VAT in Nigeria — Part 2

Today we shall build on the understanding we gained last week and attempt to examine some special rules to Nigeria VAT and its challenges.

Last week , we explained that the VAT payable along the supply chain is the difference between input VAT and output VAT suffered and charged by the VAT collector respectively.

The VAT law has some special rules for some categories of vendors/suppliers. a). Local companies are required to withhold VAT on the invoices received from non-resident vendors/suppliers. This is known as withholding VAT at source and totally different from Withholding Tax (an advance payment of income tax).

The VAT withheld at source is to be remitted to the FIRS by the local company in the currency of the transaction. For example, Firm A in Austria has provided VATable service to Company N in Nigeria. Firm A bills Company N $1,000 plus Nigeria VAT $50 making a total invoice amount of $1,050. Ordinarily, it is expected that Company N should pay Firm A $1,050 (Firm A will then remit $50 to the FIRS). However, under the special rule, Company N will only pay Firm A $1,000 and withhold the VAT on the service which is $50 and remit same on behalf of Firm A to the FIRS.

b) Government ministries, statutory bodies and agencies are required to withhold VAT at source when paying vendors/ contractors. For example, if the Federal ministry of information awards a contract for the supply of computers to Company X worth N100m. Company X send its invoice of N105m to the ministry, the ministry pays Company X N100m and remits N5m to the FIRS. Remember ordinarily, Company X was supposed to collect N105m and remit N5m to FIRS.

c) Companies in the oil and gas sector are expected to withhold VAT at source just like the examples given earlier. You may not appreciate the challenges this special rule poses until you consider a company in the oil and gas sector that has all its output VAT withheld thereby creating a situation where it cannot claim its input VAT. For example, Company M manufactures chemicals used in drilling operations by Company D, a drilling company. Company M would have paid VAT on the raw material it buys to produce the drilling chemicals. Company M is expected to recover the VAT it paid (input VAT) from the VAT it collects from Company D (output VAT) and remit the difference to the FIRS. However, the special rule says , Company D should not pay the VAT it was charged by Company M but Company D should withhold and remit same to the FIRS on behalf of Company M.

This creates a problem for Company M, the company now has input VAT for which it has to approach the FIRS for refund. This is where it gets crazy! As soon as Company M writes to the FIRS for VAT refund. The FIRS schedule the company for a tax audit with a view to ascertaining Company M’s claim. The tax audit may not be limited to VAT but may include all other taxes administered by the FIRS. This audit can last for several months. Eventually, if Company M successfully proves its “case” that a VAT refund is due, it will then have to wait some several months to receive the refund. There are however instances where the taxpayer seeking VAT refund becomes a “debtor” to the FIRS (this is a story for another day).

Now let’s go back to where we started from. What are the implications of the proposed hike in VAT rate?

Considering the fact that VAT is borne by the final consumer, it means VATable goods and services will cost more. Some may argue that it is only 2.5% increase! Yes, it is merely 2.5% but VAT is highly regressive. The burden is more on the poor than the rich as the poor spend a larger portion of their income on VATable goods and services. While the rich save and invest larger portion of their income.

Another aspect to consider, is that of manufacturer who may not be able to fully pass on the additional VAT to the consumer. For instance, how easily can a bottler increase the unit price of a bottle of drink? Can a soap manufacturer easily adjust its price upwards to cater to the hike in VAT? For this category of manufacturer, VAT hike means reduction in margins. We all know what happens after that…

Let’s take a walk down memory lane. On 23 May 2007, the then minister of finance Nenadi Usman announced a hike in VAT from 5% to 10%. Mrs Usman announced that the increase in VAT rate was necessary because Nigeria has the lowest rate in the African sub-region. That hike in VAT rate was effective for only 1 month. The business community and labour unions opposed the hike and it was reverted to 5% on 23 June 2007.

In 2006 inflation was 8.2 % (CBN), GDP growth rate was 6.7% (IMF) and in 2007 inflation was 5.4% (CBN) and GDP growth was 7.3% (IMF). Fast forward to 2018, inflation was 12.1% (NBS) and GDP growth rate was 1.91% (NBS) while 2019 inflation is 11.3% (NBS) and GDP growth rate is 1.94% (NBS).

Take a minute to study the economic indicators quoted above. QUESTION — Is there a good justification for a hike in VAT rate as proposed by the government?

This is where we will stop this week. Next week, God willing, we will conclude this #NigeriaVAT thread by examining the plans of the FIRS to impose VAT on online transactions from 2020. Thank you !