Value Added Tax (VAT) filing for businesses is a crucial component of Nigeria's tax system, serving as a major source of revenue for the government. Governed by the Value Added Tax Act, Cap V1, LFN 2004, as amended by the Finance Acts, VAT is a consumption tax levied at 7.5% on the supply of goods and services in Nigeria.
VAT compliance is essential for businesses to avoid penalties and ensure smooth operations as such businesses must register and collect VAT from customers and remit it to the Federal Inland Revenue Service (FIRS). FIRS is the government charged with the responsibility of managing VAT, collection, and enforcement.
An understanding of the VAT filing process can help business owners maintain compliance with the tax regulations in Nigeria. Whether you are a startup, a small business owner, or a corporate entity, this article will help you navigate the VAT filing process efficiently. This article provides a guide on VAT filing process in Nigeria, focusing the following issues:
VAT Registration process
VAT rates
Goods and Services Exempted from VAT
Computation of VAT
Input and Output VAT
VAT Filing procedures
VAT Filing deadline
Penalties and fines for non-compliance
VAT withholding companies
Common challenges businesses face and the way forward
VAT Registration Process with FIRS in Nigeria
VAT registration in Nigeria is crucial for all registered businesses. The registration can be done free of charges in any FIRS office and the process can be completed within one month. However, this timeline can be reduced to two weeks if the process is carried out by a professional who have mastered the terrain.
Successful VAT registration is always evidenced by the issue of VAT letter by FIRS, a sample VAT letter can be seen below:
Difference Between VAT Number and FIRS TIN
It should be noted that VAT number is the same as FIRS Tax Identification Number (TIN).
Who Must Register for VAT?
Registration for VAT is very important for all businesses; however, it is not mandatory for some; below are categories of business that are mandated to register for VAT and also the ones that are required to register on voluntary basis:
Mandatory Registration: Any business with an annual turnover exceeding ₦25 million is required to register for VAT with the FIRS.
Voluntary Registration: Businesses with a turnover below ₦25 million can voluntarily register for VAT. However, it is advisable for them to register if they wish to claim input tax credits.
Steps for VAT Registration:
1. Obtain a Tax Identification Number (TIN): Before registering for VAT, businesses must have a valid TIN, which is issued by FIRS, however, VAT registration can also be done alongside TIN registration.
2. Prepare Necessary Documents: The documents required for VAT registration include:
- Certificate of Incorporation
- Proof of business address (e.g., utility bill)
- Letter of application for VAT registration
- Identification documents for the company directors – Typically the Nigerian passport or Driver's license for Nigerian citizens and residence permit for expatriates.
- Memorandum and Articles of Association (for limited companies)
3. Complete the VAT Registration Form (VAT Form 001): Complete the VAT registration form with details of the business, including the business name, operations, and expected turnover. VAT registration form can be obtained from any FIRS office. VAT form 001 can be picked from any FIRS office; below is a picture of the form:
5. FIRS Processing: FIRS will review the registration application and documents. If all requirements are met, they will issue the business a VAT letter signifying successful registration.
What is the VAT Rate in Nigeria
The VAT rate in Nigeria is set by the Federal Government through the Finance Act, the current VAT rates is 7.5% for goods and services that are not exempt.
Goods and Services Exempted from VAT in Nigeria
While VAT applies to most goods and services, there are specific exemptions outlined in the VAT Act. These exemptions primarily include essential goods and services and items aimed at promoting social welfare. The following are the goods and services exempted from VAT in Nigeria:
Goods:
- All medical and pharmaceutical products
- Basic food items – bread, cereals, cooking oil, tubers, milk, meat etc
- Educational books and materials
- Baby products
- Fertilizers and locally produced agricultural chemicals and veterinary medicine
- Machinery and goods imported for use in the export processing zone or free trade zone provided that 100 per cent of the production are for export.
- Machinery and equipment purchased for utilisation of gas in downstream petroleum operations.
- Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
- Locally manufactured sanitary towels, pads or tampons
- Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts
- Petroleum products
- Renewable energy equipment
- Raw materials for producing baby diapers and sanitary towels
- Raw materials for manufacturing pharmaceutical products
- Locally produced animal feeds.
- Military hardware, arms and ammunition and locally manufactured uniforms used by the armed forces, paramilitary and other security agencies.
- Gas supplied by gas producing companies to Electricity Generating Companies (GENCOs). Electricity generated by GENCOs and supplied to National Grid or Nigeria Bulk Electricity Company and Electricity transmitted by Transmission Company of Nigeria to Electricity Distribution Companies.
- Agricultural seeds and seedlings
Services:
- Medical services
- Services rendered by unit microfinance banks and mortgage institutions.
- Plays and performances conducted by educational institutions as part of learning.
- Tuition relating to nursery, primary, secondary and tertiary education
- Airline transportation tickets issued and sold by commercial airlines registered in Nigeria
- Rental or lease of tractors and other agricultural equipment for agricultural purposes.
- Shared passenger road-transport service
Zero-Rated Goods and Services
- Goods and services purchased by diplomats
- All export goods and services
- Goods purchased for use in humanitarian donor funded projects
How to Calculate VAT Payable in Nigeria
The calculation of VAT payable by a business in Nigeria involves determining both input VAT and output VAT and ensuring that the difference between them is either remitted to the FIRS or refunded if the business has overpaid VAT.
Formula for VAT Calculation:
1. Output VAT = Sales × VAT Rate
2. Input VAT = Purchases × VAT Rate
3. VAT Payable = Output VAT – Input VAT
Example 1:
A business sells goods worth ₦5,000,000. The VAT rate is 7.5%. The business also purchased goods worth ₦2,000,000, and paid VAT on the purchase.
Output VAT (Sales): ₦5,000,000 × 7.5% = ₦375,000
Input VAT (Purchases): ₦2,000,000 × 7.5% = ₦150,000
₦375,000 (Output VAT) less ₦150,000 (Input VAT) = ₦225,000
Effectively, the VAT Payable to FIRS is NGN225,000.00
Input VAT and Output VAT
It is important for us to explain the meaning of input and output VAT to enable readers gain better knowledge of how VAT system operates.
VAT is based on the principle of taxing the value added at each stage of production or distribution. This implies that businesses must collect VAT from their customers (output VAT) and also pay VAT on their own purchases (input VAT).
Input VAT:
Input VAT refers to the VAT a business pays on its purchases of goods and services. A business can claim a credit for this VAT to reduce its overall VAT liability, provided it has a valid tax invoice for the purchases.
For example, if a business buys raw materials worth ₦1,000,000, the VAT paid (input VAT) will be ₦75,000 (₦1,000,000 × 7.5%).
Output VAT:
Output VAT refers to the VAT a business collects from its customers when selling goods or services. This is the amount the business needs to remit to the FIRS after offsetting input VAT.
For instance, if the business sells finished goods worth ₦2,000,000, the VAT collected (output VAT) will be ₦150,000 (₦2,000,000 × 7.5%).
With the inception of the use of TaxPro Max for filing VAT by FIRS, businesses do not need to carry out the computation of VAT payable manually because this will be done automatically once the schedule for filing VAT is uploaded on business' TaxPro Max portal.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
