A Value Added Tax also known as VAT is a type of consumption tax levied on products at every point of sale where value has been added to the product. This type of tax starts from the raw material stage to the point of sale where the goods are bought by the final consumer.
Consumption tax is a tax levied on the purchase of goods and services. Every seller in the production industry charges a VAT to the buyer, the VAT is then remitted to the government of the country.
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This information is provided for by the Value Added Tax Decree 102 of 1993 which became effective in the year 1994. Value Added Tax is charged 5% on all goods and services which are supposed to be taxed on VAT. The Value Added Tax (VAT) decree requires all manufacturers, wholesalers, importers and suppliers of VATable goods and services to be registered within the first six months of commencement of business else they will be sanctioned. VAT is collected by the officials of Federal Inland Revenue Services (FIRS) through its VAT directorate with offices in almost all the local government areas in Nigeria.
Who are the people that should pay VAT?
A person that can pay VAT is one that deals in VATable goods and services. Examples of such include:
• A limited liability company e.g. Michael Limited
• A firm e.g. Law & Co.
• A sole trader e.g. Chima and Bros
• An individual e.g. Daniel shops
• A Club or society e.g. Lagbaja Social Club
By law, when you register and become a VAT payer, 5% of the money your customers pay for your goods and services purchased is calculated as your OUTPUT VAT. Furthermore, when you purchase any goods and services from another seller, 5% of the money you pay is calculated as your INPUT VAT.
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To calculate the amount which goes into the pocket of the government, you have to subtract your INPUT VAT from the OUTPUT VAT. i.e; Total amount of VAT payable to the government = Output VAT – Input VAT. Let us solve an example below
In 2010, a cement seller sold a bag of cement to a final consumer for N250,000. The raw materials for this cement was bought at N100,000. Find the:
(i) Output VAT
(ii) Input VAT
(iii) Total VAT payable to the government
- Output VAT = The 5% VAT which will be charged on goods and services you supply or sell. Output VAT = 5% of N250,000 = N12,500.
- Input VAT = The 5% VAT which you are going to pay on goods and services that you consume. Input VAT = 5% of N100,000 = N5000
- Since the manufacturer of the product sold the product for N250,000, the 5% of the 250,000 Naira is the output VAT. (This is constant because we assume that 5% VAT is always added on every goods and services sold).The total VAT payable = Output VAT – Input VAT. Therefore, Total VAT payable = N12,500 – N5000 = N7500.
In the month of January, Mr Kingsley bought goods for N200,000 and sold the same goods for N400,000. required to Calculate the total VAT he should pay for the month of April.
1. Output VAT = 5% of his sales
Output VAT = 5% of N400,000 = N20,000
2. Input VAT = 5% of inventory purchase
Input VAT = 5% of N200,000 = N10,000
3. Total VAT payable for the month of January is Output VAT – Input VAT
Total VAT Payable = N20,000 – N10,000 = N10,000.
This amount can only be paid when the output tax exceeds the input tax. While in a situation where the input tax exceeds the output tax, the deficit will be claimed by refund.
There are three ways to claim your refund:
1. The credit method
2. Direct cash refund method and
3. A combination of the two.
THE FOLLOWING ARE THE TYPES OF GOODS EXEMPTED FROM VAT
Some goods and services are not VATable. Examples of Goods exempted from VAT
• Medical and pharmaceutical products
• Basic food items
• Books and educational materials
• Baby products
• Commercial vehicles and their spare parts
• Agricultural equipment and products and vertinary medicine
• Fertilizers, farming machinery and farming transportation equipment
• All exports
• Plants and machinery used in the zone that exports goods and services
• Equipment purchased for exploration of gas in downstream petroleum operations
• Services of Community Banks, Peoples Banks and primary Mortgage Institutions
• Plays and performances of educational institutions as part of teaching and learning process
• Services related to education
• Medical services
• All exported services
Forms used by the Tax Payer
These are the forms used by the tax payers:
1. Form VAT 001
2. Form VAT 002
Form VAT 001 – VAT Registration Form
The form 001 is also called VAT registration form. It is supposed to be completed by the person applying to become a VAT payer within six months of the commencement of business.
The following information are contained in VAT 001:
• The name of the taxpayer
• The address of business of the taxpayer
• Address of branches or units of the same company where business is carried on
• The date of incorporation of business
• The date of commencement of business
• The registration number of the business
• The nature of business
• Types of goods/services dealt in
• Address of local VAT office where the company seeks registration
• The name and signature of a principal officer of the business
• The date application is filled.
FORM VAT 002 – Value Added Tax Returns
This form is also called RETURNS form. The value added Tax returns to be filled every month will be stated in the form. A typical form 002 contains the following information.
• VAT identification number
• Name and address of the VAT payer
• Address of the local VAT office where the return will be submitted
• The month for which return is related
• Total VATable supplied made
• VAT charged
• Any adjustments
• Total tax output
• VAT on domesticated supplies received
• VAT adjustments on supplies received
• VAT on import
• Total VAT payable
• VAT on purchases not wholly used to be backed out of total VAT payable
• Total input tax
• Amount payable or refundable
• A declaration by an official of the taxpayer that the details in the returns form are true and correct as at the period.
VAT Returns must be submitted to the FIRS on or before the 21st day of the month following the month of transaction. Failure to comply with the rule will attract the following penalties:
i. If the businesses are not registered for VAT: A penalty of N10,000 for the first month in which the failure occurs and N5,000 for each subsequent month. Any unregistered business that fails to remit VAT after a period of time will be sealed and locked up by the FIRS.
ii. For businesses that are registered for VAT: 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.
According to the new finance act 2019, VAT is now 7.5% instead of 5%