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:

1. All medical and pharmaceutical products
2. Basic food items – bread, cereals, cooking oil, tubers, milk, meat etc
3. Educational books and materials
4. Baby products
5. Fertilizers and locally produced agricultural chemicals and veterinary medicine
6. 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.
7. Machinery and equipment purchased for utilisation of gas in downstream petroleum operations.
8. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
9. Locally manufactured sanitary towels, pads or tampons
10. Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts
11. Petroleum products
12. Renewable energy equipment
13. Raw materials for producing baby diapers and sanitary towels
14. Raw materials for manufacturing pharmaceutical products
15. Locally produced animal feeds.
16. Military hardware, arms and ammunition and locally manufactured uniforms used by the armed forces, paramilitary and other security agencies.
17. 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.
18. Agricultural seeds and seedlings

Services:

1. Medical services
2. Services rendered by unit microfinance banks and mortgage institutions.
3. Plays and performances conducted by educational institutions as part of learning.
4. Tuition relating to nursery, primary, secondary and tertiary education
5. Airline transportation tickets issued and sold by commercial airlines registered in Nigeria
6. Rental or lease of tractors and other agricultural equipment for agricultural purposes.
7. Shared passenger road-transport service

Zero-Rated Goods and Services

1. Goods and services purchased by diplomats
2. All export goods and services
3. 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.

The image below displays the picture of a taxpayer’s portal showing the tax credit received through input VAT:

VAT Filing Procedure

To file VAT, businesses have to:

1. Log into the FIRS TaxPro MAX portal through the link: https://taxpromax.firs.gov.ng. On the home page, click on “Taxes Due” and then select the VAT under Tax type.
2. Under the Action column, click on “Process” to initiate the process.

Download VAT filing spreadsheet from the portal and populate the beneficiary name, beneficiary Tax ID, Item, Item cost, Item description and VAT status. The image below can serve as a guide:

1. Click on “Add Record” and then “Proceed”. The VAT form will load
2. Under “Returning Currency”, select “NGN”
3. Tick the box for the declaration form
4. Confirm entries and submit.
5. Payment section: Use the Payment Reference Code to pay the amount payable online or at the bank using the Remita platform.

Timing and Filing deadline

VAT filing is done monthly, and VAT returns must be filed on or before the 21st day of the following month. For example: VAT for January must be filed by February 21st and VAT for February must be filed by March 21st.

However, If the 21st falls on a weekend or public holiday, the deadline extends to the next working day.

VAT Penalties and fines for VAT non-compliance

According to the Finance Act 2019 amended, failure to comply with VAT obligations attract penalty or fine. The VAT related offences and penalties are as follows:

1. Failure to Register for VAT after six months of commencement of business:

• A fine of ₦50,000 for the first month of non-registration.
• A fine of ₦25,000 for each subsequent month of failure to register.

2. Failure to Remit VAT Collected:

• A penalty of 10% of the unpaid tax.
• Interest on the unpaid tax at the Central Bank of Nigeria (CBN) minimum rediscount rate plus a spread.

3. Failure to Issue VAT Invoice:

• A fine of 50% of the cost of goods or services for which the VAT invoice was not issued.

4. False Declaration or Evasion

• Penalty of 100% of the amount underpaid.
• Possible criminal prosecution, leading to fines or imprisonment.

VAT Withholding

The Finance Act of 2020 introduced significant changes to VAT withholding in Nigeria, a move that aims to streamline the VAT collection process and improve compliance.

How VAT Withholding Works:

VAT withholding is a system where businesses that are subject to VAT must deduct VAT at source on payments made to vendors who provide taxable goods and services. These deductions are then remitted to the FIRS by the business making the payment.

The following businesses and agencies are designated by FIRS to withhold VAT:

1. Government Ministries, Departments & Agencies (MDAs)
2. Companies Operating in the Oil & Gas Sector
3. Oil and gas exploration, production, and servicing companies.
4. Large & Multinational Companies:
5. Banks and financial institutions.
6. Telecommunications companies (MTN, Airtel, Glo, 9mobile, etc.).
7. Manufacturing giants.
8. Other major corporate entities designated by FIRS.

The primary purpose of VAT withholding is to reduce tax evasion and ensure that VAT is collected and remitted in a timely manner. It applies to certain transactions where the recipient is a VAT-registered business, and the withholding tax is credited against their VAT liability.

VAT Withholding Mechanism

1. Application to Certain Transactions: The VAT withholding system applies to specific transactions, including construction services, professional services, and other high-value contracts.

2. Deduction at Source: When a business makes a payment for taxable goods or services, it deducts the applicable VAT (7.5%) from the payment and remits it directly to the FIRS.

3. Credit for the Supplier: The supplier or service provider can claim the withheld VAT as input VAT in their subsequent VAT return filing. The credit can also be viewed in the credit section of the TaxPro Max platform.

4. Compliance and Reporting: The business making the VAT withholding must provide a certificate or document to the vendor confirming the amount of VAT withheld. This certificate can be used by the vendor when filing their VAT return.

Example of VAT Withholding:

A construction company contracts with a vendor to supply construction materials worth ₦1,000,000. The VAT rate is 7.5%.

Amount Payable by the Construction Company: ₦1,000,000 + ₦75,000 (VAT) = ₦1,075,000

VAT Withholding (7.5%): ₦75,000 (The construction company will deduct this amount from the payment and remit it directly to FIRS)

Payment to the Vendor: ₦1,000,000 (The vendor receives the payment minus the VAT withheld)

The vendor can will receive the ₦75,000 as input VAT provided the customer remitted the VAT with the vendors TIN. The credit can be used to offset their output VAT liability.

Conclusion

Value Added Tax (VAT) is a critical element of Nigeria’s tax structure. Understanding the registration process, VAT rates, exemptions, input/output VAT, and the VAT withholding provisions introduced by the Finance Act is essential for businesses operating in Nigeria. By adhering to these regulations and filing VAT returns promptly, businesses can ensure compliance and avoid penalties while contributing to the country’s economic growth.

It should also be noted that VAT compliance is a technical aspect of the tax system; it is advisable to engage the service of a tax professional to handle your business VAT filing.