Vat & Other Indirect Taxes Essay
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Value Added Tax (VAT) was introduced in Nigeria in 1993 but became effective on 1 January 1994. VAT replaced the Sales Tax. VAT is governed by the Value Added Tax Act, Chapter V1, Laws of the Federation of Nigeria (LFN) 2004. The tax is administered by the Federal Inland Revenue Service (FIRS). Rates and scope
The standard VAT rate on goods and services is 5%. Value for VAT purposes includes customs duties, taxes, commission, transport, insurance and other charges, where applicable. Other than the standard-rated goods and services, some goods and services have been classified as VAT exempt, while others are zero-rated.
The standard rate applies to all goods imported, supplied or manufactured in Nigeria. The scope of VAT in Nigeria is broad and applies to almost all transactions. VAT, which is based on general consumption, is applicable to the supply of all goods and services made (i.e. consumed) in Nigeria, except where the supply is specifically exempted or zero-rated. VAT is applicable in all Nigerian states, including the Federal Capital Territory, the territorial waters and the continental shelf of Nigeria. For VAT purposes, the Export Processing Zones (EPZ) or Free Trade Zones (FTZ) are not treated as part of Nigeria. VAT is therefore not payable on the importation of any goods or services into an EPZ or a FTZ. In addition, plant and machinery imported for use in the EPZ or FTZ are exempt, provided that 100% of the production of such a company is for export; otherwise, the tax shall accrue proportionally on the item.
All resident and non-resident companies doing business in Nigeria are required to apply for registration with the FIRS immediately on commencement of business. There is currently no registration threshold. The tax authorities will allocate a VAT identification number to every registered person, which number must be stated on all invoices issued by the registered person. Such invoices are referred to as tax invoices. A non-resident company doing business in Nigeria is required to register for VAT using the address of the person with whom it has a subsisting contract as its address for purposes of correspondence relating to VAT. Where a registered person changes his name or trading name or the address of any of his business, he must immediately notify the FIRS in writing, and all existing registration documents should be returned to the tax authorities for amendment or re-issue.
Group or branch registration
There is no longer a requirement for each branch of a company to register separately. The FIRS now permits taxpayers to register centrally where their administrative or head offices are located. There is no group registration in Nigeria, each legal entity must register in its name.
Application for registration
Businesses must register with the tax authorities using VAT Form 001, immediately on commencement of business. Upon registration, the business will be issued a ‘Certificate of Registration’ and a VAT identification number. The number serves as an authority to charge and collect VAT on behalf of the FIRS.
The tax authorities must be notified in writing of the winding up or cessation of a business. There are no specific provisions for VAT deregistration in Nigeria.
Prices of Goods and Services
Advertised prices for taxable goods and services are deemed to be inclusive of VAT. Where prices are not inclusive of VAT, this should be clearly stated. When invoicing, VAT must be clearly stated, where applicable.
Calculation of output tax
Output VAT is calculated at the standard rate of 5% on the total sales value of the goods or services supplied. Output tax is due when a taxable supply is made or in certain other circumstances, such as:
•forced sales of goods in satisfaction of a debt;
•certain activities in relation to the cessation of a business; and
•withdrawal of goods for private or own use.
Exemptions and zero-rating
Exempt goods have no VAT levied on the final goods sold to the consumer. A registered supplier of exempt goods and services cannot claim input tax credits for VAT paid on the goods or services acquired to make exempt supplies, which include:
•all exported services;
•all medical and pharmaceutical products;
•basic food items;
•books and educational material;
•plant, machinery and goods imported for use in the Export Processing Zone or Free Trade Zone;
•plant, machinery and equipment purchased for utilisation of gas in downstream petroleum operations;
•fertilisers, tractors and ploughs, agricultural equipment and implements purchased for agricultural purposes;
•services rendered by community banks, people’s banks and mortgage institutions; and •plays and performance conducted by educational institutions as part of learning.
Exemption by Policy
Additional exemptions granted by the Minister of Finance through the Fiscal Policy Measures in line with the VAT Act include:
•Locally manufactured biscuits;
•Plant, machinery and equipment (including steel structures) for the manufacture of cement and allied products;
•Vegetable oil; and
•Motorcycle (CKD)/Bicycle(SKDs) and their spare parts.
Zero-rated goods attract VAT at 0% on the final product, while any VAT paid on the input is claimable by the supplier. The following goods and services have been listed as zero-rated: •non-oil exports;
•goods and services purchased by diplomats; and
•goods and services purchased for use in humanitarian donor funded projects.
Input tax is the VAT charged on purchases by a registered person, including:
•goods purchased, leased or otherwise acquired;
•imported goods; and
•services acquired by a registered person.
Input tax allowed
VAT incurred as input VAT may be deducted from output VAT only in respect of: •goods purchased or imported directly for resale; and
•goods constituting the stock in trade, used directly for the production of a new product on which output VAT will be charged. Input tax expressly denied
The following are not allowed for deduction as input VAT:
•VAT incurred on overheads, service and general administrative cost of any business – such VAT is expensed to the profit and loss account together with the costs to which they relate; •VAT on any capital item or asset – such VAT is capitalised along with the cost of the capital item or asset to which they relate; and •VAT on any services of accommodation, lodging and entertainment, regardless of whether such goods or services are acquired for business purposes.
Any VAT incurred on the acquisition of goods that cannot be wholly attributed to the making of taxable supplies will be reclaimable as input VAT in part only. The apportionment of input tax that can be claimed is determined by reference to the level of taxable use or consumption of the goods and subject to the normal rules for deducting input tax.
VAT is payable on the importation of all goods, whether or not the importation is subject to customs duty or excise duty. VAT on import is payable to the Nigerian Customs Service before the import can be cleared for home consumption. Goods entered into a bonded warehouse or an excise warehouse will not be recognised as imported goods until such goods are removed from the warehouses and entered for home consumption. Goods entered for trans-shipment, export or re-export in accordance with the Export Processing Zone Act are not liable to VAT. VAT on importation is calculated by applying VAT at the rate of 5% to the sum of the customs value of the goods plus any customs duty or levies and other costs (such as transport, insurance etc) up to the port or place of importation.
The VAT Act defines imported services to mean services rendered in Nigeria by a non-resident person to a person inside Nigeria.
All exports of non-oil goods are zero-rated.
Exported services are exempt from VAT. The VAT Act defines exported services to mean services rendered by a Nigerian resident or a Nigerian company to a person outside Nigeria.
Refunds to foreigners
There is no VAT refund to tourists on purchases made in Nigeria.
Place, time and value of supplies
Place of supply
There are no specific place-of-supply rules. Supplies of goods and services in Nigeria are liable to VAT in Nigeria. Supplies made outside Nigeria are outside the scope of Nigerian VAT.
Time of supply
A supply of goods and services shall for the purposes of VAT be deemed to take place at the earlier of the time a tax invoice is issued by the supplier or payment is received by the supplier.
Value of supply
If a supply is for monetary consideration, the amount of the supply with addition of the VAT chargeable will be equal to the consideration. The prices of goods and services may be stated: •exclusive of VAT, in which case output VAT will be calculated at 5% of the VAT-exclusive price; •inclusive of VAT, in which case, the tax fraction of 5/105 will be applied to the VAT-inclusive price. If the supply is for a consideration not wholly consisting of money, the value of the supply is its open market value. Where a taxable supply is not the only matter to which the consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributed to the taxable supply.
Accounting basis and tax periods
VAT is accounted for on an accrual and not a cash basis. A supplier’s liability to account for output tax arises in the taxable period in which the time of supply takes place, irrespective of whether or not the supplier has received payment during that tax period. A registered person may thus make a claim for an input tax credit in the taxable period during which the taxable supply is made to him, provided he is in possession of a valid VAT invoice from his supplier, irrespective of whether or not he has paid his supplier. The taxable period will generally commence on the first day of a calendar month and end on the last day of that month.
Returns and payment of VAT
Where a registered person’s output tax exceeds the input tax, the difference must be paid to the Tax Authorities at the time the return is submitted. Where the input tax exceeds the output tax, such VAT is carried forward as a future credit, as cash refunds are not given in practice. Where a registered person does not make any supply of goods and services and does not receive any goods or services within a particular taxable period, he must submit a nil return in respect of that tax period.
The due dates for payment of VAT are as follows:
•taxable supplies – on the submission of the return by the 21st day of the month following the end of a taxable period; •importation of goods – on entry for home consumption, when customs duty or excise duty is payable; and •notice of assessment – within 30 days of the date of the notice. Interest and penalties
Interest and/or penalty are charged as follows for the failure to: •register for VAT – penalty of N10,000 for the first month of failure and N5,000 for each subsequent month in which the failure continues; •file monthly returns – penalty of N5,000 for every month in which the failure continues; •remit VAT payable to the FIRS – penalty of 5% and interest charged at the prevailing commercial lending rate (currently about 21% p.a.); •issue a tax invoice for taxable goods or services – penalty of 50% of the cost of the goods or services for which the tax invoice was not issued; or •collect VAT (by a registered person) – penalty of 150% of the VAT not collected plus 5% interest above Central Bank of Nigeria Monetary Policy Rate. Time limit for claiming input VAT
In general there appears to be no time limit as to when input VAT can be claimed, as long as such claim is supported by a tax invoice. However, in line with the statute of limitation, which is six years, it is unlikely that any claim in excess of this will be entertained. VAT Refunds/ Carryforward
Where the allowable input VAT exceeds the output VAT, this may be carried forward as credit against future VAT payable. Alternatively, the FIRS Establishment Act provides for a cash refund on application within 90 days of FIRS decision, subject to appropriate tax audit. .. Objections and appeals
Any registered person who disputes an assessment or demand notice issued to him, may appeal to the Tax Tribunal in the prescribed format. An award or judgment by the Tax tribunal shall be enforced as if it were a judgment of the Federal High Court on registration of a copy of the award or judgment in the registry of the Federal High Court by the party seeking to enforce the judgment.
Following the decision of the Tax Tribunal, notice of the amount of tax chargeable under the assessment as determined by the Tribunal shall be served by the FIRS on the company or person liable for the tax. Notwithstanding a pending appeal, tax shall be paid in accordance with the decision of the Tribunal within one month of notification of the amount of tax payable. Any party aggrieved by the Tribunal’s decision may appeal against it on a point of law to the Court of Appeal within 30 days after the date on which the decision was given, setting out the grounds on which the decision is being challenged. VAT compliance
A tax invoice is issued on the supply of taxable goods or services in support of the transaction. The VAT invoice serves as a form of certification that VAT has been levied on a transaction, and as documentary proof supporting claims for input tax by a registered person. A tax invoice must contain the following particulars:
•the taxpayer’s identification number;
•name, address and VAT registration number of the supplier;
•customer’s name and address;
•type of supply;
•description of the goods and services supplied;
•quantity of goods or extent of services;
•the rate of VAT;
•the rate of cash discount offered; and
•the total VAT payable.
The penalty for failure to issue a tax invoice for taxable goods or services is 50% of the cost of the goods or services for which the tax invoice was not issued. Credit notes and debit notes
A credit note or debit note is usually issued to take account of a change in the consideration for a taxable supply due to the following circumstances: •the cancellation of a supply of goods and services;
•an alteration or variation in the nature of a supply;
•a change in the previously accepted consideration for the supply e.g. due to a discount;
•a short supply of goods;
•an irrecoverable bad debt arising from a taxable supply that has been written off; or
•a return of goods to the supplier.
The issue of a credit note or a debit note will form the basis for the requisite adjustment to the relevant VAT return. The VAT legislation is not specific on what information is to be reflected on the debit and credit notes but such documents should contain sufficient information to identify the original transaction and the VAT invoice to which it relates.
A registered person must keep records and books of all transactions, operations, imports and other activities relating to taxable goods and services sufficient to determine the correct amount of VAT due. Copies of a supplier’s VAT invoices should be kept for a period of at least six years after the completion of the transaction to which they relate. A general statutory limitation of six years immediately following the last day of the taxable period in which the transaction took place applies to the carrying out of a tax audit to produce records. This time limit can be extended when fraud is suspected to have occurred. Records may not be kept outside the country. Records should be kept in the form of paper copies as well as in electronic form, where possible. For the purpose of ascertaining the tax liability, FIRS may require the registered person to produce records and copies of VAT invoices for retention, as it may consider necessary.
Specific VAT rules
Where a registered person has claimed an input tax credit, and the person’s debt towards the supplier is written off as irrecoverable, the registered person will be required to make an adjustment for input tax over-claimed in the past. Where a registered person has made a taxable supply, accounted for the output tax and has subsequently written off the whole portion of the debt as irrecoverable, the relevant adjustments should be made to the VAT return for the period concerned. Although not specifically provided for in the VAT legislation, where a registered person subsequently recovers all or a portion of the debt which was previously written off, output tax should be paid in respect of the VAT portion of the amount recovered in the relevant tax period.
Land and buildings
The Nigerian Law does not specifically exempt land from VAT, however, as land cannot be expressly described as either a good or a service, the practice is to treat land as exempt from VAT. The supply of buildings is however not exempted from VAT. The FIRS would therefore demand output tax in this respect, which should be accounted for in the normal manner. Input tax in line with normal rules is capitalised as part of the cost of the asset.
Other indirect taxes
Customs duties are payable on imported goods at the rate of duty shown in the customs duty tariff with reference to the prevailing Harmonized Commodity and Coding System (HS code).The current tariff under the Customs Act ranges from 0% to 35%. Duties on imported goods are levied on the Cost, Insurance and Freight (CIF) value of the imported good. Other rates and charges include:
•7% surcharge (Port development levy), calculated on the customs duty •0.5% trade liberalization scheme levy, calculated on customs duty (where import is from countries outside the ECOWAS region) •1% Comprehensive Import Suspension scheme (CISS) administrative charge for destination inspection based on the FOB value of goods. •Value Added Tax (VAT) calculated at the rate of 5% on the CIF value of the import, customs duty and the charges stated above. Nigeria is moving towards the adoption of the Common External Tariff (CET) for Economic Communities of West African States (ECOWAS). The tariff under the CET ranges from 2% to 20%. It should be noted that the Ministry of Finance reviews Customs and Importation Guidelines and Policies from time to time. Sometimes, the practice is inconsistent with the law and policies. It is therefore recommended to keep abreast of developments in this area.
Excise duties are payable on certain goods manufactured and sold in Nigeria. The following goods are liable to excise duties at the specified rates in Nigeria:
•Beer & Stout; 20%
•Spirits; 40% and
•Cigarettes and Tobacco; 40%.
All instruments relating to an act to be performed in Nigeria, unless specifically exempted, must be stamped within 40 days of first execution. Stamp duties may be charged at a flat rate (specific) or in proportion to the value of the consideration (ad valorem) depending on the class of instrument. The penalty for late stamping of instruments is N20; but where the unpaid duty exceeds N20, there is a further penalty in the form of interest on the stamp duty payable at the rate of 10% per annum subject to a maximum of the unpaid duty.