Administration of Worth Added Tax In Nigeria: Items And Companies Exempt

Friday August 06, 2021 /
08:19 PM /  By CITN  / Header Image Credit: Source Expert



VAT is a consumption tax that has been embraced and
adopted by many nations across the globe. Because it is a consumption tax, it
is difficult to evade and relatively easy to administer.  From a buyer’s
perspective, VAT is a form of consumption tax. From the perspective of the
seller, it is a tax only on the value added to a product, material, or service
while from an accounting point of view, by the stage of its manufacture or
distribution.  It is levied on the value-added that results from each exchange.
It is an indirect tax collected from someone other than the person who bears
the cost of the tax or the tax burden.


Nigeria’s VAT rate since the introduction of VAT
through the VAT Decree No. 102 of 1993 has been 5% up until January 2020 when
it was increased to 7.5%. The decision by the Federal Executive Council (FEC)
to approve the proposed increase did not come as a surprise given the several
attempts by recent and past administrations to increase the rate of VAT. 
The Value Added Tax (VAT) rate of 7.5 per cent took effect immediately after
the Finance Act 2019 was signed into law by President Muhammadu Buhari on 13th
January 2020.


Taxable Persons

Under Section 12, which is the definition section of
the Value Added Tax (Amendment) Act of 2007, a taxable person includes an
individual or body of individuals, family, corporations, sole trustee or
executor or a person who carries out in a place an economic activity, a person
exploiting tangible or intangible property to obtain income therefrom by way of
trade or business or a person or agency of government acting in that capacity.
This definition as contained in the amended Act is more elaborate and the scope
of a taxable person is wider, unlike the provisions of Section 46 of the VAT
Act where the words “a person who independently carries out economic
activity” are used. Such words are capable of so many interpretations.
Some may refer to it only as an individual not a corporate entity or body of
individuals. Flowing from the amended Act the word ‘person’ is defined to
include artificial persons such as corporate entities, families, a body of
individuals, sole trustees, executors, etc.


A taxable person is obliged to register with the FIRS
for VAT collection “within six months of the commencement of the Act or within
six months of the commencement of business, whichever is earlier” Failure to
register attracts a penalty of N50,000.00 for the first month in which the
failure occurs; and N25,000.00 for each subsequent month. Since a period of six
months has elapsed after the promulgation of the Act, it presupposes that every
taxable person is now obliged to register as soon as it commences business. VAT
can only be lawfully collected after registration; it means that until then the
taxable person will not have any output VAT against which the input tax can be


Meanwhile, Section 10 mandates a non-resident company,
carrying on business in Nigeria to register for VAT by using the address of the
person with whom it has a subsisting contract.  A non-resident company
shall include the tax in its invoice while the person to whom the goods and
services are supplied shall remit tax in the currency of the transaction. 


Exemption and Zero

Outright exemption of VAT on some goods and services
entails that there is no obligation of VAT and no attempt at charging VAT from
the outset. Exempted goods and services attract neither input nor output VAT.
Therefore, the deduction of the former from the latter, and remittance of the
difference to FIRS does not arise. VAT exempt items are outlined in Parts I and
II of the First Schedule to the Act.


On the other hand, a zero rate of VAT means that the
item is liable to VAT but at zero per cent. This implies that while the
supplier pays input VAT, there is no output VAT from the consumer as the zero
rates are actually on the output VAT. Hence, there is always a 100% excess of
the input VAT over output VAT, and the entire input VAT incurred is claimed
from FIRS as a refund.


A taxable activity for VAT includes any activity, other
than those in the exempt list, conducted as business, vocation, trade, and
profession. It includes the activities of public or government authorities,
associations, and clubs. It does not matter whether or not the activity is
carried out for profit, but it should involve the supply of goods and services
to another person for consideration. Besides those expressly exempted by law,
several activities are not taxable activities for VAT purposes. These are:

1.         a)
Wages and salary from employment;

2.         b)
Hobby activities;

3.         c)
Private transactions such as the occasional sale of household or domestic
articles, furnishings, personal effects, etc. and

4.         d)
House rent.


Section 3 of the VAT Act read in conjunction with
section 47 of the Finance Act 2019 and section 45 of the Finance Act 2020
explicitly exempt the following goods and services from VAT:


Goods Exempt

1.         All
medical and pharmaceutical products.

Basic food items.

3.         Books
and educational materials.

Baby products.

Locally produced fertilizer, agricultural and veterinary medicine, farming
machinery and farming transportation equipment.

6.         All
exported goods.

Plant and machinery imported for use in the Export Processing Zone.

Plant, machinery, and equipment purchased for the utilization of gas in
downstream petroleum operations.

Tractors, ploughs, agricultural equipment and implements purchased for
agricultural purposes.

10.       Locally
manufactured sanitary towels, pads and tampons.

11.       Commercial
aircraft, commercial aircraft engines commercial aircraft spare parts.


Services Exempt

Medical services;

Services rendered by Microfinance Banks, People’s Banks, and Mortgage

Plays and performances conducted by educational institutions as part of
learning; and

4.         All
exported services.

Tuition relating to the nursery, primary, secondary and tertiary education.

Airline transportation tickets issued and sold by commercial airlines
registered in Nigeria.

Hire, rental or lease tractors, ploughs and other agricultural equipment for
agricultural purposes.


Practical Implications

There were seven exempted goods and three exempted
services at inception. Initially, the trend was to extend the exempted goods
and services from time to time ostensibly in response to the lobby from
interest groups. However, following the Finance Acts 2019 and 2020, the number
of exempt goods was increased to eleven while exempt services were increased to
seven. The Finance Act 2019 defined essential food items to include additives
(honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch,
fruits (fresh or dried), live or raw meat and poultry, milk, nuts, pulses,
roots, salt, vegetables, water (natural water and table water). Others included
in the Act are locally manufactured sanitary towels, pads or tampons. It also
included services rendered by microfinance banks, tuition fees relating to a
nursery, primary, secondary and tertiary education.


Disputes have arisen in recent times between the FIRS
and taxable persons as to what constitutes the definition or explanation of the
items in some categorizations. A very recent case in reference is the one in
respect of what the definition of ‘basic food item’ is as the VAT Act in
previous times did not provide such answers in terms of explanations or


This lacuna gave rise to several attempts to define
the concept of basic food for a better understanding of the impact and issues
on basic food items as used in the VAT Act.  For example, an author
defined food as any nutritious substance that people or animals eat or drink or
that plants absorb to maintain life and growth. Food is also defined as an
edible or potable substance (usually of animal or plant origin), consisting of
nourishing and nutritive components such as proteins, fats, carbohydrates,
vitamins, and essential minerals, which (when ingested and digested) provides
growth, generates energy and sustains life. While many foods can be eaten raw,
many also undergo some forms of preparation for reasons of flavour, safety,
palatability, or texture. This may involve cutting, washing, trimming, or
adding other ingredients, such as spices at the simplest state. It may also
involve mixing, heating or cooling, pressure cooking, fermentation, or
combination with other food.


As a response to the concerns as to what constitutes
basic food items, FIRS released an information circular in 2009 on VAT
exemption which defined basic food items as follows: “any unprocessed staple
food item, whether or not it is packaged.” This, to FIRS, means that for a food
item to be exempted from VAT, it must be a staple food item, and it must be
unprocessed. What then does “staple food” mean? It is the name given to food
that can be easily stored, and eaten throughout the year by a dominant part of
a population. Early civilizations usually ate staple foods because they could
be stored for an extended period without having to worry about them going bad.


Some examples of staple foods include carbohydrates,
wheat, barley, rice, potatoes, tinned food, milk, and things that do not need
to be refrigerated. Staple foods are regularly eaten even daily since they
supply a significant proportion of nutritional and energy requirements.  A
staple food, in other words, is a fundamental food item in the typical diet of
a group of individuals.  Dwelling on the foregoing clarifications, it is
apparent that the factors to bear in mind when ascertaining whether a food item
is a staple or not is not the level or form of processing the food has
undergone; instead, it is the nature of consumption, nutrients formulation, and
proportion of the populace that routinely consume the food item.


There were other concerns, especially as relates to
the ambiguity in FIRS’ application of the “processed and unprocessed”
rule.  For example, FIRS included semi-milled or wholly milled rice as
part of the recognized VAT exempt food items. However, in another instance,
FIRS attempted to assess some companies involved in the production of
cassava-based flour to VAT. In a further scenario, FIRS sought to classify this
‘non-special bread commonly referred to as ‘Agege loaf of bread’, preferred by
the low-income earning class, as an essential food item while classifying
sliced loaf as non-basic, which is typically preferred by the high-income or
middle class. Worthy of note, however, is that there is no evidence in the Act
to show that the applicability of the VAT Act does not lay any specific
emphasis on luxury items or services and goods that the rich or poor in the
society consume.


In a FIRS Information Circular released in 1997, the
basic food item was later described to include “any unprocessed staple food
item, whether or not it is packaged.” However, the Federal High Court Coram
Honourable Justice Ibrahim Buba in its 2015 ruling in Lagos in the case between
Warm Spring Waters Nigeria Ltd & Ors. v FIRS held that FIRS cannot amend
the provisions of a statute by issuing a circular. It also held that water is a
basic food item and therefore exempt from VAT regardless of whether it has been
processed or packaged. Contrarily, Justice Adamu Hobon had earlier given
judgment in a 2004 ruling in the case of Monamer Khod Enterprise v FIRS which
was said to have “erroneously focused exclusively on the question whether
packaged water was a manufactured good and therefore taxable, rather than on
the more relevant inquiry whether water is a basic food item within the meaning
of paragraph 2 of Part 1 of Schedule 1 to the VAT Act.” The judgment also
was even though FIRS argued bottled water is a luxury good and was not exempted
by the VAT Act. This coupled with FIRS’ predisposition that all luxury items
should be taxed the VAT was not primarily targeted at the low-income earners in
Nigeria.  Thus, the two judgments are conflicting, but neither of them aligns
with the FIRS Circular’s bid to choose one mode of packaging over another in
determining where to apply VAT.


In view of the fact that the content of the FIRS
Circular does not bound taxpayers, it goes to show that taxpayers could justify
the notion of basic food items using other acceptable means. For example, the
dictionary definition of ‘basic’ means ‘fundamental’, and as highlighted
earlier, basic food items are fundamental food items in the typical diet of a
group of people; often eaten at every meal, and consumed in large quantities.


In the absence of a clear definition of what
constitutes a basic food item, the Finance Act 2019 had extended the list of
goods and services exempted from VAT and has included clarifications on basic
food items to include milk, nuts, bread, cereals, water (natural water and
table water), among others. Nonetheless, FIRS is encouraged to further look
into its current position and application thereon to enable a more realistic
and settled treatment around the concept of basic food items as exceptions to
the imposition of VAT, for example, the application of natural and table water
in the Finance Act 2019. This will ensure that the target beneficiaries of this
exemption are not excluded via a strained interpretation or application of the
provisions of the VAT Act.


Medical services are also at the centre of the
controversy in Nigeria’s VAT policy. In the case of medical services, the VAT
Act or the Federal Inland Revenue Service (FIRS) circulars failed to explain
the scope of the term. Recent breakthroughs in the world of medical technology
have brought about an increase in cosmetic surgeries and procedures. A general
exemption of medical services is no longer sufficient in light of these



While a review has been made on some of the areas
shrouded in ambiguity in the Finance Acts 2019 and 2020, this has not
completely laid to rest the many controversies surrounding the administration
of the tax. With lapses here and there and taxpayers having studied the loopholes
inherent in the VAT, legislation has continued to capitalize on these to evade
the payment of VAT. The consequence of failure to provide enough clarification
and other crucial delimitation is the frequent dissension between FIRS and


This is even worrying because an amendment was made as
recent as 2020 with the introduction of the Finance Act. To this end, FIRS and
other concerned entities should make efforts to galvanize the views of the
numerous stakeholders in the tax practice and administration chain and further
make attempts to provide clarity on the subject matter. However, this should
not be at the neglect of necessary legislative amendments as ambiguities in tax
laws, once identified, are best solved by legislative amendments. In this
regard, it is also crucial that taxpayer education and enlightenment as parts
of the roles and functions of the Federal Inland Revenue Service should be
improved. This should be done by emphasizing the recent amendments such as the
introduction of a VAT exemption threshold for businesses with a turnover of
less than N25 million per annum and the expansion of the list of VAT exempt
items and services to include locally manufactured sanitary towels, pads and
tampons as well as tuition relating to the nursery, primary, secondary and
tertiary education.


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