Value Added Tax or VAT, as it’s commonly called, is a tax on the supply of goods and services in Nigeria. Whether you’re running a business or making major purchases as an individual, you need to understand how VAT works. The good news is VAT in Nigeria is pretty straightforward once you understand the basics.
In this beginner’s guide, we’ll walk you through the essentials of VAT, what it is, how it’s calculated, how to register and account for VAT in Nigeria as a business, and more.
Understanding VAT in Nigeria
VAT stands for Value Added Tax. It’s an indirect tax levied on goods and services consumed in Nigeria. VAT was introduced in Nigeria by decree 102 in 1993, and implementation began in 1994. It superseded previous kinds of taxation, such as the 1986 sales tax law. VAT is Nigeria’s fastest-rising tax revenue source.
Basically, VAT is charged and collected at each stage of the supply chain, from raw materials all the way to the final consumer. Businesses collect VAT on their sales and pay VAT on their purchases. The difference between these amounts is remitted to the government. For consumers, VAT is reflected in the final price you pay for goods and services.
VAT provides a major source of revenue for the government to fund public services and infrastructure. As a consumer, the amount of VAT you pay depends on how much you spend, so be sure to get the best value for your money.
How VAT Works in Nigeria
In Nigeria, VAT stands for Value Added Tax. It’s a consumption tax added to the price of most goods and services.
The standard VAT rate in Nigeria is 7.5%, it was raised from 5% on 1st February 2020. A few goods and services like Basic food items, Baby products, and medical services are VAT exempt. As a consumer, you pay VAT on things you buy, like food, clothes, electronics, and services such as hotel rooms. The businesses you buy from collect the VAT and remit it to the government.
The amount of VAT paid depends on how much was spent. For example, if you buy an item for ₦10,000, you’ll pay ₦750 VAT (7.5% of ₦10,000). The total amount you’ll pay the business is ₦10,750. In some cases, you won’t even know that VAT has been added; they charge you the whole thing for the services or goods.
The VAT funds public services like healthcare, education, infrastructure, and administration. While no one likes paying taxes, VAT helps provide important services we all benefit from.
Who is a VATable Person?
A person who qualifies for VAT under the Value Added Tax Act VI of the 2004 Act is “a person (other than a Public Authority acting in that capacity) who independently carries out in any place an economic activity as a producer, wholesaler, trader, supplier of services (including mining, and other related activities) or person exploiting tangible or intangible property for the purpose of obtaining income by way of trade or business.”
In other terms, you are a VATable person if you supply taxable goods and services in Nigeria.
Which Agency is in Charge of Administration of VAT in Nigeria?
In Nigeria, the Federal Inland Revenue Service (FIRS) is the agency responsible for administering VAT. The FIRS is empowered by the VAT Act of 1993 to assess, collect, and account for VAT on behalf of the Federal Government.
Current VAT Rates in Nigeria
The standard VAT rate in Nigeria is 7.5%. Nigeria’s VAT rate since the introduction of VAT through the VAT Decree No. 102 of 1993 has been 5% up until January 2020, when it was increased to 7.5%. This rate applies to most goods and services. A few items, like exported goods and services, are VAT exempt.
Some state governments in Nigeria also charge VAT on goods and services. The average VAT rate charged by state governments is about 5%, which brings the total VAT paid by consumers in those states to 12.5%. The states that charge additional VAT include Lagos, Ogun, Kano, Kaduna, Anambra, Osun, Ekiti, Ondo, Ebonyi and Rivers.
Registering for VAT in Nigeria
Ensure your business is VAT-compliant. Only businesses with an annual turnover of N25 million or more are required to register for VAT.
To register for VAT in Nigeria, follow these steps:
- Fill out and submit the Taxpayer Registration Input Form or VAT Registration Form 001. VAT Form 001 is a form used for the purpose of registering for VAT in the tax jurisdiction.
- This form can also be found on the FIRS website.
- Provide supporting documents like business registration, audited accounts, bank statements, etc. to the FIRS.
- Then, obtain a Tax Identification Number (TIN) for your business. This can be done on the Federal Inland Revenue Service (FIRS) website.
If you follow these steps, then you are automatically registered and authorized to collect VAT.
VAT Filing and Remittance In Nigeria
Remitting VAT means paying the net VAT owed to the FIRS. This is done by submitting payment receipts or e-tax payment receipts along with your VAT returns. Late filing or non-remittance of VAT attracts penalties and interest charges.
To file and remit VAT in Nigeria, you must have:
- Registered your business for VAT at the Federal Inland Revenue Service (FIRS)
- Charged 7.5% VAT on all taxable goods and services
- Filed VAT returns monthly and remit the VAT charged
- Kept records of sales and purchases to determine your VAT liability
VAT returns can be filed manually or online using the FIRS e-Tax platform.
Nigeria requires monthly VAT returns on Form 002 to be filed. They must be submitted no later than the 21st of the month following the reporting period. Any VAT owed should be paid by this date as well. This should be completed through a payment or transfer from an approved bank. Returns can be filed both online and on paper.
A return must include a list of all VATable supplies received and supplied.
What are the relevant documents required for filing VAT returns?
Here are the documents required:
- Evidence of payment such as bank teller, e-ticket, e-acknowledgment, etc., from a FIRS designated revenue-collecting bank
- A completed VAT Returns Form 002 (for individuals, enterprises, and companies)
- Schedule of VAT collected indicating the Name, Taxpayer Identification Number (TIN) of the company or individual on whose transaction the VAT was charged and the related amount.
Failure to file a return may incur a fine of NGN 5,000 per month. Failure to remit any VAT due will incur a fine equal to 5% of the liability plus interest.
Staying on top of your VAT obligations is important to avoid issues with the tax authorities. Engage an accountant if needed to ensure accurate VAT filing and prompt remittance.
What is VAT Receivable or Input VAT?
Input VAT is the amount of Value Added Tax (VAT) that a business pays on the goods and services that it purchases for its business activities. The VAT paid on the inputs or purchases utilized by the firm to manufacture goods or deliver services is referred to as “input” VAT.
What is VAT Payable or Output VAT?
VAT payable refers to the amount of VAT you have charged your customers minus the VAT you have paid on business purchases. To calculate your VAT payable, you’ll need to keep accurate records of:
- Your output VAT (the VAT you charge customers)
- Your input VAT (the VAT you pay suppliers)
Simply put VAT payable = Output VAT – Input VAT. If output VAT exceeds input VAT, you pay the difference to the government. If input VAT exceeds output VAT, you can claim a refund.
Managing VAT Compliance and Reporting
To comply with VAT regulations in Nigeria, you’ll need to register for VAT, charge VAT on taxable supplies, deduct input VAT, submit VAT returns, and pay VAT due.
Registering for VAT involves applying to become a VAT vendor. You’ll receive a VAT registration number (VAT TIN) to charge VAT on sales and claim input credits.
Charging VAT means adding VAT to the price of taxable goods and services sold to customers according to the current VAT rate. You must provide VAT invoices for B2B transactions.
Claiming input VAT allows you to deduct VAT paid on business expenses. Keep records of VAT paid on purchases to claim in your VAT return.
Submitting VAT returns involves filing returns with the FIRS declaring your VAT-liable sales; input VAT claimed, and VAT payable. Most businesses file monthly.
Paying VAT due means remitting the net VAT payable from your VAT return. Late payments incur penalties, so pay on time.
Managing your VAT obligations properly allows you to comply with the law and avoid penalties. Keep good records, file accurate returns, and pay VAT to steer clear of trouble.
VAT Exemptions in Nigeria
In Nigeria, certain goods and services are VAT-exempt to ease the tax burden on citizens.
Exempted Services under the VAT Act
Exempted services are services that are not VATable and that are not subject to 7.5% VAT. These include:
- Medical services
- Services rendered by Community Banks,
- People’s Banks and Mortgage Institutions,
- Educational institutions conduct plays and performances as part of learning.
- All exported services
Exempted Goods under VAT Act
Exempted goods are those goods that are not subject to VAT.
Certain goods are exempted from VAT in Nigeria. Some of the major exempted goods include:
- All medical and pharmaceutical products;
- Basic food items;
- Books and Educational materials;
- Baby products;
- Fertilizer (locally produced), agricultural and veterinary medicine, farming machinery and
- farming transportation equipment;
- Plant and Machinery imported for use in the Export Processing Zone or Free Trade Zone; provided
- that 100% production of such a company is for export
- Plant, Machinery, and equipment purchased for utilization of gas in down-stream petroleum
- Tractors, plows, and agricultural equipment and implements were purchased for agricultural purposes.
- Proceeds from the disposal of Short-Term Federal Government of Nigeria Securities and Bonds.
- Proceeds from the disposal of Short-Term State, Local Government and Corporate Bonds
- (including supra-national Bonds).” Limited to ten years with effect from December 2011
What is Zero Rated VAT?
Zero rated VAT are VAT exempt, meaning VAT is charged at 0%. This includes:
- Non-oil exports
- Goods and Services purchased by Diplomats
- Goods and Services purchased by humanitarian donor-funded projects
As a business owner in Nigeria, you need to understand how VAT works and how it impacts your operations. VAT stands for Value Added Tax, which is an indirect tax on the supply of goods and services. It is charged at a flat rate of 7.5% on the value of taxable goods and services.
Some key points about VAT:
- VAT is charged at each stage of the supply chain. Businesses collect VAT on sales and pay VAT on purchases. The difference is remitted to the government.
- All goods and services are taxable unless exempted. Exemptions include medical goods, exported goods, and basic food items.
- Businesses must register for VAT if annual turnover exceeds N25 million. Voluntary registration is allowed for smaller businesses.
- VAT returns and payments are due within 21 days of the month’s end. Late filing and payment attract penalties.
- Proper record keeping is required to claim input VAT and ensure accurate VAT reporting. Invoices, receipts, and other documents must be kept for audit purposes.
- VAT impacts business cash flow as output VAT is collected on sales, but input VAT is only claimed once suppliers’ invoices are received.
Understanding how VAT works in Nigeria and properly implementing it in your business processes is key to avoiding issues during audits and ensuring compliance. Be sure to stay up to date with any changes to VAT rules and rates.
Frequently Asked Questions
Here are some frequently asked questions about VAT in Nigeria:
Who should register for VAT?
Both individual and corporate bodies as long as they are trading in goods and services.
Is VAT registration compulsory?
If your business provides VATable goods or services exceeding N25 million in a calendar year, VAT registration is required. Some exceptions apply, so check with the FIRS for details.
Why is VAT on certain goods and services paid in foreign currency?
Imported goods and services are subject to VAT at the point of importation. The VAT is charged in the currency of the transaction, so if you import goods from the US and pay in USD, VAT will be charged in USD.
Do I pay VAT on exempted goods/services?
No. VAT is not charged on exempted goods and services.
Are entertainment services VATable?
Yes. Entertainment, hospitality, and catering services are subject to VAT. This includes services provided by hotels, restaurants, cinemas, nightclubs, and sports and recreational clubs.
When should I register for VAT?
You must register for VAT within 6 months of commencing business if your annual turnover exceeds N25 million. Voluntary registration is also allowed if your turnover is below the threshold.
How do I pay VAT?
VAT is paid through all FIRS-designated revenue-collecting banks into the VAT Pool Account.
What are the penalties for non-deduction of VAT?
Non deduction or failure to collect the tax by a taxable person attracts a penalty of 150% of the uncollected tax plus 5% interest above the CBN’s rediscount rate.
What are the penalties for non-remittance of VAT?
Failure to remit VAT charged to customers to FIRS can result in a penalty of a sum equal to 5% per annum plus interest at a commercial rate payable within 30 days of notification by the Tax Authority.
How much does it cost to register for VAT in Nigeria?
The VAT registration process is free and can be completed on the Federal Inland Revenue Service (FIRS) website.
What are the penalties for non-registration for VAT?
Businesses that should register for VAT but fail to do so face a penalty of N10,000 for the first month in which the failure occurs and N5,000 for each subsequent month. If this persists, the business premises will be closed after a considerable amount of time.
What does “VAT Inclusive” mean?
When an item is sold “VAT inclusive,” it means VAT has already been added to the stated price. The seller has included VAT in the final selling price displayed. However, this term is being discouraged as it is always advised that VAT be isolated and not included as part of the total invoice value.
When should a taxable person register for VAT?
All taxable people are required to register for VAT as soon as they are registered with the Corporate Affairs Commission (CAC) or commencement of business.
Who is a VAT Agent?
VAT Agents Are Revenue Collection Agents for Value Added Tax. They facilitate the deduction and submission of VAT to the Revenue Office, for example, Ministries/Government Agencies/Parastatals and Oil Companies.
Is VAT a multiple Taxation?
No, VAT is a multi-stage tax, not a multiple taxation; it is a consumption tax.
Should VAT be paid on commercial rent?
Yes, 5% VAT should be paid by the tenant on rent paid for the use of the property for commercial purposes.
You now have a solid overview of how VAT works in Nigeria. While the rules can seem complicated, the core idea is simple: VAT applies to most goods and services, and businesses collect and remit the tax to the government. As a consumer, you pay a little bit of VAT on most items you buy, which adds up to fund important programs and services.
Though VAT can impact prices, it’s an important source of revenue for Nigeria. Understanding how it works will make you a smarter consumer and help you make better financial decisions. The next time you make a purchase, you’ll know exactly what portion goes to VAT and why. You’ll also be able to determine when an item should be VAT-exempt.
With this foundation in the basics, you’re well on your way to becoming a VAT pro. Stay up to date with any changes to the VAT Act and rates to ensure you remain compliant and take advantage of any opportunities to maximize value.