Overview of the Value Added Tax (VAT) Act in Nigeria

Overview of the Value Added Tax (VAT) Act

The VAT Act Cap V1, Laws of the Federation of Nigeria (LFN) as published in the Laws of the Federation of Nigeria, 2004 edition, is the legal basis for the imposition and operation of VAT in Nigeria.  The Act imposes VAT on the supply of all taxable good and services, including imports.

VAT is a consumption tax, which is levied at each stage of the production and distribution chain.  The tax burden is borne by the final consumer of the good or service and is charged at a flat rate of 5% on all goods and services other than those specifically exempt under the Act.

The list of exempt goods and services are provided in the First schedule to the VAT Act.  The Federal Inland Revenue Service (FIRS) has, based on the powers conferred on it under Section 38 of the VAT Act, has also published a comprehensive list of exempt VAT items via its Circular 9701 dated 1 January 1997, which amended an earlier Circular 9401.

VAT Registration

 

Every taxable person (companies and individuals) doing business in Nigeria is required to register for VAT as soon as it is incorporated or for a non-resident company, as soon as it commences business in Nigeria.  Non- resident persons are allowed to register using the address of the company with whom it has a subsisting contract, as its address for the purposes of correspondence.  Non-registration for VAT attracts sanctions under the Act.   The applicable penalties and fines, which may be imposed upon conviction of the company by a court.

 

VAT Invoice
 
Taxable persons are required to issue a “tax invoice” which would include among others the VAT registration number, VATable amount and the VAT payable.  Failure to raise a VAT invoice will attract penalties. 

 Penalty for not charging VAT
All taxable persons registered for VAT are required to file monthly VAT returns at the nearest tax office whether or not it has any VAT liability for the month.  VAT returns are due for filing latest by the 21st day of the month following the month in which VATable sale or supply was made. Failure to charge VAT on transactions will result in a liability, on conviction, of 50% of the cost of goods and service for which the invoice was not issued.

However, where a non-resident company charges VAT, the Nigerian party to the transaction is required to withhold the VAT charged and pay it directly to the FIRS.

A company is required to offset the total tax paid on purchases in a given period against the total tax charged on sales and then pay any excess tax to the Federal Inland Revenue Service (FIRS).  If more tax has been paid than charged, then a company may claim a refund from the FIRS.  In practice, however, companies tend to offset any excess input VAT against future output VAT.  The input VAT incurred in the procurement and production of exempt items is expensed along with the item on which it was incurred.

 

 Opinion

 

Transactions with suppliers not registered for VAT

As stated above, the VAT Act specifically requires every taxable person (individual or company) doing business in Nigeria to register for and charge VAT at the appropriate rate on its invoices.  Failure to comply with these provisions will expose the party in default to penalties.

However, the Act does not impose any penalties on companies, which are registered and which enter into transactions with such defaulting companies.

We have analysed below the different scenarios, where a company transacts with a defaulting party:

  Where a vendor is not registered and does not charge VAT

The VAT Act does not contain any provisions precluding companies from carrying on business with non- registered companies.  While the Act requires a taxable person to pay over the tax to the supplier of goods and services, it is silent on any self reporting requirements, when such a supplier fails to or is not authorised to charge the VAT.

 

It should be noted that the liability for such non-compliance lies on the vendor who is required to charge the VAT.  Infact, Section 31 of the Act makes it an offence for a non-registered company to issue a tax invoice. Therefore it is my opinion that  Companies will not incur any liability where it carries on business with such companies. 

However, for reasons of good corporate citizenship, Companies may undertake to notify such defaulting companies of their obligations under the VAT Act and request them to register for the VAT and charge such amounts on their invoices.

Please note that when such vendors are subsequently registered, they would be entitled to issue the invoices for the VAT not previously charged.  However, it is highly remote that the FIRS would request for the VAT directly from Company, as it is not empowered to do so under the Act.


Where a vendor is not registered but charges VAT

 As stated above, it is an offence for a vendor to charge VAT without registration for VAT purposes.  However, the Act does not impose any penalty on a company which pays over tax to such a defaulting company.

 

It is my opinion that where such a situation arises, Company may request evidence of registration by such company before paying over the tax or it may pay over that tax charged, as the obligation to ensure registration rests on the vendor and not on the Company.  Please note however, that where Company decides to withhold the payment on the basis of non-registration, it should make provision for the amount, pending when the vendor provides evidence of registration.

 

   VAT charged by non-resident companies

 Section 10 of the VAT Act requires local companies to withhold the VAT on the invoices received from non-resident vendors/suppliers.  The VAT withheld at source is to be remitted directly to the FIRS by the Nigerian company.  The above arrangement is to enable the FIRS recover such amounts, which may otherwise be lost to non-resident companies.  Company is therefore obliged to deduct the VAT and remit same to the FIRS in such situations. 

Where Company fails to withhold the VAT, it would be held liable to pay over the VAT to the FIRS, notwithstanding the fact that it may have already paid over such amount to the non-resident company.  In addition, Company would be liable to a penalty of 150% (one hundred  and fifty percent) of the VAT amount not collected and a 5% (five percent) interest above the Central Bank of Nigeria rediscount rate.

We have noted that the Act is silent on where the liability lies, where the non-resident company does not charge the tax and therefore the Nigerian company does not withhold the tax.  It may be argued by the FIRS, that since the Nigerian company is aware of the requirements of the VAT Act, in this respect and that the obligation rests on it to collect the tax, then it should be liable to pay over any such amount, whether charged by the non-resident company or not. 
 
We are not aware that any such situation has previously arisen.  It may however, be necessary to seek a ruling from the FIRS on this matter. 

Olatunji is a Manager (International Tax & Advisory Services) with Saffron Professional Services(Member firm of Geneva Group International), Lagos, Nigeria.

E-mail:Oabdulrazaq@saffron-ng.com,Oabdulrazaq11@gmail.com