Value Added Tax is an indirect form of taxation that is based on the consumption pattern of individuals and companies. In Nigeria VAT is a 5% charge on all goods and services except for those exempted. Organisations are by law expected to remit VAT charged to invoices on behalf of the Federal Inland Revenue Service. However, in remitting the taxes to the FIRS, organisations are also expected to deduct certain Vat expense (called Input) Vat that they also incur.
How to deduct
Companies typically include a 5% Vat on a invoices for services rendered or for sale of goods. For example, if you buy a Television set from Mega Plaza for N100,000, that amount will include a Vat of N4,761.90. That is N100,000/1.05=N95,238.10. N100,000 less N95,238.10= N4,761.90. But surely Mega Plaza is not in the business of Manufacturing TV’s since they are mainly a retail outlet. This means Mega Plaza must have purchased the TV at a lower price before adding their Mark Up and Vat to arrive at the selling price of N100,000. Supposing that the TV cost Mega Plaza N85,000 inclusive of Vat of 5%? Therefore Mega Plaza paid a sum of N3,809.52 in Vat.
Based on the above, we can now calculate how much Mega Plaza is to remit to the Federal Inland Revenue Service.
Vat Output (Vat included in invoices paid by customers) – N4,761.90
Vat Input (Vat included in invoices paid to suppliers) – N3,809.52
Vat Remittable to the FIRS – N952.38
Basically, the Law only includes in the VAT input tax on goods purchased or imported directly for resale and goods which form the stock in trade used for the direct production of any new product on which the output tax is charged. It therefore does not include input vat on any overhead, services, admin and general expenses pf any business. The belief is that these expenses will be deducted before arriving at taxable profits.
What does this mean?
Not all items can be classified as Vat Inputs. For example, apart from paying 5% Vat on the TV set purchased for resale, Mega Plaza may also have incurred marketing cost & advertising before the TV set is sold. Lets assume they spent N1,000 in marketing cost to sell the TV for N100,000. The N1,000 marketing cost includes a 5% Vat which is N47.62. This amount cannot be offset against the Vat Output above of N4,761.90. This extends to Vat paid to lawyers, consultants, furniture and fittings, bank charges etc. What you therefore need to include as Input Vat are items that are directly related to the item or service that you are selling.
A retaurant and bar incurred vat on the following expenses
Furniture & Fittings in the bar – N100,000
Vat on light and telephone bills – N20,000
Vat paid on purchase of alcoholic drinks – N35,000
Vat on paid on Kitchen Materials such as knives and forks – N30,000
Vat paid on Rent – N75,000
Vat paid on Bank Charges – N20,000
Total Vat on Sale of Drinks and Food – N250,000
Amount to remit
Vat Output – N250,000
Vat Paid on Alcoholic Drinks – N35,000
Vat Paid on Kitchen Materials – N30,000
Total Vat Input – N65,000
Total Vat Payable (250k-65k) – 185,000