ProposeValue-Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
Value-added taxation is based on a taxpayer’s consumption rather than their income. In contrast to a progressive income tax, which levies greater taxes on higher-level earners, VAT applies equally to every purchase.
A VAT is levied on the gross margin at each point in the manufacturing-distribution-sales process of an item. The tax is assessed and collected at each stage, in contrast to a sales tax, which is only assessed and paid by the consumer at the very end of the supply chain.
For example, duvet is manufactured and sold in Nigeria. Presently, Nigeria has a 5% Value-Added Tax, payable to Federal Inland Revenue Service (FIRS)
If duvet manufacturer buys the raw materials for N1,000 plus a VAT of N50 – payable to the government of Nigeria – for a total price of N1,050.
The manufacturer then sells duvet to a retailer for N3,000 plus a VAT of N150 for a total of N3,150. However, the manufacturer renders only N100 to FIRS in Nigeria, which is the total VAT at this point, minus the prior VAT charged by the raw material supplier. Note that the N100 also equals 5% of the manufacturer’s gross margin of N2,000.
Finally, the retailer sells the duvet to consumers for N6,000 plus a VAT of N300 for a total of N6,300. The retailer renders N300 to FIRS, which is the total VAT at this point (300) minus the prior N150 VAT charged by the manufacturer. The N300 also represents 5% of the retailer’s gross margin on the duvet.
VAT, essentially, a self-assessment tax that is paid on the purchase of goods and services. It has a refund of credit mechanism built in such that VAT is paid on purchase of goods (input tax) and recover back as output if the goods are for sale.
If in the course of the transaction, higher amount constitute the net VAT. Conversely, if input tax is greater than output (which rarely occurs), the difference is paid back to the vatable individuals.
In essence, it is the output at less the input that constitutes the VAT payable as output – input tax VAT payable as output – input tax VAT payable.
The VAT system in Nigeria is administered by the federal government by using the existing tax machinery of the Federal Inland Revenue Service (FIRS), which is centrally located in Abuja (Headquarter) with network of zonal and local VAT offices throughout the federation.
The administration is carried out on the close co-operation with the Nigeria Custom Service (NCS) and the State Internal Revenue Services (SIRS) by the operation of VAR.
Several benefits to be derived from VAT system were enumerated by the federal government which include, VAT system will generate a lot of revenue, it will eliminate administrative enforcement, it will eliminate cascading, it will encourage rapid growth (industrial) by allowing credit for input tax for capital goods, it will maintain relative competitiveness in export of goods and services, it will enforce documentation of transaction, it will bring about automatic indication (i.e. as price increases, VAT increases).
Value Added Tax (VAT) was introduced by the Federal Government of Nigeria and is provided for by the Value Added Tax Decree 102 of 1993 which became effective in 1994 which requires manufacturers, wholesalers, importers and suppliers of VATable goods and services to be registered within six months of commencement of business.
Such a registered person is expected to charge and collect VAT on supplied goods and services. The amount collected constitutes the VAT output.
Businesses add VAT to the sales price of the goods or services they offer in Nigeria and the tax is borne by the final consumer of goods and services because it is included in the tax paid. VAT is calculated at a flat rate of 5% of the cost of services and products and is charged on a wide array of goods and services.
VAT is calculated at a flat rate of 5% on all goods and services sold in Nigeria; as is stipulated under section 4 of the VAT Act, except items that are on the VAT exempt list or zero-rated. Example of such is exported goods, all exported goods are zero-rated, that is such goods are VAT-able but at zero percent. This means that VAT is collected from the foreign buyer and at the same time any input tax is refundable. Businesses are required to calculate the amount of VAT they received from customers in a month and offset that with the VAT they paid to suppliers for goods and services. If the amount of VAT paid is more than the VAT the business collected, then the business is owed a refund. If the amount paid is less than the VAT the business collected, the business must remit the difference. Note: only goods purchased or imported directly for resale and goods used for the direct production of any new product on which the output tax is charged can be used to calculate the offsetting tax. The VAT on overhead, services and general expenses cannot be used to calculate the offsetting VAT. These expenses are expected to be deducted before arriving at taxable profits and so do not qualify.
A business is expected under section 15 sub 1 to remit VAT it has collected by the 30th day of the month following the month the goods or services were sold. For example, if a business sells a product on March 15th, VAT on the sale must be submitted by April 30th of the same year to avoid any penalties. The penalty for non-remittance of VAT to the FIRS is N5,000 per month for every month that the amount is past due. Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stage at which the tax is paid.
However, there are some goods in Nigeria, which are specifically exempted from paying VAT as contained in the first schedule of the VAT Act, and such include medical and pharmaceutical products; basic food items; books and educational material; newspapers and magazines; baby products; commercial vehicles and their spare parts; agricultural equipment and products; and veterinary medicine.
Proposed VAT Increment from 5% to 7.5%
The Federal Executive Council (FEC) of the Federal Government of Nigeria (FGN) on Wednesday, 11th September 2019, approved a 50% increase in the Value Added Tax (VAT) rate applicable on supply of goods and services in Nigeria, from 5% to 7.5%. The new rate is expected to take effect in 2020 after due consultations with relevant stakeholders.
Recall that FGN attempted to increase the VAT rate to 10% in 2007, but this was faced with stiff opposition resulting in the suspension of the proposed increase.
However, recently, there have been discussions and sensitization by the tax authorities on the need for an increase in the current VAT rate.
FEC’s approval of the proposal for an increased VAT rate is the latest of this development and we have provided a high-level assessment of issues for consideration below:
Modality for amendment: there are speculations that the amendment to VAT Act could be through an Act of the National Assembly or an Executive Order.
In this regard, it is imperative to note that Section 38 of the VAT Act empowers the Minister of Finance to amend VAT rate as well as the list of exempt and zero-rated goods and services in its First Schedule. Thus, the FGN could make the amendment through an Executive Order, on the ground that Section 5 of the Nigerian constitution empowers it to implement an Act of the National Assembly.
The above notwithstanding, making the amendment through an Executive Order is arguably contrary to the express provisions of the Nigerian constitution which vests legislative powers (to enact and amend laws) in the National Assembly. The supremacy provision of the constitution also implies that any conflict between the constitution and any other law should be resolved in favour of the constitution to the extent of the inconsistency.
In view of these strong arguments, it would be interesting to see the amendment route FGN seeks to take. FEC has nevertheless stated that due consultations with relevant stakeholders would be carried out prior to increasing the VAT rate.
Implications for business: Nigeria has one of the lowest VAT rates in the world. However, it still practices a modified VAT system where taxpayers can only claim a limited portion of input VAT against output VAT charged.
Consequently, without a corresponding adjustment to the VAT system, the increment may turn out to have a higher impact than envisaged. This is more so as entities will ultimately seek to pass the cost to end-users. This may result in increased inflation.
In view of the above, it is important for the proposed changes to the VAT Act to include changes to Nigerian VAT system such that taxpayers can be allowed to claim all input VAT incurred against output VAT charged.
Also, minimum VAT registration thresholds should be set to encourage small businesses in Nigeria. Hopefully, these matters will be considered during the stakeholders’ consultations and subsequently included in the amendment to the VAT Act.
Companies and other stakeholders are urged to review the proposed amendments in more details to ensure that all relevant and crucial issues are raised before the new VAT rate is effected.
Companies are also advised to use the proposed amendments as a guide in planning their business operations and strategies in the near future.
It will be recalled that in April, 2019, Nigeria’s minimum wage was increased from N18,000 to N30,000.
Barely six months after the approval of the N30,000 minimum wage, the Federal government decided to increase the VAT, which will adversely have negative impact on all goods and services, thereby increasing the price of all goods and services which will invariably increase the hardship on Nigerians.
Could it be that Federal government is using the right hand to feed its workers N30,000 minimum wage and using the other hand to collect it back?
The reasons for this sudden change in the VAT rate is to enable the government create jobs, increase the people’s standard of living and as well continue with its effort to develop the country’s infrastructure.
This recent approval of a 50% increment of value Added Tax (VAT) rate by the Federal Executive Council of Nigeria from 5% to 7.5% which applies to goods and services in the country has raised lots of questions, doubts and fear in the mind of the people.
This could be due to the fact that our Nation is not economically stable and the consumers are the ones that will suffer the hammer of the increment more, as producers are likely to add the increased tax on the goods and services so that they will be able to pay Federal government the VAT.
These are what some members of the public had to say concerning this issue;
Elder Icha Stephen in his own opinion believes that increment in VAT will make life more difficult for the people.
He said, “Increase in VAT will make things difficult for the people and will make a commodity which should be sold for 2kobo to be sold for 3kobo. But rather than making things difficult for the people, the government should remove VAT so it would be easier for people to purchase goods.”
Barr. Friday Ogazi on his part believes that when it is finally increased from 5% to 7.5%, the cost of living will be high as everything will increase in price.
He said, “It is all about the cost of consumption so when you want to buy anything, be it biscuit, and VAT is added, it will increase the cost. And bearing in mind that the economy is in its lowest turn at the moment, it has not even been easy for Civil Servants to access the new increased minimum wage of N30,000.”
“Also bearing in mind that generally, the economy has been in its bleak moment. For some years now, there’s what we call increment on fuel price. Since that increment of fuel price, there has not been increment on salaries i.e commensurate increment and increment of fuel price then was almost double and now we are talking about increment of VAT. I think it is uncalled for.”
“My advice to the government is that they should forget about the increment of VAT for the moment and focus on increasing the number of people who are in the category of those who pay VAT and increase awareness on the issue of VAT rather than increment of VAT.”
Mrs. Agbo Chinonmso wants people to pay tax since it is a tool that can enhance development.
She said, “My opinion is that, it is good for people to pay that little tax since it is used for the development. If actually it is being used, it is good for the customers to pay. It means that customers are paying for the goods, that is, paying the tax indirectly. Like civil servants they pay their own. So for this extra payment, if actually the government will use it, it is good to pay. but the extra addition is a burden.”
“They should consider the level of the customers, their standard and capability. Even at that increase some persons can buy such goods comfortably. For instance, rice is over N7,000, there are people who would still go there and buy up to ten (10) bags but there are poor ones who would struggle to buy a bag. So in line with that, they should consider.”
“Since the tax after collecting it would be used for our good and development, the government has a good idea to build infrastructure which would be helpful to us. Just as we see in Ebonyi State now, we see developments. We are happy to see those things but the poor may not be able to feed properly because they are trying to adjust to the increase.”
“I suggest that the government should be considerate when raising the VAT by trying to harmonize its rate so that the poor would be able to access and as well enjoy several goods. The government should also try to monitor the agents responsible for collecting this money so it doesn’t get stocked in a person’s pocket.”
Comrade Igboke Nwonu Igboke said, “People have been kicking against the increment especially civil servants as its adverse effect will fall back on the people. Yes you can bear me witness that what you used to buy with a small amount of money like finger battery which used to be N50 or N80 is now N250. There are so many other things. You should also know that the increase of this VAT is pure punishment.”
“The Federal Government may say that when they increase it, they would use the money to build health care centers, schools, tertiary institutions and so on but all these things are lies. Because when they increase the VAT and Federal government gives the State or Local government the money, they won’t use the money to increase the living standards of the people rather they would embezzle the money.”
“How much is fuel now? With the increase of VAT, fuel price may increase, prices of goods will skyrocket and when the prices increase, an ordinary man in the village cannot afford it. Only the politicians go after these goods. Now let’s take goods at Meat Market for example: because I live at Abakaliki, if you want to buy ordinary vegetable and you price it for N50, a politician who because he has the money will come and pick it for N100 or above without pricing and go because he has the money. That is to tell you that the increase of this VAT was put in place to punish those who have voted them into power.”
“Some governors were not able to pay the N18,000 minimum wage but they acquire assorted cars. Now, we are talking about the issue of N30,000 minimum wage, some state governors are not paying. Imagine a level 7 or 8 civil servant officer with a certificate receiving less than N25, 000 per month, a graduate for that matter.”
“Has it augured well with the civil servant, even hired labourers? Of course we know that the increment of VAT will automatically trigger increase in transport fare, increase in the cost of product in the market, which the ordinary man may not be able to afford.”
“The increment of VAT is nothing but punishment on the society, even if they start the implementation of N30,000 minimum wage, I want to tell you that is just like someone giving something and collecting it from your back, because they don’t want us to grow. They want to be using us anytime they want.”
“That is why they don’t want anything that would benefit us. What are they using the money for? When you give them the money they would mismanage it. So what is the need for increasing VAT?”
“For me, there is no need for increasing VAT, if they finally increase the VAT, the masses will suffer, we are suffering already. They just want to impoverish everybody.
“I don’t like, support, or cherish the increment of VAT. It is punishment on the general public except the politicians who have the money already.”
The manager, All Season Mall, Miss Obumneme Divine in her opinion said, “The increment will definitely affect the masses because there is a hard condition in the country already and it will be harder on them if another 2.5% is added to the 5% they are paying, because it’s not everybody that has the money to pay, after paying all the rates and other things.”
“People struggle to pay that 5% and the addition of 2.5% is going to be strange on the customers or the masses because it will lead to the increment of goods in the market, the shop and everywhere, so nobody is safe. The masses have not seen something to eat and you are forcing them to pay extra fee on goods and services, it’s just like trying to squeeze blood out of someone you know has bled enough.”
“There will be negative impact on the citizens, most time they would not be able to afford what to eat due to the increase of prices of goods, it will also lead to theft. The government is not sure that they are going to render these services as they promised the citizenry, are they going to use this to effect changes in the society on infrastructure and others.”
“There are a lot of unemployed youths moving around in the street carrying files around for employment and yet they are not employed, but they are being taxed. Increment in VAT can increase social vices.”
“The federal government should tax the rich more because they have the resources that can be taxed, like someone who has ten to fifteen cars. By the time the federal government start to tax them based on the properties they acquire, it will reduce the burden that the federal government have and they will have to channel those money that they acquired into infrastructure and other things that are beneficial to the country and its citizens, like building industries where citizens can be employed.”
Aliagha Michael in his own view believes that anything concerning tax favours the public and the government.
He said, “The tax is used in building infrastructures, maintaining the road, improving electricity; all these, the public will benefit from. Tax increment favours the government more because it will make them achieve their objectives and goals, it will help them to get money to do whatever they want to do thereby making their government better.”
“Increasing VAT will not favour the public because the money paid to civil servants to take care of their needs is not even enough, then increasing VAT will not favour them, it will only increase their poverty level.”
“The government should not go ahead to increase VAT, because increasing it will lead to increment of goods and services and it will affect the citizens more.”
Scientist Matthew Mbam N. said “As far as the increment of VAT is coming from the government, if you go against it, is an act of rebellion, the bible says we shouldn’t rebel against the government.”
“But if the government should consider the people, it will be good because nobody needs more burden. Should VAT be increased, the poor masses will suffer because things are getting harder, but for those who are making their money, they will not feel it. An adage says that when two elephants fight, the grasses suffer it. The business owners may not feel it much but the end users will suffer it most.”
According to the manager of Dreamlink Company, Onyenaucheya Prince, “Increasing the VAT will have a negative effect on the consumers, people are already complaining of the 5% it is now, so increasing it will affect the people the more, most people doing business and those that open newly, it will really affect them and the end users.”
“Increasing the VAT will lead to increment of goods and services, though what the government is doing is really a good thing, but after increasing the VAT, the government should use it on what the public will see because it will be a problem after paying and the result is not seen. But if the money is used in building road, establishment of companies which will lead to more employment, the citizens will enjoy it the more.
Chief Chukwuka Arisi said, “VAT is a value added tax either to production or services, he said that increment of VAT is completely a bad one because the federal government is yet to add any value, the road infrastructure has not improved, the economy too is in a very bad shape.”
“The masses are suffering, they just want to keeping on pushing cause to the masses, they are trying to strangulate the masses they suppose to govern. Instead of the government increasing the VAT, they should decrease it, they should have been humane in knowing that the masses of this country are suffering and they should review the VAT downwardly.”
“The federal government can start collecting toll on roads or allow individuals to build roads and collect tolls on it, that would be a better way of taxing the people and people will be happy to pay it because they are seeing the good road. But increasing the VAT from 5% to 7.5% means that they are not considering the fact that they are not even in touch with the masses they are ruling.”
“The increment will have a negative impact on the citizens in all areas, in fact, it is not an allegation, and it is a plan to take back the minimum wages they are claiming that they increased. They are giving the masses the minimum wage with one hand and they are taking it back with the other hand, the masses are at the receiving end.”
The increment is a way of strangulating the masses, the increment of VAT has no way of developing the country because the people cannot survive with their take home pay. When their take home pay cannot take them home, how do they achieve growth, let alone development? So, it is a very bad policy and if it is implemented, it is a sad one.”
“The government should tax the upper class, the taxation should start from the top; there should be reduction in cost of government, but they are not talking about that, our legislatures and our government officials are the highest paid in the world, compared to others and there have been agitation to review that downward, but instead of doing that, what they are doing is to make sure they review taxation on the masses so that more will die of hunger.”
“If the VAT is increased, a lot of people will die and some people will even migrate to other countries, even if they are going to die there, they don’t mind. Increment in VAT will cause inflation threat that will cut across every angle. So many people will not be able to afford most of the goods, it will affect the total revenue we generate it will affect the individual spending capacity and so on.”
The manager, Nhamuha Royal Company Ltd, Miss Winifred Eze said, “VAT is currently at the rate of 5%, the increment of VAT is going to increase the poverty level of the Nigeria, because sometimes there will not be sales or the expenses one made within the month is high, like paying tax to Ebonyi State Government and Local government and their charges are so high that after paying all the tax and payment of the employees, one already ran at loss or have spent beyond the income.”
“The increment of VAT will also affect the consumers, because the product they normally get at a particular price will increase, either double or triple, depending on the goods and service. The increment will lead to increment of some goods and services.”
“The government should not increase the VAT because it is going to affect everybody especially the poor masses.”
According to Mr. Chibuzor Umah “Though increasing VAT is good, sometimes government use it to raise fund for financing some project but the increment of VAT is not coming at the right time, because of the hardship in the country.”
“Increasing VAT will add more hardship and more problems to households trying to finance their expenses because it will increase the prices of goods and services in the market. It is an indirect tax that the citizens pay for automatically when they purchase goods and services that have VAT, it is aimed at consumers and not producers.”
“The increment of VAT is a good idea only if the government will use it for what they promised to use it for.”
Mr. Harrison Onwe, Chinedu in his own opinion said, “The proposed increment came as a surprise. The citizens should be well informed of the VAT increment because they are the ones paying it, they are the ones it will affect more.”
“Though everything that comes at a particular point in time comes at the right time, some people will still say that it is coming at the wrong time, but the fact is that many persons have nothing doing and increasing VAT rate will really affect them. So, the government should consider the lower class and at least leave the VAT at the 5% it is now to avoid creating more expenses and problems for the citizens.”
Mr. Mbamoke Dennis in his own view said, “The increment of VAT is not coming at the right time due to the present condition of the country, but nothing good comes easy. It is a matter of time, everybody will get used to it and things will change to normal. Though it will affect the citizens, but the increment comes in a way that it will favour a greater percentage of people if it is well utilized.”
Mr. Ochigbo Uchenna said, “The increment of VAT is a welcome development, with the reasons that it is to develop our country, it is a very good idea but looking at the present condition of the country now, it is not coming up at the right time.”
“Increasing VAT will lead to more expenses and problems for the citizens, especially the end users. Increasing VAT will really affect the people in the lower class because when they need something, they struggle hard to get it and when VAT is increased, it means they might not be able to afford certain things at all and that will lead to more problems for the citizens.”
“I advice the government to still leave the VAT at the current rate which is 5%, when things get better, it can be increased.”
Increasing VAT at this time of economic hardship will only increase the hardship on the citizens because only a few of citizens produce something, while majority are consumers.
The consumers are the ones at the receiving end as they will spend the little they earn on the goods and services and since the increment of VAT will bring an increase on all goods and services.
Increment of VAT is likely to increase social vices in the country as those unemployed can resort to stealing, other crimes or other social vices.
Federal government should look into the increment of VAT especially now that it has approved the N30,000 minimum, the citizens should be allowed to enjoy that minimum wage even though they are yet to be paid the said minimum wage.
The federal government should look at other options in which they can get fund to finance its projects and look for ways to better the lives of its citizens, rather than compounding their problems, the citizens’ burden should be lightened and not adding to their burden.
The increment of VAT is coming to the citizens at a wrong time and if finally implemented can cause more catastrophe. Federal Government should sheathe its sword of the VAT increment and attend to issues that can better the lives of its citizens and not make their lives more miserable.