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What Is Zero Rated Vat in Nigeria?

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Summary

  • VAT is a consumption tax levied at 5% on the supply of goods and services.
  • You can claim VAT by deducting your Input Vat from your Output Vat
  • If you are registered for VAT you must levy 5% Vat on all goods and services excepZ
  • Zero rated items are liable to VAT but at 0%
  • Exempt goods are not liable to VAT

 

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There are relatively two methods of administering VAT. These include the suspension scheme and the credit mechanism. The suspension scheme ensures that the taxes are deferred until the final consumption stage for instance, the Retail Sales Tax system in the US. However, the credit mechanism allows input taxes paid at the intermediate stages of the production of goods to be set off against the output tax. This in effect still allows for the VAT to be borne by the final consumer.

In Nigeria, VAT is administered via the credit mechanism. The law allows for you to claim VAT paid on the purchase of goods for resale (Input VAT) from the VAT charged at the point of resale (Output VAT). That is, your net VAT payable is your Output VAT less your Input VAT. However, this claim is only valid for goods. Input VAT incurred on services is not claimable against your Output VAT but should be posted into the profit or loss account as an expense.

If you’re registered for VAT, you have to charge VAT at 5% on all goods and services you supply, unless they fall into one of these categories:

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  • zero-rated
  • exempt from VAT

Zero-rate of VAT

There are certain goods and services that are zero-rated. This means that they are liable to VAT, but the VAT rate is zero per cent. If you sell zero-rated goods, you can generally reclaim Input VAT on any purchases that relate to those sales. In Nigeria, these items were recently reintroduced into the VAT Act.

They include:

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  1. Non-oil exports
  2. Goods and services purchased by diplomats
  3. Goods purchased for use in humanitarian donor-funded projects

Sellers are to charge VAT on the sale of these goods at 0%. As a result, there is no Output Vat from which you can reclaim the Input VAT incurred at the point of purchase. This may result in additional tax cost to the business. However, the Nigerian tax laws allow you to claim a refund or credit for the Input VAT.

VAT Refund Mechanism 

The Nigerian tax laws provide a mechanism for claiming VAT refunds. The eligibility to claim VAT refunds arises where the Input VAT genuinely exceeds the Output tax for a transaction period. For a supplier of Zero-rated goods, the Input VAT would always exceed the Output VAT as the Output VAT is zero. There are three methods of refund available to Nigerian business owners. They include, the credit method, the direct cash refund method and the final method is a combination of both.

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Credit Method

This is carried out with the use of VAT form 002 (VAT Self-assessment Form) which contains the calculation of total Output VAT and Input VAT. On this form the supplier of Zero-rated goods discloses the Output VAT of zero and Input VAT incurred. This method allows you to offset the credit balance of Input VAT against any subsequent Output VAT chargeable. This is a popular VAT refund approach and is encouraged by the Nigerian tax authorities. However, it will only apply where the supplier of Zero-rated goods also supplies other goods on which VAT is applicable at the standard rate. Where this is not the case, the direct-cash method is preferable.

Direct Cash Method

Under this method, an application is made to the FIRS stating the excess of Input VAT over Output VAT. This application is made along with the relevant supporting documents.

All claims for refund, irrespective of the mode of refund, are subject to verification by the tax authorities. It is therefore important for all supporting documents to be maintained. Some of such documents include,

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  • Monthly VAT return form 002 (a VATable entity is required to file monthly VAT returns stating it VAT status, whether or not VAT is payable);
  • Input VAT invoices and sales invoices;
  • Notices of import and original proof of tax payment on imports;
  • Export documents, notices of export and proof of realization of export; and
  • Any other relevant document needed to back up refund claim.

The audit is carried to confirm the amount up for claim by the taxpayer. The direct cash refund method is the method mostly prone to audit by the tax authorities. It is important to state at this point that this audit usually delays the refund process. Therefore, it is preferable to use the credit approach as you are able to personally administer the refund and there may not be a cause for audit by the tax authorities. Input VAT claim via the credit method becomes subject to audit by the tax authorities where the Input VAT amount has accumulated overtime and the company intends to offset the amounts against its current Output VAT.

Zero-rated goods and Exempt goods.

Many tax payers fail to distinguish between Zero-rated goods and Exempt goods. Exempt goods are not liable to VAT, so if you supply them, then:

  • you don’t charge any VAT on them;
  • you don’t include them in your VAT accounts; and
  • you can’t normally reclaim VAT paid on purchase of inputs.

Therefore the major distinction between Zero-rated goods and Exempt goods is the ability to reclaim Input VAT incurred.

VAT exempt items are specifically listed in the Act and are primarily essentials. Some of which include:

  1. All medical and pharmaceutical products
  2. Basic foods items
  3. Books and educational materials
  4. Baby products

If you sell a combination of exempt goods and goods that are liable to VAT (whether at 5% or 0%), your business is ‘partly exempt’ and you will only be able to reclaim Input VAT related to the VAT incurred on the taxable goods.

 

Patricia

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

7 Comments

7 Comments

  1. adekola

    June 2, 2016 at 11:26 am

    pls kindly advice me on how to go about this nagging issues am going through about VAT and WHT. Assuming I supply a construction firm some VAT able good and I charge them VAT and in return the company charge me WHT . Will I still remit the VAT that was not giving by the company by deducting WHT from my invoice. for example I supplied goods worth 500,000 and I charge 5% VAT making the total cost 525,000. and the company in returns deducts 5% WHT from my invoice making the total money am to be paid to be 500,000. who is going to be liable for returns to FIRS. Please your candid advice is highly needed.

    • Nairametrics

      June 5, 2016 at 10:51 pm

      Here is how it works. Let’s even assume that you forgot to charge Vat and then invoice the company N500k. The company will deduct N25k from you as WHT and then remit on your behalf to the FIRS leaving you with just N475k. So basically whether you charge VAT or not a WHT must be deducted from your invoice. If however, you forgot to charge VAT you will still pay the FIRS their N25k leaving you now with N450k meaning that you near the loss.

      So back to your original question, you still pay the FIRS the N25k in Vat, leaving you with a net balance of N475k. However, you recover your N25k back when you get a tax credit for the N25k deducted from you in WHT. Recall that a WHT is basically an advance tax which will be refunded when you file your tax returns. Where it however gets tricky is that you must obtain a WHT Credit note from your supplier for you to even get your N25k back. Hope we answered your question well?

  2. Paul

    June 10, 2016 at 9:39 pm

    But kindly note that you can only use WHT to strictly offset CIT. FIRS will not allow you excuse unpaid VAT for WHT. This is a common problem for individuals in employment, partnerships and business names who don’t have CIT obligations yet they experience adekola’s issue. Therefore they often times suffer double taxation. Infact you cannot use WHT to reduce EDT. I think our tax laws are not just robust enough and they have too many questionable grey areas.

  3. chinyere

    January 25, 2017 at 4:08 pm

    Please i need some clarifications on BDC whether they are liable to pay VAT to FIRS.

  4. Adeola

    March 10, 2017 at 11:11 pm

    Pls kindly assist;supposing am a construction firm and my clients give me the work of consultancy on their project,they are the one to supply all the materials(by sending the actual cost of the material to my account) needed am just to manage or over-see the project,pls am i to pay VAT? If yes what and what am i to VAT your advice is needed pls.

  5. Dr Benedict Okafor

    February 25, 2018 at 3:56 pm

    Please help me out with this situation around VAT . ECOWAS common external tariff (GET) applies the zero rated VAT concept on certain products imported into Nigeria. These products are not listed as non oil exports , goods and services for diplomats or humanitarian donor yet still it specifies a zero rate for vat charges.
    My concern is clearly this document implemented by the Nigeria custom services takes away input vat . What about output vat is this also at a zero rate? Is their any reference to Government official gazette that captures this matter.
    Please help.

  6. kole

    June 6, 2018 at 1:35 pm

    is service charge in the hospitality industries a VAT exempted item in the computation of VAT payable?

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Coronavirus

COVID-19 Update in Nigeria

On the 4th of July 2020, 603 new confirmed cases and 6 deaths were recorded in Nigeria bringing the total confirmed cases recorded in the country to 28,167.

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The spread of novel Corona Virus Disease (COVID-19) in Nigeria touched a new milestone as the latest statistics provided by the Nigeria Centre for Disease Control reveal Nigeria now has 28,167 confirmed cases.

On the 4th of July 2020, 603 new confirmed cases and 6 deaths were recorded in Nigeria, having carried out a total daily test of 3,355 samples across the country.

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To date, 28,167 cases have been confirmed, 11,462 cases have been discharged and 632 deaths have been recorded in 35 states and the Federal Capital Territory. A total of 148,188 tests have been carried out as of July 4th, 2020 compared to 144,833 tests a day earlier.

COVID-19 Case Updates- 4th July 2020

  • Total Number of Cases – 28,167
  • Total Number Discharged – 11,462
  • Total Deaths – 634
  • Total Tests Carried out – 148,188

According to the NCDC, the 603 new cases were reported from 19 states- Lagos (135), Edo (87), Abuja (73), Rivers (67), Delta (62), Ogun (47), Kaduna (20), Plateau (19), Osun (17), Ondo (16), Enugu and Oyo (15), Borno (13), Niger (6), Nasarawa (4), Kebbi (3), Kano (2), Sokoto and Abia (1) case each

Meanwhile, the latest numbers bring Lagos state total confirmed cases to 11,045, followed by Abuja (2,153), Oyo (1,466), Edo (1,353), Kano (1,264), Delta (1,227) Rivers (1,181), Ogun (974),  Kaduna (855), Katsina (579), Borno (528), Bauchi (516), Gombe (513), Ebonyi (438), Plateau (421), Ondo (410), Abia (383), Enugu (372), Imo (352), Jigawa (318).

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Kwara state has recorded 269 cases, Bayelsa (234), Nasarawa (225), Osun (165), Sokoto (153),  Niger (122), Akwa Ibom (104), Benue (97), Adamawa (89), Kebbi (84), Zamfara (76), Anambra (73), Yobe (61), Ekiti (43), Taraba (19), while Kogi state has recorded 5 cases.

 

READ ALSO: COVID-19: Western diplomats warn of disease explosion, poor handling by government

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Lock Down and Curfew

In a move to combat the spread of the pandemic disease, President Muhammadu Buhari directed the cessation of all movements in Lagos and the FCT for an initial period of 14 days, which took effect from 11 pm on Monday, 30th March 2020.

The movement restriction, which was extended by another two-weeks period, has been partially put on hold with some businesses commencing operations from May 4. On April 27th, 2020, Nigeria’s President, Muhammadu Buhari declared an overnight curfew from 8 pm to 6 am across the country, as part of new measures to contain the spread of the COVID-19. This comes along with the phased and gradual easing of lockdown measures in FCT, Lagos, and Ogun States, which took effect from Saturday, 2nd May 2020, at 9 am.

On Monday, 29th June 2020 the federal government extended the second phase of the eased lockdown by 4 weeks and approved interstate movement outside curfew hours with effect from July 1, 2020.

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READ ALSO: Bill Gates says Trump’s WHO funding suspension is dangerous

DateConfirmed caseNew casesTotal deathsNew deathsTotal recoveryActive casesCritical cases
July 4, 202028167603634611462160717
July 3, 2020275644546281211069158677
July 2, 2020271106266161310801156937
July 1, 2020264847906031310152157297
June 30, 202025694561590179746153587
June 29, 20202513356657389402151587
June 28, 20202486749056579007149957
June 27, 20202407777955848625148947
June 26, 20202329868455458253144917
June 25, 20202261459454977822142437
June 24, 20202202064954297613138657
June 23, 20202137145253387338135007
June 22, 20202091967552577109132857
June 21, 202020242436518126879128477
June 20, 202019808661506196718125847
June 19, 202019147667487126581120797
June 18, 20201848074547566307116987
June 17, 202017735587469145967112997
June 16, 202017148490455315623110707
June 15, 20201665857342445349108857
June 14, 202016085403420135220104457
June 13, 20201568250140785101101747
June 12, 20201518162739912489198917
June 11, 2020145546813875449496737
June 10, 20201387340938217435191407
June 9, 2020134646633654420688937
June 8, 2020128013153617404084007
June 7, 20201248626035412395981737
June 6, 2020122333893429382680657
June 5, 20201184432833310369678157
June 4, 2020115163503238353576467
June 3, 2020111663483151332975227
June 2, 20201081924131415323972667
June 1, 20201057841629912312271579
May 31, 20201016230728714300768687
May 30, 2020985555327312285667267
May 29, 202093023872612269763447
May 28, 202089151822595259260647
May 27, 202087333892545250159787
May 26, 2020834427624916238557107
May 25, 202080682292337231155247
May 24, 202078393132265226353607
May 23, 202075262652210217451317
May 22, 2020726124522110200750337
May 21, 2020701633921111190748987
May 20, 202066772842008184046377
May 19, 202064012261921173444757
May 18, 202061752161919164443407
May 17, 202059593881826159441837
May 16, 202056211761765147239737
May 15, 202054452881713132039544
May 14, 202051621931683118038154
May 13, 202049711841646107037374
May 12, 20204787146158695936704
May 11, 202046412421521090235894
May 10, 202043992481421777834794
May 9, 202041512391271174532784
May 8, 202039123861181067931154
May 7, 20203526381108460128184
May 6, 20203145195104553425071
May 5, 2020295014899548123704
May 4, 2020280224594641722912
May 3, 2020255817088240020702
May 2, 20202388220861735119522
May 1, 20202170238691035117512
April 30, 2020193220459731715562
April 29, 2020172819652730713692
April 28, 2020153219545425512322
April 27, 20201337644102559942
April 26, 20201273914152399942
April 25, 20201182873632229252
April 24, 202010951143312088552
April 23, 20209811083231977532
April 22, 2020873912931976482
April 21, 20207821172631975602
April 20, 2020665382311884662
April 19, 2020627862221704362
April 18, 2020541482021663562
April 17, 2020493511841593172
April 16, 2020442351311522772
April 15, 2020407341211282672
April 14, 202037330111992632
April 13, 202034320100912422
April 12, 20203235100852282
April 11, 202031813103702382
April 10, 20203051770582402
April 9, 20202881471512302
April 8, 20202742260442262
April 7, 20202541661442042
April 6, 2020238650351982
April 5, 20202321851331942
April 4, 2020214540251850
April 3, 20202092542251800
April 2, 20201841020201620
April 1, 2020174352091630
March 31, 202013982091280
March 30, 2020131202181210
March 29, 2020111221031070
March 28, 20208919103850
March 27, 2020705103660
March 26, 20206514102620
March 25, 2020517102480
March 24, 2020444102410
March 23, 20204010112370
March 22, 2020308002280
March 21, 20202210001210
March 20, 2020124001110
March 19, 20208000170
March 18, 20208500170
March 17, 20203100030
March 16, 20202000020
March 15, 20202000020
March 14, 20202000020
March 13, 20202000020
March 12, 20202000020
March 11, 20202000020
March 10, 20202000020
March 9, 20202100020
March 8, 20201000010
March 7, 20201000010
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March 5, 20201000010
March 4, 20201000010
March 3, 20201000010
March 2, 20201000010
March 1, 20201000010
February 29, 20201000010
February 28, 20201100010

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Economy & Politics

Over 20% of N-Power beneficiaries are now business owners – FG

The Minister emphasized the President’s vision of lifting 100 million Nigerians out of poverty.

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The Minister of Humanitarian Affairs, Disaster Management and Social Development, Sadiya Umar Farouq, has said that about 109,823 beneficiaries of the N-Power programme now have their own businesses.

This represents about 22% of the 500,000 Nigerians that have benefited from this programme since its inception.

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This was disclosed in a statement by the Minister’s Special Assistant on Strategic Communications, Mrs Halima Oyelade on Saturday, July 4, 2020. She said that the beneficiaries of Batch A and B of N-Power have established businesses in their communities.

The Minister in the statement said, “Statistics like this gives me joy and once again, I want to say congratulations; I look forward to hearing amazing testimonies and meeting beneficiaries of this programme who will be doing great things in the future”.

She emphasized President Muhammadu Buhari’s vision of lifting 100 million Nigerians out of poverty in the next 10 years by creating opportunities that would improve the productivity of Nigerian youths for entrepreneurship or employment.

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Going further the minister said, “Thus, the need to find ways to engage them is of utmost importance. However, the commencement of the enrolment of Batch C was predicated on the need to give more Nigerian youths the opportunity to benefit. This is because, keeping only 500,000 beneficiaries for four years defeats the purpose of Mr President’s vision, hence the need to scale up and was in no way meant to be punitive.”

While acknowledging the beneficiaries’ contributions, Farouq said, ‘’You are our model N-Power beneficiaries. Please avail yourselves of all opportunities provided by government like interest-free loans and leverage on those opportunities while using N-Power as a stepping stone”.

The minister said the ministry is working at resolving some of the challenges facing the programme which include delays in the payment of stipends, beneficiaries not showing up at their places of primary assignments and people accessing the programme while gainfully employed elsewhere.

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The minister also assured beneficiaries that outstanding payments would be made and transition plans were ongoing and would be duly communicated to them on their platform.

Some of the beneficiaries of the programme gave good testimonies about the impact of the programme in their lives and all expressed their gratitude to the Federal Government for the opportunity.

Nairametrics has reported the opening of application portal for batch C of the programme with effect from 11.45 pm on June 26, 2020. There have been over 3 million applicants that have shown interest in batch C of the programme in about a week.

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Corporate Press Releases

Meristem features Nike Okundaye in Campaign titled “The Journey”, highlights the importance for partners

Meristem taps into Okundaye’s creative energy, highlighting the shared story of growth and collaboration.

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It has been a long journey for financial services provider, Meristem Nigeria, having started out as a boutique stockbroking firm over 16 years ago and morphing into a capital market conglomerate offering an array of diversified service and product offerings. The tale is similar for the art and culture doyen, Nike Okundaye-Davies whose humble beginning in traditional weaving and dying practice annealed her to the art world and art lovers.

At a graceful age of 70, she has achieved over 102 solo art exhibitions, 36 group art exhibitions, a permanent display of two of her works in the Smithsonian National Museum of African Art, a Harvard recognition and many other global acclaims. With four (4) art galleries spread across the country, and the Lagos center being the biggest art gallery in West Africa, she once told a Forbes journalist that her dreams are driven by careful financial planning as she reinvests at least two-thirds of her income in her business and art centers.

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Meristem taps into her creative energy in this campaign, highlighting the shared story of growth and collaboration for both institutions, and the need to onboard the right partners to achieve long term financial goals and investment security.

Meristem, a capital market conglomerate and diversified financial services provider offering stockbroking, wealth management, asset management, trustee services and financial advisory. Over the past 16 years, Meristem has been consistent in value creation and innovation within the capital market space. The Nigerian stock exchange awarded Meristem as the best digital broker of the year. In 2018 also, Meristem became the first Nigerian asset management firm to attain compliance with the Global Investment Performance Standards (GIPS) by the CFA Institute. In 2017, Meristem handled the single largest trade in the history of the Nigerian Stock Exchange.

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Patricia
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