power distribution NERC

Federal Government of Nigeria (FGN) is poised to change the face of VAT in the power sector with the Value Added Tax (VAT) (Modification) Order 2018 (the Order), which seeks to provide clarity on the applicability of VAT for operators in the Nigeria Electricity Supply Industry (NESI).

The Order is dated 1 March 2018; however, it is uncertain if the gazette has been issued, thereby casting doubt on its efficacy. Nonetheless, the Order as it currently reads, applies to generating companies (GenCos), transmission companies (TransCos) and distribution companies (DisCos); representing major levels of the electricity value chain. It also applies to Nigeria Bulk Electricity Trading Plc (NBET), a 100% government-owned company which buys electricity from the GenCos and resells to the DisCos / final consumers.

We have summarised the key highlights of the Order below:

  1. Input VAT on all capital items used by operators in NESI shall be capitalised
  2. Part I of the VAT Act (list of exempt items) is modified to specifically include:
  • Supply of gas by gas producing companies to GenCos
  • Electricity generated by GenCos and supplied to National Grid/NBET company
  • Electricity transmitted by TransCo of Nigeria to DisCos

The Order is intended to provide the legal basis for a single point of VAT collection in the electricity value chain, which is at the point of sale of electricity from DisCos to final consumers.

It is noteworthy that the exemptions in the Order are not all-encompassing as they appear inapplicable to the direct sale of electricity by the Independent Power Producers (IPPs) to the DisCos, direct sale of electricity by captive power generators to final consumers, and sale of gas to gas midstream companies who eventually sell to GenCos. This does not appear to be the intention of the Order, considering that it seeks to provide exemption for companies operating within the power value chain, as stated in the explanatory note.

Further, we envisage that companies within the value chain not expressly covered may consider changing modalities of operation to enjoy inherent benefits. Thus, we expect FGN to clarify these raging issues before appending final seal to the Order.

Please see link to our previous article related to this subject. Also, see link to download a copy of the draft Order.

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