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The manufacturing industry is a vital part of the Nigerian economy. Based on the sectoral distribution of Value Added Tax (VAT) released by National Bureau of Statistics (NBS) for the period January to November 2017, the VAT derived from the manufacturing sector was about ₦121.03 billion. This represents 17.25% of the total VAT collection, making it the highest contributor to VAT, despite the numerous challenges facing the sector. In view of the strong contribution of the sector to revenue generation, it is expected that any challenge facing the sector will receive utmost attention, in order to improve the ease of tax compliance. This article discusses some of the industry challenges with respect to accounting for VAT.

Basis of Accounting for VAT – Cash or Accrual Basis

Based on the VAT Act, a taxable person is required to render monthly VAT returns of all taxable supplies made in the previous month. However, the amount to be remitted when rendering the monthly returns is the net Output VAT, which is the amount of VAT charged and collected by the taxable person after recovering any applicable Input VAT1 from the Output VAT. Where the Input VAT exceeds the Output VAT, the tax payer is entitled to a refund. The approach of remitting Output VAT based on VAT collected or paid by customers is usually referred to as the cash basis. This implies that the amount yet to be collected should not form part of the remittance and should be adjusted from the total supplies.

There is an alternate view which assumes that the obligation to render the monthly returns of all VATable supplies, means that all Output VAT should be remitted upon rendering the returns, whether it has all been collected or not. This is referred to as the accrual basis. In practice, tax payers adopt either method depending on the nature of their business. The accrual method is preferred where invoices are paid at the point of sale or within a very short period, while the cash basis is more efficient for those with longer credit periods.

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