What You Should Know about Valued Added Tax: Paying As You Consume

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Ever wondered how the concept of Value Added Tax (VAT) works? or wondered why you have to pay an additional 5% charge on the cost of a good or service?

VAT is a consumption tax payable on the goods and services consumed by any person whether government agencies, business organizations or individuals. The target of VAT is the consumption of goods &services unless an item is specifically exempted by law, the final consumer pays the VAT.

VAT can also be defined as a tax on spending/consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. In Nigeria, it is currently levied at a rate of 5%.

Although VAT is a multiple-stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.

The yield from VAT is a fairly accurate measurement of the growth of an economy since purchasing power (which determines yield) increases with economic growth. The input-output tax mechanism in VAT also makes it self-policing.

Input VAT is paid by any registered person on goods/ services for the purpose of resale. While Output VAT is charged by any registered person on goods and services sold and are borne by the final consumer.

At the moment, there are some categories of goods and services that are exempted VAT. These goods and services are referred to as NON-VATable. The goods and services that are NON-VATable are:

Goods exempt

  1. All medical and pharmaceutical products.
  2. Basic food items.
  3. Books and educational materials.
  4. Baby products.
  5. Fertilizer, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment.
  6. All exports.
  7. Plant, machinery and goods imported for use in the export processing zone or free trade zone: Provided that 100 per cent production of such company is for export otherwise tax shall accrue proportionately on the profits of the company.
  8. Plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations.
  9. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
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Services exempt

  1. Medical services.
  2. Services rendered by Community Banks, People’s Bank and Mortgage Institutions.
  3. Plays and performances conducted by educational institutions as part of learning.
  4. All exported services.

Zero-rated goods and services

  1. Non-oil exports.
  2. Goods and services purchased by diplomats.
  3. Goods purchased for use in humanitarian donor-funded projects.

“humanitarian donor-funded projects” includes projects undertaken by Non- Governmental Organisations and religious and social clubs or societies recognized by law whose activity is not for profit and in the public interest”.

Every other item not listed above is regarded and treated as VATable goods and services.

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VAT Returns

A manufacturer or supplier of taxable goods or services is to render a return to the tax authority on or before 21st day of the month following that in which the supply was made.

Thus, every VATable person must keep records of all supplies made and received. He must also make a return on form VAT 002. He has to fill in details of supplies made and received during the period and pay the net VAT due to the tax authority.

Every importer of goods into Nigeria is required to pay VAT on imports while compliance is to be enforced by the Nigeria Customs Service before releasing the imported goods.

Offences and penalties:

There are various offences with very stiff penalties. Some of the offences are:

(i)failure to register;

(ii)Failure to keep proper records of accounts;

(iii)Failure to issue a tax invoice;

(iv)Failure to collect tax;

(v)Failure to submit VAT returns;

(vi)Failure to notify change of address;

(vii)Furnishing of false documents;

(viii)Resisting an authorized officer.

These offences carry penalties ranging from fines of up to N 10, 000 to various terms of imprisonment. In some cases, the fines or penalties depending on the amount of evasion involved. The law is even stricter in dealing with officers of the Board. Any officer of the Board who aids or abets the commission of any of the offences under the VAT law will be liable to a fine of N 50, 000.00 and/or imprisonment for five years.

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VAT RATES AND PENALTIES

The World Corporate and Income Tax Comparison Rates, VAT/GST rates around the world range from 5% to 21%. Nigeria’s VAT rate is one of the lowest in the world at 5%. Entities that charge and receive VAT are expected to file/remit it to the Federal Inland Revenue Service through the tax authority on or before the 21st day of the month following that in which the purchase or supply was made.

Section 35 of VAT Act stipulates a penalty of N 5,000.00 every month that returns are not made.

Failure to register with FIRS within the specified time attracts a penalty of N10,000 for the first month in which the failure occurs & N5,000 for the subsequent months in which the failure continues. If this persists, the premises where the business is carried out may be sealed.

Illustration:

If a product moves from Raw Materials Producer

(A) to Manufacturer

(B) at N1,000.00 then to wholesale

(C) at N1,500.00, then to Retailer

(D) at N2,000.00; and finally, to the consumer who pays N2,500 to the Retailer, VAT payable on the product at 5% is as follows:

The DUE DATE for filing returns and remitting VAT is 21st day of the month following the month of transaction i.e 21st day of every month. Failure to file returns and remit VAT attracts penalties as stipulated in the VAT Act.

A pictorial illustration of how VAT works
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