VAT is a tax on the supply of goods and services which is eventually borne by the final consumer but collected at each stage of the production and distribution chain. It is eventually borne by the final consumer, (however sometimes multiple layers do bear part of the burden e.g. VAT on tax on services and fixed assets)
The standard rate of tax is currently 5% of invoice value of goods and services except items specifically stated as exempt or zero-rated. The VAT system in Nigeria is administered by the Federal Inland Revenue Service (FIRS). All existing manufacturers, distributors, importers and suppliers of goods and services are required to register for VAT. The prospective VAT payer will obtain and complete VAT registration (and return it to the nearest FIRS Tax Office. A permanent VAT registration number is then issued to the tax payer.
Liability to VAT arises when the output VAT is more than the input VAT. The net VAT in a tax period is the amount to be remitted to the FIRS. Output VAT is the VAT that is due on VATable supplies. It is derived by multiplying the value of the aggregate supply by the tax rate, while Input VAT is what is charged on business purchases and expenses. These include goods and services supplied in Nigeria or imported.
The VAT system in Nigeria has an in-built refund or credit mechanism which eliminates the cascading effect that is a feature of the retail sales tax. The input-output tax mechanism in VAT also makes it self-policing. In essence, it is the Output tax less Input Tax that constitutes the VAT payable and it is the equivalent of the VAT paid by the final consumer of the product that will be collected by the government.
Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.
Tax Invoice and VAT
A Tax Invoice is similar in many ways to a normal sales or purchases invoice, except that it has provision for VAT registration number and VAT payment at the prescribed rate. Every taxable firm has a duty to issue a tax invoice for every single Vat able transaction carried out by the business.
Whenever a person supplies VATable goods or services to another person he must issue a Tax invoice in support of the transaction. The customer also needs the Tax invoice to support his claim for Input VAT.
Tax invoices are to contain the following information:
- Taxpayers Identification Number (TIN);
- Name, address and VAT registration number;
- Customer¡¦s name and address;
- Type of supply;
- A description of the goods and services supplied;
- Quantity of goods or extent of services;
- The rate of VAT;
- The rate of any cash discount offered; and
- The total VAT payable.
Goods on which VAT is Applicable
Locally Supplied Goods: VAT is chargeable on the supply on goods and services in Nigeria, except goods and services that are specifically exempted.
Imported Goods: VAT will be charged on non-exempted imported goods into Nigeria irrespective of whether or not:-
- the goods have to attract customs duties; and
- the person importing the goods is registered for VAT
The VAT chargeable is in addition to customs duties and other charges that may be done. The value of such imported goods includes all the duties and charges that may be made.
Imported Service: VAT is payable on services received from outside Nigeria if such services are supplied to a Nigerian customer.
(a) Medical and pharmaceutical products;
(b) Basic food items;
(c) Books and educational materials;
(d) Newspapers and magazines
(e) Baby products;
(f) Commercial vehicles and their spare parts, and
(g) Agricultural equipment and products and veterinary medicine;
(ii) Services Exempted
(a) Medical Services;
(b) Services rendered by Community Banks, Peoples Banks and Mortgage Institutions; and
(c) Plays and performances conducted by educational institutions as part of learning.
Exported Goods: All exported goods are zero-rated, that is, such goods are VATable but at zero percent. This means that no VAT is collected from the foreign buyer and at the same time any input tax is refundable.
Points to Note
- VAT is a tax on spending. The tax is borne by the final consumer of goods and services because it is included in the price paid.
- The tax is at a flat rate of 5%.
- The tax is collected on behalf of the Government by businesses and organizations which have registered with the Federal Inland Revenue Services (FIRS) for VAT purposes,
- A business or organization which has registered for VAT is classified as a “registered person”. Such persons will pay 5% VAT on goods and services purchases but can claim credit for this tax (called input tax) when sold.
- 5% VAT (called output tax) is included in the price of all goods and services supplied by registered persons.
- The registered person has to make regular VAT returns and either pays to, or receives from the FIRS, the difference of the input tax and the output tax.
- VAT returns (and payments) are normally made monthly to the FIRS on or before 21st day of the month next following that in which the supply was made.
- To claim a credit for Input VAT, a registered person must hold a “Tax Invoice”.
- Records and accounts have to be kept to aid VAT administration and as support documents in the event of an audit.
The Author Asabi Vincent is a tax consultant and a Senior Content Partner with Nairametrics