VAT is a consumption tax that is paid on the purchase of goods and the provision of services. The cost of the product excluding any costs of components that have already been taxed at a previous stage determines how much VAT the user must pay.
If you buy something from a department store in Nigeria, the sales receipt you receive will show a certain amount, called value-added tax. Typically, this is not a problem because the price includes Value Added Tax (VAT).
The VAT regime in Nigeria has undergone major modifications as a result of the Finance Acts 2019, 2020, and 2021 in terms of rate, obligation, penalty, and self-charge.
It is important to be aware of the new regulations that affect sales and acquisitions whether you are a local or foreign company to make informed planning decisions.
In this post you will learn all you need to know about VAT.
Learning About Value-Added Tax (VAT)
VAT is based on consumption. VAT is a flat rate tax that is applied uniformly on all purchases, as opposed to a progressive income tax that increases taxes for the wealthy.
Advocates claim that, unlike income taxes, VAT increases government revenue without burdening rich people more. It is also thought to be less complicated and inconsistent than a conventional sales tax, with fewer compliance problems.
Critics contend that the VAT is primarily a regressive tax that imposes an excessive financial burden on individuals with lower incomes while raising the administrative cost of companies.
In general, both VAT detractors and supporters say that it should be used instead of income tax. Because many nations impose both an income tax and a VAT, this is not always the case.
Read- Financial Reporting: What Startups Should Know.
How Value Added Tax (VAT) Works in Nigeria
At each stage of the production, distribution, and sale of an item, VAT is assessed on the gross margin. Each stage involves assessing and collecting the tax.
In contrast, a sales tax system only assesses and collects money from the consumer at the very end of the supply chain.
Read- Step by Step Guide on How to Start a Snail Farm.
What Organization is Responsible for Administering VAT?
In Nigeria, the Federal Inland Revenue Service (FIRS) is the only organization responsible for managing value added tax.
What is the Nigerian Value Added tax rate?
VAT rate in Nigeria is 7.5%. However, there are two other rates that you should be aware of, such as the rates for exempt and zero-rated items.
How to Calculate Value Added Tax (VAT)
Every business typically charges a 5 percent VAT on the services and goods they provide; this is always noted on the invoices they issue for those items.
You can use a calculator to compute the VAT on things, but you can also try using your own brains to do it!
For instance, to add VAT to a product that costs N100,000, you would simply increase N100,000 by 5%, which would equal N5,000. As a result, while selling goods in Nigeria, you must add N5,000 to collect N105,000, totalling N105,000.
Value Added Tax History (VAT)
VAT was primarily developed in Europe. Although the concept of taxing each stage of the production process is reported to have been first proposed a century earlier in Germany, Maurice Lauré, the head of France’s tax administration, launched it in 1954.
One International Monetary Fund (IMF) study claims that any country switching to VAT initially experiences negative effects from lower tax revenues. However, the analysis came to the long-term conclusion that the adoption of the VAT had, in most instances, increased government revenue and demonstrated effectiveness.
In some parts of the world, VAT has developed a bad reputation, even harming its proponents politically. Sen. Ralph Recto, for instance, was a leading VAT advocate in the Philippines in the early 2000s
Value-Added Tax History (VAT).
VAT was primarily developed in Europe. Although the concept of taxing each stage of the production process is reported to have been first proposed a century earlier in Germany, Maurice Lauré, the head of France’s tax administration, launched it in 1954.
One International Monetary Fund (IMF) study claims that any country switching to VAT initially experiences negative effects from lower tax revenues. However, the analysis came to the long-term conclusion that the adoption of the VAT had, in most instances, increased government revenue and demonstrated effectiveness.
In some parts of the world, VAT has developed a bad reputation, even harming its proponents politically. Sen. Ralph Recto, for instance, was a leading VAT advocate in the Philippines in the early 2000s, was defeated in his bid for reelection by the electorate.
However, the populace finally came to accept the tax in the years that followed its installation. Recto eventually returned to the Senate and started advocating for an increased VAT.
Services with No Value Added Tax (Exempted services)
- Medical services, on the other hand, are excluded services.
- Community banks, people’s banks, and mortgage institutions provide services.
- Educational institutions’ productions of plays and other performances as part of instruction
- All exported services . A service that has been exported is one that a Nigerian resident has provided to an NRP outside of Nigeria, whether it was performed inside or outside of Nigeria. A service, however, is not an exported service if it is given to a fixed base or permanent establishment of a company of an NRP.
- Obtaining a residential lease or rental
- Public transport
- School fees (Nursery, Primary, Secondary and tertiary institutions )
Persons Exempted from VAT
Is there any industry exempt from VAT under the new law besides goods and services?
Yes.
Small businesses are exempt from VAT accounting if their annual revenue is under NGN25 million. Additionally, it implies that a small business may send an invoice devoid of the (output) VAT.
But when buying taxable goods and services, the business will have to pay (input) VAT.
When must a Taxable person file their VAT return?
A taxable person starts doing business in Nigeria, they must register for VAT when an organization:
- Posts advertisements for its goods or services,
- Secures a license to operate in Nigeria,
- Makes its first purchase or sale,
- Fulfills its first trading contract following incorporation,
- Sends or receives its first invoice or shipment of goods, or
- First provides services to its clients.
Input and output VAT
What distinguishes input VAT from output VAT?
Raw materials, products, and services utilized in production, sold, or imported specifically for resale are all subject to input VAT.
Additionally, a taxable person cannot use input VAT that can be deducted from output VAT through the income statement or capitalized with an asset.
On the other hand, output VAT must be paid on delivered goods and services. If output VAT is greater than input VAT, the difference must be paid to FIRS. However, the taxable person requests a refund when input VAT exceeds output VAT.
Conclusion
The repercussion for not registering is NGN25,000 for every additional month, with a penalty of NGN 50,000 for the first month the failure occurs.
KEY TAKEAWAYS
- Definition: VAT is a consumption tax that is paid on the purchase of goods and the provision of services.
- Rate of VAT in Nigeria is 7.5%
- Zero-rated and VAT-free goods and services are exempt from VAT
- Small companies with annual sales of NGN25 million are exempted from VAT
