid is more than what you received, you can ask for a refund.
Note that only the VAT you paid for the goods you purchased or imported can be used as output VAT to calculate tax and offset the VAT you received, which is the input VAT. Therefore, you cannot include other expenses and overhead charges when calculating VAT for your business.
What is Output and Input VAT
The output VAT is charged on goods and services supplied to you or your business, while input VAT is payable on goods, services or raw materials used for the purpose of production or resale. Where the input VAT is higher than the output VAT, a taxable person can claim a refund. However, a taxable person should not use input VAT that can be capitalised with an asset or paid out through an income statement to reduce output VAT.
Relevant Value Added Tax authority and VAT Registration
If you own a company or a business in Nigeria, whether you are a producer, wholesaler or retailer, you are liable to pay VAT, and the sole agency responsible for the administration of Value Added Tax in Nigeria is the Federal Inland Revenue Service (FIRS). So you should register your company/business with FIRS to start paying VAT. If your company is not situated in Nigeria, you have to register for VAT with FIRS using the address of the person or business in Nigeria affiliated with your company.
Also, if your business/company is not in Nigeria, you are expected to include VAT in your invoice to supply taxable goods and services. In addition, if the goods and services are supplied to you, you are to pay Value Added Tax to FIRS in the currency in which the transaction was carried out.
However, if taxable goods and services are supplied to you and no tax is charged on the invoice, you are expected to calculate the amount of tax required and remit it directly to the FIRS.
When do you Register for VAT as a Taxable Person?
As a taxable person, you are expected to register for the current Value Added Tax in Nigeria once you commence a business. Under the VAT Act, a business should be registered for VAT with the FIRS on the earliest date it-
- Obtains an operating license in Nigeria.
- Renders its first services to customers.
- Makes its first purchase or sale.
- Receives or sends its first set of goods or invoices.
- Performs its first trading contract after incorporation.
- Advertises its products or services for sale.
How to Register for VAT with FIRS?
If you are a taxable person, you can register for the current Value Added Tax in Nigeria by going to any FIRS office closest to you with the following documents.
- Memorandum and Articles of Association.
- Duly filled and stamped VAT registration form 00.
- Certificate of incorporation: CAC7, CAC2.
- Utility bill.
- Duly filled and stamped CIT form.
- Application letter on company/business letter headed paper.
- Business name registration certificate.
- Valid means of identification.
You should go to the FIRS office with original copies of these documents and two photocopies each. One of the photocopies will be stamped and returned to you as evidence that you have applied to register for Value Added Tax in Nigeria with FIRS, while the other copy will be left with them. The original copies you provided are for sighting only.
Also, remember that registration for the current Value Added Tax in Nigeria is free and would be completed instantly or within 24hrs. In addition, a taxable person can also deregister for Value Added Tax in Nigeria after 90 days of permanent cessation of operations. you can also read the guidelines for new taxpayers here.
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After going through this guide, the next time you see the tag VAT on your receipts and invoices, you will know exactly what it means and why it is included. However, you should never forget that VAT payment is your civic responsibility. So if you own a business or company that meets the Value Added Tax in Nigeria requirements, you should register the business/company as soon as possible.
Please note that all information provided in this guide is not in any way intended as a form of legal advice, but it is aimed at enlightening people and business owners on all about the current Value Added Tax in Nigeria and what it entails.
