Goods bought and services rendered in Nigeria are subject to a 7.5% Value Added Tax (VAT) at each stage of the supply chain where value is added, from initial production to point of sale, save for zero-rated goods and services and those on the VAT-exempt list. To remit VAT to the Federal InIand Revenue Service (FIRS), every registered VAT payer in Nigeria should be able to calculate VAT when filing with the FIRS but some find it to be a difficult task. In this article, we’ll be explaining how to calculate 7.5% VAT in Nigeria, as well as providing other VAT-related information you would find useful.
How to calculate 7.5% VAT in Nigeria would be discussed below:
How Does VAT Work in and How to Calculate 7.5% in Nigeria?
Before proceeding to discuss how to calculate VAT in Nigeria, let’s briefly address how VAT works. VAT is a consumption tax put on goods and services at each stage of the supply chain from the initial production to the point of sale. In Nigeria, just as in other countries that practice VAT, the VAT paid by a registered VAT payer is based on the cost of the product, minus any cost of the materials that had been already taxed at the previous stage of the supply chain, that is to say, VAT is assessed and collected at each stage of the supply chain.
Let’s make use of an illustration to drive home the point. Say, for example, a biscuit called Denty is manufactured and sold in Nigeria with a 7.5% VAT rate. The following bullet points would show how VAT works:
- Denty’s manufacturer buys the raw materials for N20,000, plus a VAT of N1500 -payable to the FIRS- for a total price of N21,500
- After the production of the biscuit, the manufacturer sells Denty to a retailer for N30,000, plus a VAT of N2250. The manufacturer remits only N750 to the FIRS, which is the total VAT at this point minus the prior VAT charged by the raw material supplier
- Finally, a retailer sells Denty to a consumer for N36,000 plus a VAT of N2700, bringing the total amount to N38,700. The retailer remits N450 to the FIRS, which is the N2700 VAT at this point minus the N2250 charged by the manufacturer
From the illustration above, we can determine the Total Payable VAT to FIRS = Output VAT – Input VAT. So, for the Denty manufacturer, the total payable VAT to the government is N750 for that single transaction, while the retailer’s total payable VAT is N450.
In a situation whereby the Input VAT exceeds the Output VAT, the VAT payer can claim the deficit as a refund from the FIRS. This can be done in either the credit method, direct cash refund or a combination of credit method and direct cash transfer method, however, the credit method is the common route employed by VAT payers in claiming a refund from the FIRS.
Any person or business that deals in the goods and services covered by VAT are expected to register and remit VAT through the FIRS to the Federal Government of Nigeria. Therefore, limited liability companies, firms, sole traders, clubs or societies and individuals dealing in goods and services covered by VAT are mandated to remit VAT every month to the FIRS.
How to Remit VAT in Nigeria
The Federal InIand Revenue Service (FIRS) expects all VAT payers in Nigeria to remit VAT on or before the 21st of every month. Payment of VAT can be online or as cash payment at FIRS VAT offices across the country. Online payment is recommended and it can be done through several platforms such as Remita, Interswitch, NIBSS, and eTranzact Online Payment.
If payment isn’t made to the FIRS on or before the 21st of every month, the VAT payer would be fined N50,000 for the month of default and N25000 for the following months in which the default continues. Also, in the case where a VATable person or business dodges registration for VAT, a penalty of N50,000 is imposed for the first month, and afterward N25,000 for every month the default continues. The FIRS can seal any unregistered business that dodges paying VAT for an extended period.
What Goods and Services are Subject to VAT in Nigeria?
VAT virtually applies to all goods and services in Nigeria, except for those exempted from the VAT in the VAT Act.
The goods that VAT are levied upon in Nigeria meet the following criteria as outlined in the VAT Act:
- The goods are physically present in Nigeria at the time of the supply
- The goods are imported or installed in Nigeria
- The goods or rights over it are situated, exercisable or registered in Nigeria
- The beneficial owner of rights in or over the goods is a taxable person in Nigeria
The services that VAT is imposed upon must meet the following criteria:
- The services are rendered in Nigeria by a person physically present in Nigeria at the time of rendering the surface
- The services are performed to a person in Nigeria regardless of whether the service is provided within or outside Nigeria
What Goods and Services are Exempt from VAT in Nigeria?
The VAT Act specifically exempts certain goods and services from VAT.
The following are the goods exempted from VAT in Nigeria:
- Baby products
- Basic food items
- All exports
- Agricultural equipment and products
- Locally manufactured sanitary towels
- Plants and machinery used in the Export Processing Zone (EPZ)
- Fertilizers, farming machinery and transportation equipment
- Plants, machinery and equipment for utilization of gas in the downstream petroleum operations
- Books and educational materials
- Products of veterinary medicine
The services exempted from VAT in Nigeria include:
- Services related to education
- Medical services
- Services rendered by microfinance banks, mortgage institutions, and people’s banks
- All exported services
- Plays and performances conducted by educational institutions as part of learning