Introduction to VAT
Value Added Tax (VAT) is a consumption tax imposed on the supply of goods and services. In Nigeria, it is governed by the Value Added Tax Act Cap V1 LFN 2004 (as amended). VAT is a multi-stage tax, meaning it is applied at each stage of the production and distribution chain. The final burden of the tax, however, is borne by the final consumer.
Businesses act as agents of the Federal Government, collecting VAT from their customers and remitting it to the Federal Inland Revenue Service (FIRS).
Current VAT Rate
Since February 1, 2020, following the Finance Act 2019, the standard VAT rate in Nigeria is 7.5%.
Formula for Calculation:
VAT = (Cost of Good/Service) x 7.5%
For example, if you sell a pair of shoes for ₦10,000, you must add ₦750 as VAT. The total invoice amount will be ₦10,750.
Exempted Goods and Services
Not all goods and services are subject to VAT. To reduce the cost of living and support key sectors, the government has exempted the following categories:
1. Basic Food Items
Includes additives (honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits, meat, poultry, milk, nuts, pulses, roots (yam, cassava), salt, vegetables, and water.
2. Medical and Pharmaceutical Products
All medical services and pharmaceutical products are exempt to ensure affordable healthcare.
3. Books and Educational Materials
Books, newspapers, magazines, and educational equipment are exempt to support literacy and education.
4. Baby Products
Includes baby carriages, clothing, and sanitary wear for infants.
5. Agricultural Equipment and Fertilizer
Farming machinery, fertilizer, and farming transportation equipment.
6. Exported Goods and Services
All exported goods and services are zero-rated. This means the VAT rate is 0%, allowing exporters to claim refunds on input VAT.
Registration Requirements
Threshold for Compliance
According to the Finance Act 2019, only businesses with an annual turnover of ₦25,000,000 (Twenty-Five Million Naira) or more are required to charge, collect, and remit VAT.
- Below ₦25M: You are not required to charge VAT, but you must still file monthly returns (nil returns) to maintain compliance.
- Above ₦25M: You must actively collect and remit VAT.
How to Register
Upon incorporation with the CAC, a Tax Identification Number (TIN) is automatically generated. You must validate this TIN with the FIRS to commence VAT filing.
Filing and Remittance
VAT returns must be filed and payments made on or before the 21st day of the month following the month of the transaction.
The Mechanism: Input vs. Output VAT
- Output VAT: The tax you collect from your customers on sales.
- Input VAT: The tax you pay to your suppliers on purchases (inventory, assets).
Remittance Amount = Output VAT - Allowable Input VAT
Note: You can only claim Input VAT on goods purchased for resale or direct production. VAT paid on overheads (furniture, electricity, legal fees) is not recoverable but should be capitalized or expensed.
How to File
- Log in to the TaxPro-Max portal.
- Select "VAT filing" for the relevant month.
- Upload your schedule of sales and purchases.
- Generate the payment reference (RRR).
- Make payment via your bank or online.
Penalties for Non-Compliance
Failing to adhere to VAT laws attracts strict penalties:
- Failure to Register: ₦50,000 for the first month, and ₦25,000 for every subsequent month.
- Failure to Remit: 10% of the unremitted tax plus interest at the prevailing CBN rediscount rate.
- Failure to File Returns: ₦50,000 for the first month of default and ₦25,000 for each subsequent month.
Frequently Asked Questions
Can I charge VAT if my turnover is less than ₦25m?
No, the law exempts small companies from charging VAT. However, if you win a contract with a government agency or oil company, they may be obligated to deduct VAT at source regardless of your turnover.
What happens if I file late?
You will be automatically penalized by the TaxPro-Max system. It is crucial to file by the 21st, even if it is a nil return.
Reference: Value Added Tax Act Cap V1 LFN 2004 (as amended by Finance Acts 2019, 2020, 2021).