Value added Tax (VAT) is a consumption tax paid when goods and services are rendered. It is governed by Value Added Tax Act Cap V1, LFN 2004 (as amended). It is borne by the final consumer. All taxable persons are required to file VAT monthly returns not later than the 21st day following the month of transaction.
Below are three groups of taxpayers obligated to deduct VAT at source and remit directly to the tax authority in Nigeria.
- Nigerian companies that carry out VATable transactions with non-resident companies within the country
- Companies operating in the oil and gas sector
- Government ministries, statutory bodies and other agencies of government
The VAT rate in Nigeria was recently reviewed upwards from 5% to 7.5%. This is contained in the new finance bill which was passed into law on 14th January 2020 and took effect from February 1, 2020.
This Finance act 2019 further expanded the list of goods and services that are exempted from VAT. The purpose is to promote equitable taxation and reduce the burden of taxation on vulnerable segments, It further allays the fear that low-income earners and companies will be marginalized by the new law. Below are additional VAT exempted goods and services;
Basic goods/food items exempted: Additives (honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits (fresh or dried), live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables, water (natural water and table water), locally manufactured sanitary towels, pads or tampons.
Services exempted: Services rendered by microfinance banks, Tuition relating to nursery, primary, secondary and tertiary education.
As a business owner in Nigeria, here are some recommendations as well as adjustments that are necessary for a smooth implementation of this new tax rate.
Determine adequate Pricing for your goods and services
Proper attention should be given to pricing to ensure provision is made for VAT deductions and thus profit is not affected. Here is a simple guide; The VAT on a product initially sold for 1000 Naira is 50 Naira, but with this new increment, the VAT will now be 75 Naira. This has to be factored in when setting the price of the product. The VAT burden is borne by the final consumer.
Registration and collection of Tax Identification Number(TIN)
Business owners and Companies who are duly registered with CAC must register with the relevant Tax Office nearest to them and obtain a Taxpayer Identification Number (TIN). This is a unique number allocated to a Business Owner or a Company as a duly registered tax payer in Nigeria. Registration for tax purposes is done with the relevant tax authority in Nigeria (Federal Inland Revenue Service FIRS). It is a legal obligation of every organization who is required to pay tax in Nigeria.
Proper record keeping
This doesn’t require advanced accounting skills but a little knowledge of bookkeeping can assist business owners to keep proper record of numbers arising from their daily endeavors. When the business expands with time, the services of an in-house Accountant or an outsourced accounting firm will be required to facilitate prompt reporting and tax remittances.
Prompt Remittance of VAT deductions monthly
Since VAT deductions are to be compiled and filed monthly with the designated tax office, delaying it or remitting it once or twice in a year will only attract penalties and will not reflect a true picture of the profit made from the business each month.
Transparency is essential in tax matters. It is not all goods and services that are subject to VAT, therefore, business owners should be able to back up their claims with adequate supporting documents when required by tax officials. The need usually arises during tax audit exercises.