VAT, GST and Sales Tax in Nigeria

Summary

Name of the tax Value-added tax (VAT)
Date introduced 1-Dec-93
Trading bloc membership Economic Community of West African States Member
Administered by Federal Inland Revenue Service (FIRS)
VAT rates
Standard 5%
Others Zero-rated and exempt
VAT number format 01012345-0001
VAT return periods Monthly
Registration thresholds None
Recovery of VAT by non-established businesses No

Scope of the tax

VAT applies to the following transactions:

  • Supplies of goods and services other than those specifically exempt under the VAT Act
  • Goods and services imported into Nigeria

Who is liable

Taxable persons. Taxable persons are persons that make supplies of goods and services. They are expected to register for VAT. The following are examples of taxable persons:

  • Individuals or bodies of individuals, families, corporations with one shareholder, trustees or executors that carry out economic activities
  • Persons exploiting tangible or intangible property for the purpose of obtaining income from the property in the course of a trade or business, including persons from or agencies of the government performing such actions

The following are required to deduct VAT on their suppliers’ in voices and remit the VAT to the FIRS:

  • Oil and gas companies including oil-service companies
  • Governments and government ministries, agencies and depart­ments
  • Resident entities engaging in transactions with nonresidents carrying on business in Nigeria

Non-established businesses. A nonresident company carrying on business in Nigeria is required to register for VAT using the address of the Nigerian customer with which it has a contract.

Group registration. The Nigerian law does not provide for group registration.

Late-registration penalties. The VAT Act provides for a late-registration penalty of NGN10,000 for the first month and NGN5,000 for every subsequent month in which the default continues.

Tax representatives. A taxpayer may register for VAT and file returns directly in person or appoint an accredited tax representa­tive to act on its behalf.

Reverse charge. There are no specific reverse-charge provisions in the VAT Act. Under the act, however, the taxable person in Nigeria to whom the supply is made is required to withhold the VAT included in the invoice and remit to the FIRS if:

  • The supplier is a nonresident company carrying on business in Nigeria.
  • The consumer is a company operating in the oil and gas sector.
  • The consumer is a government ministry, department or agency.

Deregistration. There is no provision for deregistration in the Nigerian VAT Act but there is a cessation requirement that the tax authorities should be notified in writing of the winding up or cessation of a business.

VAT rates

The standard rate of VAT is 5% of the invoiced amounts for tax­able goods and services including imported goods. Certain goods and services are zero-rated or exempt from tax.

Examples of goods and services taxable at 0%

  • Non-oil exports
  • Goods and services purchased by diplomats
  • Goods and services purchased for humanitarian donor-funded projects
  • Imports of commercial aircraft, aircraft spare parts and machin­ery and equipment used in the solid minerals sector

Examples of exempt supplies of goods and services

  • All exported goods and services
  • Medical goods and services and pharmaceutical products
  • Basic food items
  • Books and educational materials
  • Plant, machinery and goods imported for use in free-trade zones
  • Plant, machinery and equipment purchased for the utilization of gas in downstream petroleum operations
  • Tractors, plows and agricultural implements purchased for agricultural purposes
  • Services rendered by community banks and mortgage institu­tions
  • Plays and performances by educational institutions as part of learning
  • 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. This exemption will only last ten years from a commencement date of 2 January 2012
  • Fees or commissions earned on traded shares. This shall apply for five years effective 25 July 2014
  • Fees or commissions due to Securities and Exchange Commission, the Nigerian Stock Exchange and the Central Securities Clearing System. This shall apply for five years effective from 25 July 2014

Time of supply

The time when VAT becomes due is called the “time of supply.” The VAT Act does not define “time of supply.” In practice, the “time of supply” is the date on which the related invoice is issued or payment is made, whichever is earlier.

Recovery of VAT by taxable persons

A taxable person may recover input tax that is charged on busi­ness purchases by offsetting it against output VAT that is charged on taxable supplies. If the input VAT exceeds the output VAT, the taxable person is allowed to claim a refund of the excess input VAT. An input VAT refund may be claimed in any of the follow­ing manners:

  • Credit method
  • Direct cash refund
  • By both credit method and direct cash refund

The most common practice is the credit method under which the taxable person may offset the excess input VAT against the output VAT in the subsequent month.

Input VAT is recoverable from output VAT if it relates to goods purchased or imported directly for resale and goods that form the stock-in-trade used for the direct production of any new product on which the output tax is charged. Refund is also available for input VAT paid on zero-rated goods and services.

Nondeductible input tax. A taxable person cannot reclaim VAT paid on goods and services used for nonbusiness purposes. In addition, input VAT incurred on the purchase of fixed assets and expenses such as general administration and overhead costs, cannot be recovered from output VAT. Recovery of input VAT is not allowed with respect to the supply of services and exempt supplies.

VAT on fixed assets should be capitalized together with the cost of the assets, but VAT on general administration, overhead costs and services should be expensed in a company’s profit-and-loss account.

Refunds. The FIRS Establishment Act provides for a cash refund within 90 days, subject to a refund application by the taxpayer and an appropriate audit by the FIRS.

Preregistration costs. Not recoverable.

Recovery of VAT by non-established businesses

Nonresident, unregistered businesses may not recover input VAT in Nigeria.

Invoicing

VAT invoices and credit notes. A taxable person that makes a tax­able supply is required to furnish the purchaser with a tax invoice for that supply, which contains the following:

  • Taxpayer’s identification number
  • Name and address
  • VAT registration number
  • Date of supply
  • Name of purchaser or client
  • Gross amount of transactions
  • Tax charged and the rate applied

A tax invoice must be issued at the time of supply, regardless of whether payment is made at the time of supply.

VAT is payable in the currency of the transaction.

There are no specific provisions on credit notes in the VAT Act. However, as a principle in accounting, a VAT credit note should be used if the VAT payable on a supply is reduced or reversed because of a subsequent allowance or discount or an error. In practice, an annual reconciliation of total VAT per audited account with total VAT per monthly returns filed is carried out to ensure accurate VAT accounting and remittances. Accordingly, it will be helpful to have in place a credit note indicating a reversal of revenue and VAT initially recognized and accounted for.

The details of information to be contained in the credit note are essentially the same as that required in a tax invoice. However, the credit note should give a description of the initial invoice, the amount of which is reversed or reduced for ease of reference.

Foreign-currency invoices. There is a specific provision to remit the tax on a foreign currency denominated transaction in the cur­rency of the transaction.

Electronic invoices. There are no specific provisions in the VAT Act on electronic invoices. In Nigeria, invoices are not submitted to the Nigerian tax authority when filing tax returns. However, a detailed review of physical invoices are carried out upon tax audit or investigation.

Proof of export. There are no specific provisions in the VAT Act on this. However, documentary evidence that goods physically left Nigeria and evidence within the accounting system to con­firm that a transaction took place should suffice. This documen­tation should be kept accessible should the Nigerian tax authority request this. In the event that no document is provided on request by the tax authority, a company may be required to account for VAT on an export sale.

VAT returns and payments

VAT returns. VAT returns must be submitted monthly on VAT Form 002. A taxable person is required to submit a VAT return on or before the 21st day of the month following the month in which supplies are made. A taxable person must pay the tax due by the due date when filing the VAT returns. Payment must be made via a bank-certified check/draft or wire transfer through designated banks to the local tax office that issues a receipt after confirma­tion of such payment.

The VAT return must be accompanied by a schedule containing details of the supplies made and received within the tax period.

Penalties

The following penalties may be issued with respect to VAT:

  • Failure to issue tax invoice — on conviction, fine of 50% of the cost of the goods or services for which a tax invoice was not issued
  • Failure to maintain proper records — NGN2,000 for every month in which the failure continues
  • Failure to submit returns — fine of NGN5,000 for every month in which the failure continues
  • Failure to remit VAT — 5% per year of the amount of tax not remitted, plus interest at the bank lending rate
  • Failure to collect tax — penalty of 150% of the amount not collected, plus 5% interest above the Central Bank of Nigeria’s “rediscount” rate (monetary policy rate)

The VAT Act provides a penalty of 5% for late remittance of VAT; the FIRS Establishment Act provides a penalty of 10% for late payment of any tax (including VAT). Section 68 of the FIRS Establishment Act gives it supremacy over other tax laws, and the FIRS currently applies the penalty at 10%.