MSME Tax 101 - What is VAT?

By Deloitte Nigeria | 5 min read
7th July 2017
MSME Tax 101 - What is VAT?

Value added tax (VAT) is a compulsory consumption tax charged and payable on the supply of all goods and services, other than those goods and services listed in the First Schedule to the Value Added Tax Act. The Value Added Tax Act is the enabling law guiding the administration of VAT in Nigeria.

Definition of terms

Term

Definition

Ref

Tax base

The value of goods and services on which VAT is to be charged

 

Input VAT

VAT incurred on purchases[1]

A

Output VAT

VAT charged on sales

B

 

VAT payable

Difference between the output VAT and the input VAT. The VAT payable is the amount to be remitted to Federal Inland Revenue Service (FIRS).

 

C=B-A


2. Tax rate

The applicable rate is 5% of the tax base and the tax burden is borne by the final consumer. However, some goods and services are classified as zero-rated, meaning that they are liable to VAT at 0%. Examples include: non-oil exports, goods and services purchased by diplomats and goods purchased for use in humanitarian donor funded projects.

3. Exempt goods and services

The First Schedule to the VAT Act shows a list of goods and services exempted from VAT. Examples of such transactions include; medical and pharmaceutical goods and services, basic food items, books and educational materials, baby products, exported goods and services etc.

4. Administration

VAT in Nigeria is administered by the Federal Inland Revenue Service (FIRS).

5. Registration

MSMEs who make taxable supply of goods and services are required to register for VAT with FIRS, within six months of commencement of business. MSMEs can register for VAT at the nearest FIRS office. A taxable person acts as an agent of the government, by collecting VAT from customers and remitting same to FIRS

6. Tax invoice

MSMEs who make taxable supplies are required to issue a tax invoice to the customer containing the following details:

a) Supplier's Tax Identification Number (TIN)

b) Name and address of supplier

c) The date of supply

d) Name of customer

e) Gross amount of transaction

f) Rate of tax and amount of tax charged

A tax invoice must be issued on supply whether or not payment is made at the time of supply.

7. Input and Output VAT

Input VAT refers to the VAT that a taxpayer suffers upon purchase of taxable goods and services. Output VAT is the VAT charged by a taxpayer upon making taxable supplies.

8. Due Date for filing of VAT returns

Taxpayers are expected to complete a VAT Form 002 on a monthly basis - on or before the 21st day of the month following the month in which the taxable supply was made, and submit same to FIRS. For example, if a taxable supply is made in January 2017, VAT returns in respect of the supply should be filed with FIRS on or before 21 February 2017.

The VAT returns is to be accompanied by evidence of payment of net VAT. In the event that a taxpayer does not make any taxable supply in a month, the taxpayer is still required to file nil returns in respect of that month. The nil returns should be accompanied by the taxpayer's bank statements as evidence that no taxable supply was made in the month.

We have attached in Appendix 1, a sample VAT Form 002.

9. Offences and penalties

We have attached as Appendix 2, a summary of offences and applicable penalties in the event of default, with respect to VAT compliance.

Appendix 1 - Sample VAT Form 002

Appendix 2 - Summary of offences and penalties

Offence

Penalty

Failure to register

N10,000 in the first month, N5,000 for each subsequent month

Evasion of tax

The higher of N30,000 or two times the amount of tax being evaded

Failure to notify change of address within one month

N5,000

Failure to issue invoice

50% of value not invoiced, on conviction

Obstructing VAT inspectors/ auditors, false claims

N10,000 on conviction or 6 months imprisonment or both

Unauthorized person issues invoice

N10,000 on conviction or 6 months imprisonment or both

Failure to keep proper records

N2,000 for every month in which failure occurs

Making false claims

Twice the value of the amount under-declared

Failure to submit returns

N5,000 for every month in which failure occurs

Failure to remit tax

5% penalty plus interest at commercial rate

Failure to collect tax

150% of amount not collected, plus 5% interest above CBN rediscount rate

[1] Allowable input VAT on purchases is limited to the VAT on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output VAT is charged. Input VAT cannot be claimed on any overhead, service, and general administration; and input VAT on any capital item and asset.



 
 

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This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the "Deloitte Network") is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

© 2017 Akintola Williams Deloitte


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 







Deloitte Nigeria
Deloitte & Touche is the Deloitte Touche Tohmatsu Limited (DTTL) member firm in Nigeria and the oldest indigenous professional services firm in Nigeria. The firm was established in 1952 by Mr. Akintola Williams, FCA, CFR, CBE, the doyen of the accountancy profession in Nigeria. Through astute management, the member firm has grown in size and scope of services to become one of the largest global professional services organisations in Nigeria, with offices in Lagos, Abuja and Port Harcourt. The firm currently provides audit, tax, consulting, accounting and financial advisory, corporate finance, and risk advisory services, to public and private clients spanning multiple industries. www.deloitte.com.ng
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