Value Added Tax – Issues and Challenges in Telecommunication Industry

Photo by Tomas Sobek

Overview of the telecommunication industry

The telecommunication industry (the Industry) is an important growth driver of the Nigerian economy. According to the National Bureau of Statistics (NBS), the telecommunications and information services sector accounts for about NGN15.4trillion, which is 10.7% of the 2019 gross domestic product (GDP), approximated at NGN144.2trillion.

The Industry comprises several segments along the value chain and the major players include operators, infrastructure and platform providers, device vendors, retailers and distributors. Different roles are performed at each of the segments, culminating in the variety of services enjoyed by the consumers.

Value Added Tax - Issues and Challenges in Telecommunication Industry Brandspurng
Photo by Tomas Sobek

Today, many businesses in Nigeria leverage the output of the telecommunications industry to meet the needs of their customers. For instance, numerous innovative products in the financial services industry, such as internet banking, mobile banking etc., rely heavily on internet access, which is an output of the Industry. Many online retail platforms have also emerged as a result of the impact of the Industry.

Value-added tax (VAT) and telecommunication industry

Businesses operating in the Nigerian telecommunication industry are required to pay VAT on taxable goods and services consumed. They also have an obligation to collect and account for VAT on taxable supplies to their customers.

The foregoing is based on the Value Added Tax Act, 2007 (VATA or the Act), as amended by Finance Act 2020, which requires VAT to be charged and paid on supply of all goods and services (except those specifically exempted by the Act (Section 2 VATA)). The applicable rate is 7.5% and 0% for standard-rated and zero-rated supplies, respectively.

VAT is multi-layered as it is imposed at every stage of value addition in the transaction value chain, from production to ultimate consumption. Every supplier of any good and/or service liable to VAT is expected to include VAT on its invoice and collect the VAT, except the supplier makes taxable supplies less than NGN25 million in any calendar year. The VAT is regarded as ‘output VAT’.

VAT incurred by a purchaser on goods qualifies as ‘Input VAT’. Section 17 of VATA stipulates the mechanism for a claim of input VAT incurred. Specifically, input VAT is to be offset against output VAT in the following circumstances:

  • where the goods are purchased or imported directly for resale
  • where the goods form the stock-in-trade used for the direct production of any new product on which the output tax is charged.

While qualifying input VAT incurred are claimable from output VAT where they meet the above conditions, input VAT incurred on expenses that do not meet such conditions and not recoverable against output VAT are to be expensed through the income statement if incurred on overheads, services and general administration or capitalised as part of the cost of the asset if incurred on fixed assets (property, plant and equipment).

In other words, only trading or manufacturing activities in relation to goods would qualify for input VAT claim from output VAT.

The net output VAT over the claimable input VAT is required to be paid to the Federal Inland Revenue Service (FIRS) within 21 days of the month following that in which the purchase or supply was made.

However, where the claimable input VAT exceeds the output VAT, the taxpayer is entitled to a refund from FIRS (Subject to providing such documents, FIRS may require to substantiate the refund).

Challenges facing the application of VAT in the Industry

There are several challenges operators in the telecommunication industry face regarding the application of VAT on their purchases and supplies. Some of the major challenges are as follows:

  • Non-recoverability of input VAT from output VAT

The non-recoverability of VAT incurred via the input-output mechanism is a major issue affecting profitability and cashflow in the telecommunication sector. According to NBS, the service industry, including the telecommunication industry, accounts for over 50% of Nigeria’s GDP.

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Given the strict conditions for offsetting input VAT against output VAT, companies in the service industry are not able to recover the whole input VAT incurred on their purchases. This is regardless of the fact that VAT is incurred on the cost of service that forms part of the direct cost of the companies.

This impacts cash flow as more cash is parted with on a monthly basis while annual profits are eroded due to the expenditure of input VAT to the income statement. Although the current system as it is creates a compensating effect with income tax being lowered, the effect is more excruciating from a working capital perspective.

  • Recognition of VAT on interconnect charges

Some operators in the telecommunication industry usually pay to interconnect charges for using other operators’ networks to complete calls that originate from their networks but terminate in such other networks.

The operators on whose networks the calls originate charge the customers and pay the operators on whose networks the calls terminate their share of the amounts charged. These charges are usually inclusive of VAT. In practice, the operators prefer to offset the VAT incurred on interconnect charges from output VAT charged to their customers for services provided.

FIRS, in contrast, usually frowns at this practice and demands the full VAT on revenue earned from the customers, while insisting that the VAT incurred on interconnect charges be charged/expensed to/in the statement of comprehensive income.


The issues identified above are proof that there is still a wide gap between current business realities and the provisions of VATA. While businesses have continued to evolve, the tax laws have not been sufficiently amended to address new business exigencies and realities, notwithstanding amendments introduced by the Finance Acts 2019 and 2020.

In order to address the challenges that are currently being faced in the telecommunication industry, the following steps, among others, may be taken:

  • Review of VAT system – Despite a low VAT rate of 7.5%, and year on year amendments since 2019, the VAT system and VATA still do not reflect business realities. The VATA, in its current form, is unable to capture the evolution in the operations and business models of companies, including operators in the telecommunications industry.
  • Fair and equitable tax system – One of the principles of a good tax system is fairness and equity. It was on this backdrop, amongst others, that the National Tax Policy was developed and subsequently revised by the Federal Government of Nigeria in 2017. The discriminatory provision in VATA as it affects the claim of input VAT in service industries has created a lot of controversies. The service industries must be given the opportunity to claim input VAT in the same manner as companies operating in the trading and manufacturing sectors. Several countries of the world, such as the United Kingdom, South Africa and even Ghana, do not have provisions restricting recoverability of input VAT from output VAT.

The telecommunication industry has been and remains one of the symbols of successful policy implementation stories of the Federal Government of Nigeria in the last two decades.

Therefore, to the extent that the Industry continues to be at the frontier of major economic initiatives of the government at various levels, friendlier tax practices can only help to enhance productivity and investment in the industry and the Nigerian economy at large.


Abdul-Hafiz Ibrahim, ACTI (Member, CITN Tax Policy and Administration Faculty)