Value Added Tax; what you should Know
Small business owners are often faced with what to do when it comes to regulatory matters, especially on issues like tax remittances, obtaining licences and permits, and preparing CAC’s annual returns. It is most advisable to engage professionals when dealing with these matters. However, having substantial knowledge about these issues will also go a long way in knowing what to do when regulatory bodies come knocking at your door. We will in this article look at one of the few taxes the government expects businesses to remit. VAT. Value Added Tax (VAT) is a consumption tax paid when goods are purchased, or services are enjoyed. In simple terms, VAT is a tax levied on consumption. It is only payable when taxable goods and services are consumed.
Currently, section 8 of the VAT Act of 1993 requires a taxable person (an individual, body of individuals, companies, etc ) to register for VAT with FIRS (Federal Inland Revenue Service) and charge VAT at 5% on the supply of their goods or services to customers. The VAT charged must be paid to FIRS together with a VAT form duly filled and submitted on a monthly basis. Failure to comply carries financial penalties.
Registration under VAT Act of 1993
Registration for VAT purpose is free and compulsory for all business entities registered for doing any form of business in Nigeria including manufacturers, wholesalers, retailers, distributors, all financial institutions, importers and exporters, oil and gas companies and suppliers of goods and services. Also, government and non-government organizations (NGOs) are required to registered for VAT. All registered persons under the VAT act are issued a tax identification number (TIN) upon registration with the FIRS after the presentation of relevant documents.
Relevant documents for VAT Registration
- Duly completed taxpayer registration input form.
- Certificate of incorporation.
- Memorandum and article of association (where applicable).
- Valid means of identification (for individuals).
- Documents containing the following information:
- Registered address of the company/enterprise.
- Principal place of business.
- Date of commencement of business and accounting year-end.
- Name of bankers, auditors and tax consultants.
- Valid email address and telephone number.
The implication of the VAT registration to Taxable Persons
All taxable persons are required to add 5% VAT on all taxable goods and services. For example, let’s assume that Waje, a sole trader buys a bag from a company at N5,000 per bag plus N250 VAT making N5,250. She, in turn, sells the bag for N6,000 to her customer. Under existing VAT law, Waje must charge N300 on the sale making N6,300 to her customer, and offset the N250 she earlier paid (input VAT) against the N300 collected (output VAT) and pay over N50 to FIRS.
Right of a Taxable Person
It is the right of a taxable person:
- To be given a taxpayer identification number (TIN) free of charge.
- To object to disputed VAT assessment as specified in the VAT Act.
- To appeal against notice of refusal to amend a VAT assessment as specified in the VAT Act.
- To claim input tax by deducting it from output tax.
- To be issued receipts for all VAT remittances.
- To be educated/enlightened by FIRS in area concern.
Offences and Penalties under the VAT Act
- Failure to register for VAT: ₦10,000 for the first month and ₦5,000 for every subsequent month.
- Failure to remit VAT: 5% per annum of the amount of tax not remitted plus interest at bank lending rate.
- Failure to issue tax invoice: Fine of 50% of the cost of the goods or services for which tax invoice was not issued.
- Failure to register is an offence liable upon conviction to a fine of ₦5,000 and sealing of the business premises if no registration is done after one month.
- Failure to keep proper records: Fine of ₦2,000 for every month in which failure continues.
- Failure to collect VAT: penalty of 150% of the amount not collected plus 5% interest above the CBN Monetary Policy Rate.
- Failure to submit returns: Fine of ₦5,000 for every month in which failure continues.
The proposed amendment to VAT law
President Muhammadu Buhari on Tuesday, October 8, 2019, announced a VAT registration threshold, a new VAT rate and new items that would be exempted from the value-added tax during the 2020 Budget presentation.
What does VAT registration threshold mean?
Based on the proposed amendments, any business (company, sole trader, partnership or enterprise) whose annual turnover is less than N25m is exempted from VAT registration and by implication does not have to charge VAT on its goods and services. The objective of this threshold policy is to exempt micro and small businesses from the burden of VAT compliance and their customers would not be charged VAT. This does not mean that such small businesses will not pay VAT when they purchase goods and services that are not exempted from VAT, it only means they won’t have to charge VAT when they sell to their own customers.
The implication of the VAT registration threshold and the new VAT rate
Under the proposed threshold and new rate, using the same assumption. Waje will buy the same bag for N5,000 plus N375 VAT (7.5%VAT) making N5,375 and if Waje’s total sales in a year are less than N25m then she will not have to charge VAT when she sells to her customer. However, because Waje is not registered for VAT, she can’t claim the N375 VAT paid. So, for Waje to maintain her N1,000 profit she will have to sell at N6,375.
New items that would be exempted from the VAT from 2020
The President also said the list of items exempted from the VAT would be expanded to cover items covered under Section 46 of the Finance Bill, 2019. The new exempted items include brown and white bread; cereals, including maize, rice, wheat, millet, barley and sorghum; fish of all kinds; flour and starch meals; fruits, nuts, pulses and vegetables of various kinds. Others are roots, such as yam, cocoyam, sweet and Irish potatoes; meat and poultry products including eggs and milk; salt and herbs of various kinds and natural water and table water.
The finance bill is presently with the National Assembly and it is expected to be passed before the end of the year 2019. When passed, small business owners can begin to align their business strategies and take full advantage of the new tax regime. You can also seek advice from a tax consultant if you can afford one or at least an accountant who has experience in tax remittance.
Muyiwa Mogaji is finance operations and reporting specialist. He is also a business supports consultant. Follow him on Facebook via his group page @finance tax & biz advisory. Follow him on twitter @mkmuyiwa.