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This thread exposed everything that’s wrong with Nigeria’s VAT

There are reasons why it may be wrong to compare VAT in Nigeria with that of other countries. Our VAT is not a proper VAT.



Ex Finance Minister Zainab Ahmed, explains why VAT will rise to 7.5% next year

Last week, the Minister of Finance announced the Federal Executive Council had approved an increase in VAT from 5% to 7.5%. Minister Zainab Shamsuna Ahmed also went further to explain that the government will be engaging with various stakeholders in a bid to get the increased passed into law by the National Assembly.

As expected, there have been several commentaries around this announcement with some for or against the policy. However, a twitter user and Senior Manager Tax and Transfer Pricing at KPMG Victor Adegite, weighed in on the discourse providing a useful insight into other areas of Nigeria’s VAT system that is perhaps flawed.

He tweeted this in a series of thread which we have put together as an article for our readers who may not be on twitter.

Hello friends! Let’s talk about VAT in Nigeria and some perspectives on the proposed hike to the VAT rate. It’s a thread! #NigeriaVAT

1. We are all aware of the plan by the FG to increase VAT rate from the current 5% to 7.5% come 2020. While several “experts” and public affairs commentators have complained about how low our VAT rate is compared to other countries in Africa…#NigeriaVAT

2. …they have failed to appreciate the deficiencies of the Nigerian VAT system.
There are reasons why it may be wrong to compare VAT in Nigeria with that of other countries. Our VAT is not a proper VAT. It is more of a sales tax than VAT. #NigeriaVAT

3. What is VAT? 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. #NigeriaVAT

4. What is sales tax? A sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer, and passed on to the government. #NigeriaVAT


5. Across the world sales tax ranges could range from 1% to 10% and are levied by various arms of government. While VAT ranges from 5% to 25% and is centrally administered in most countries. #NigeriaVAT

6. As sales tax is a tax on the sales (i.e. sale price), the rates are often low. VAT is effectively levied on the “value-added”, hence the relatively high rates.#NigeriaVAT

7. We will proceed to examine the operations of a typical VAT system. #NigeriaVAT

8. VAT is levied at each stage of the supply chain. It is a tax on consumers (that is users of the output of the previous stage of production). However, it is typically operated with a credit mechanism (i.e., in the form of input VAT) …#NigeriaVAT

9. …such that each producer along the chain is allowed to claim the tax paid at the previous stage when passing the product of his effort to the consumer on the next level of the supply chain. #NigeriaVAT

10. The credit, however, stops at the stage where the product can no longer be passed further down (i.e., when it is purchased by the final consumer). Hence, the final consumer bears the tax fully at the final stage. #NigeriaVAT

11. Generally, the mechanism used for accounting for VAT is that each business offsets the total VAT paid on purchases (called ‘input tax’) in a given period against the total VAT charged on sales (‘output tax’), and pays any excess tax to the tax authority.#NigeriaVAT

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12. Since the tax charged at the input stage is used to reduce the tax charged at the output stage, the difference between the output tax and input tax is the tax on the additional value added at that stage of the production. #NigeriaVAT

13. A typical supply chain would appear like this in the VAT system. Where a product moves from raw materials Producer A to Manufacturer B at N1,000, then to Wholesaler C at N 1,500. The product is then subsequently sold to Retailer D at N 2,000 …#NigeriaVAT

14. …and finally to the Consumer who pays N 2,500 to the Retailer. #NigeriaVAT

15. VAT of 5% will be charged and collected at each stage , that is N50 ( 5% of N1,000,) N75 ( 5% of N1,500), N100 (5% of N2,000) N125 (5% of 2,500). The interesting thing is that the collectors of these VAT are not expected to remit N350 but N125! #NigeriaVAT

16. At each stage, the VAT collector will offset its input VAT against the VAT collected (Output VAT) and remit the difference to the FIRS. #NigeriaVAT

17. From our example above Manufacturer B collects N75 VAT when he sells to Wholesaler C , however, he had paid VAT of N50 to Producer A so he will only remit N25 ( N75-N50). #NigeriaVAT

18. The example above is how VAT should work in all cases. However, the VAT law in Nigeria creates 3 categories of VATable goods and services. 1. Where you manufacture or buy for resale, you can claim your input VAT as explained above.#NigeriaVAT

19. 2. Where you buy fixed assets and pay VAT on same, you cannot claim input VAT on the purchase. You are permitted to capitalize it as part of the cost of the fixed assets. #NigeriaVAT


20. 3. Where you have paid VAT on services which form part of your input in producing goods and services, you are not permitted to claim the Input VAT on this! This is where our VAT law behaves like a sales tax!#NigeriaVAT

21. Let’s consider a call center in Lagos with 500 employees. The call center has incurred cost on services like data, telephone, and transportation services for its workers. These services are key to its operations. #NigeriaVAT

22. The company pays 5% VAT on the services provided by its vendors. However, when the call center bills its own client, it will charge VAT at 5%. #NigeriaVAT

23. Typically, it is expected that the call center’s input VAT ( VAT suffered on data, telephone and transport services) is deducted from the VAT (output VAT) collected from its client and the difference paid to the FIRS. #NigeriaVAT

24. Based on the provisions of our VAT law, this not permitted! The call center will have to remit the output VAT without the benefit of offsetting the input VAT. #NigeriaVAT

25. This is where we will stop this week! If we have 1,500 retweets to this thread. We will continue next week and examine some special rules for Nigeria VAT and its challenges. END. #NigeriaVAT

Ugodre, Nairametrics Founder also weighed in on the thread with his own comments. See below

Here is the original thread from Victor Adegite. Follow Victor for part two of the thread.


The "Blurb Team" is the official conveyer of the opinions of the Nairametrics Research & Analysis Board on matters of financial reports, macroeconomic data, and economic policies.

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GSK in big trouble as losses mount

The results were less than impressive with several key indicators showing a year-on-year decline.



GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues.

GlaxoSmithKline Consumer Nigeria Plc (“GSK Plc” or “the Company”) is a public limited liability company with 46.4% of the shares of the Company held by Setfirst Limited and Smithkline Beecham Limited (both incorporated in the United Kingdom), and 53.6% held by Nigerian shareholders.

The ultimate parent and controlling party is GlaxoSmithKline Plc, United Kingdom (GSK Plc UK). The parent company controls GSK Plc through Setfirst Limited and SmithKline Beecham Limited.

The Company recently published its unaudited first quarter (Q1) 2021 consolidated financial statements for the period ended 31 March 2021.

READ: GSK Consumer Nigeria Plc records 3.34% increase in 2020 9M revenues

The results were less than impressive with several key indicators showing a year-on-year decline. For example, Group revenue (turnover) declined from ₦4.99 billion in Q1 2020 to ₦3.46 billion in Q1 2021 a drop of over 30.66%. The revenue drop was due to a sharp decline in the local sale of its healthcare products.

Total loss after tax as of Q1 2021 was ₦238.07 million compared to a profit after tax of ₦113.47 million for the same period to Q1 2020.

The company is essentially divided into two segments viz: Consumer Healthcare and Pharmaceuticals. While the Healthcare segment was largely profitable in Q1 2021 (making a profit before tax of ₦ 8.73 million by March 31, 2021, the pharmaceuticals segment made a loss of ₦262.93 million in the same period.

READ: GlaxoSmithKline Nigeria announces changes in its board


The Consumer Healthcare segment of the company consists of oral health products, digestive health products, respiratory health products, pain relievers, over the counter medicines, and nutritional healthcare; while the pharmaceutical segment consists of antibacterial medicines, vaccines, and prescription drugs. While goods for the consumer healthcare segment are produced in the country, the pharmaceuticals are all imported.

The largely imported pharmaceutical products are thus exposed to the vagaries of foreign currency fluctuations coupled with a negligible to no revenue from the foreign sale of its healthcare products (same as in Q1 2020) as it barely exports its products out of the country.

The cost of importing the antibacterial, vaccines and prescription drugs, and the significant local operating expenses wiped off the marginal gross profits made by the pharmaceutical segment of the company. In effect, the gross profit of ₦508.12 million made by the pharmaceutical segment of the company was eliminated by an operating expense of ₦735.7 million and this resulted in a net loss for the pharmaceutical segment of the business.

READ: Nigerian Breweries posts N7.66bn as Q1 2021 profit, shares gain 2.2%

Apart from the impact of imported pharmaceutical products as already discussed, other issues that affected the company’s Q1 2021 results and are likely to continue to affect its performance in future include:

  1. A limited product mix that has only the likes of Macleans and Sensodyne (Oral Healthcare); Pain relievers (Panadol and Voltaren); Digestive Health (Andrews Liver Salt); and Respiratory Health (Otrivin and Panadol Cold and Catarrh) all within the Consumer Healthcare segment.
  2. Increased competition, particularly from local pharmaceutical manufactures of similar over the counter medicines and other prescription medications and vaccines.

In addition, in October 2016, GSK Plc divested its drinks bottling and distribution business that manufactures and distributes Lucozade and Ribena in Nigeria, and other assets including the factory used for the drinks business to Suntory Beverage & Food Limited. The loss in revenue from these popular brands continues to impact its topline.

GlaxoSmithKline (GSK) is a global healthcare company and is well-known and acknowledged for its pioneering role in discovering and distributing vaccines for the likes of hepatitis A and B, meningitis, tetanus, influenza, rabies, typhoid, chickenpox, diphtheria, whooping cough, cervical cancer and many more.

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It is also renowned for its manufacture and distribution of prescription medicines such as antibiotics and treatments for such ailments as asthma, HIV/AIDS, malaria, depression, migraines, diabetes, heart failure, and digestive disorders.

Perhaps GSK Plc’s fortunes may change if the company is able to obtain the parent company’s licence to manufacture GSK-owned vaccines and prescription medicines within the country while also exploring the possibility of extending the sale of its products outside the shores of the country.

Since different expertise is required for vaccines and prescription drug manufacture and distribution as compared to manufacture and sale of consumer healthcare products, perhaps another alternative may be for the company to create two separate companies with one company being a 100% vaccines and prescription drug pharmaceutical manufacturing and distribution company while the second company specializes entirely in the manufacture and sale of consumer healthcare products.

As a result of the Q1 2021 performance, the company’s earnings per share (EPS) dropped to -20 kobo compared to the 9 kobo earnings per share reported in Q1 2020. At the start of 2021, GSK Plc’s share price was ₦6.90 but the company has since lost over 10% of its price valuation as the company’s share price closed at ₦6.20 on April 30, 2021.

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NB Plc’s share price and dividends keeping shareholders happy

It was not all hunky-dory for the company as its cost of sales jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021.



Jordi Borrut Bel, Nigerian Breweries Plc

Nigerian Breweries Plc (“NB Plc” or the “Company”) reported its first-quarter (Q1) 2021 results on April 23, 2021.

The company’s performance was impressive considering the headwinds it faced late in 2020 and early 2021 from inflationary pressures, poor consumer purchasing power, lethargic economic growth, and increase in the company’s beer prices which took effect from Q4 2020.

The company achieved a net revenue for the three months to March 31, 2021 of N105.68 billion compared to N83.23 billion for the same period to March 31, 2020 — a 27% increase compared to the Q1 2020 results.

It also achieved a N39.67 billion gross profit — a 13.7% increase in gross profit compared to Q1 2020.

Quarter-on-quarter EBITDA rose by 22.8% from N19.82 billion in Q1 2020 to N24.34 billion in Q1 2021. Other positive outcomes quarter on quarter were the increase in operating income (from N10.94 billion to N14.49 billion), profit before tax (from N8.3 billion to N11.51 billion), and profit after tax (from N5.53 billion to N7.66 billion).

It was not all hunky-dory for the company as its cost of sales (direct costs attributable to NB Plc’s production) jumped from N48.3 billion in Q1 2020 to N66 billion in Q1 2021, an increase of N17.7 billion. According to the company, its costs are subject to seasonal fluctuations as a result of weather conditions and festivities. As a result, the company’s results and volumes are dependent on the performance in the peak‐selling season, typically resulting in higher revenue and profitability in the last quarter of the year.

The total cost of sales, marketing and distribution, and administration expenses grew from N72.47 billion in Q1 2020 to N91.63 billion in Q1 2021 – a jump of 26.43%. This jump was largely attributable to the cost of raw materials and consumables which grew to N46.53 billion (compared to N30.2 billion for the same period in Q1 2020).

The raw materials cost pressure has been a trend since Q2 2020 driven by the rising commodity prices, foreign exchange devaluation and domestic inflationary pressures. As a result, the cost of the raw materials to net income ratio has continued to rise. This ratio was 36.3% in Q1 2020 but has risen to 44% in Q1 2021.


What may be a source of particular concern for the company is how well working capital is being managed from a liquidity and leverage perspective. The company reported cash and cash equivalents of N30.37 billion in Q1 2020, this had dropped to N18.43 billion by Q1 2021. In the same period, trade debtors and other receivables (i.e., those that owe the company for purchases that have not been paid for) had increased from N11.42 billion in Q1 2020 to N23.48 billion in Q1 2021, an increase of over 105% in just 12 months!

More worrying, in terms of magnitude, are trade creditors and other payables (i.e., those that the company owes payments for goods and services purchased) which grew from N139.2 billion in Q1 2020 to N145.41 billion in Q1 2021, a rise of N6.21 billion (or 4.5%) in just 12 months.

While the company’s loans and borrowings had reduced significantly (short-term loans in Q1 2021 was N35.65 billion versus N39.64 billion in Q1 2020; and long-term loans in Q1 2021 was N15.87 billion versus N51,81 billion in Q1 2020), the cost of borrowing, that is, interest expenses that the company paid on borrowed funds, rose from N2.7 billion in Q1 2020 to N3 billion in Q1 2021. This suggests that while short term and long-term borrowing have reduced, working capital needs are being refinanced at a higher cost or alternatively, most of the reduced short term or long-term borrowings have simply been restructured from longer-term loans to shorter-term overdrafts and commercial papers with a higher interest expense. The balance sheet as of Q1 2021 showed a liability in the form of bank overdraft and/or commercial papers of N21.44 billion which was not in the books in Q1 2020.

The first-quarter report also showed that as of March 31, 2021, the company had revolving credit facilities with five Nigerian banks to finance its working capital with the approved limit of the loan with each of the banks ranging from N6 billion to N15 billion (total N66 billion). N9 billion of the available amount was utilized at end of March 2021 (2020: Nil).

It should be noted that NB Plc’s financial statements for the 3 months ended 31st March 2021 are yet to be independently audited, so the results may be further improved or be worse, depending on the views and professional opinion of the external auditors in terms of accounting treatments and management judgement on significant transactions.

From the company’s numbers and explanations, the results are clearly driven by:

(1) Benefits from its increased pricing with the raised prices taking effect from December 10, 2020. The increases ranged from 5.2% to 6%, mainly on selected brands packaged in aluminium cans and on the 600-ml Star Larger returnable glass bottle.

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(2) Volume growth in its premium brands (particularly Heineken) and non-alcoholic portfolio (particularly Maltina).

(3) Relative inelastic demand for its portfolio mix despite price increases, availability of substitutes, and stagnate consumer wages eroded by inflation. In economics, inelastic demand occurs when the demand for a product remains static or changes less than changes in price.

Overall, the company achieved outstanding results that would have confounded analysts’ estimates. Given continued inflationary trends and currency depreciation, it would be interesting to see whether turnover and profitability growth are sustainable over the remaining quarters of the year. On its financial year 2020 performance, the company paid a final dividend of NGN0.69 in April 2021 (interim of NGN0.25 paid in December 2020). If the trend is sustained, it can only be good news for NB Plc in terms of increases in its share price and dividends for its shareholders.

Heineken Brouwerijen B.V owns 37.73% of the company to which NB Plc pays annual technical service fees and royalties.

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