A Value Added Tax is a type of consumption tax levied on products at every point of sale where value has been added to the product. It starts from the raw material stage to the point of sale where it is bought by the final consumer.
Consumption tax is simply defined as a tax levied on the purchase of goods and services. Every seller in the production chain charges a VAT to the buyer, which is then remitted to the government. The amount of VAT levied at each point of sale along the production chain is based on the value added by the seller.
This is provided for by the Value Added Tax Decree 102 of 1993 which actually became effective in 1994. Value Added Tax is charged 5% on all VATable goods and services. The VAT decree requires manufacturers, wholesalers, importers and suppliers of VATable goods and services to be registered within six months of commencement of business. VAT is administered by the Federal Inland Revenue Services (FIRS) through its VAT directorate with offices in almost all the local government areas in the country.
Who are those that should pay VAT?
A VATable person is one that deals in VATable goods and services. Examples of such include:
• A limited liability company e.g. Tunde Limited
• A firm e.g. Law & Co.
• A sole trader e.g. Emeka & Brothers
• An individual e.g. Lawal shops
• A Club or society e.g. Gbaja Social Club
When you register and become a VAT payer, 5% of the money your customers pay for your goods and services is calculated as your OUTPUT VAT.
On the other hand, when you purchase any goods and services, 5% of the money you pay is calculated as your INPUT VAT.
To calculate the amount that goes to the government, you have to subtract your INPUT VAT from the OUTPUT VAT.
That Is; Total VAT payable to the government = Output VAT – Input VAT
In 2001, a phone manufacturer sold a phone to a final consumer for N250,000. The raw materials for this phone was bought at N100,000. Find the:
(i) Output VAT
(ii) Input VAT
(iii) Total VAT payable to the government
Output VAT = The 5%VAT you charge on goods and services you supply or sell.
Input VAT = The 5% VAT you pay on goods and services that you use.
Since the manufacturer of the product sold the product for N250,000, the 5% of the 250,000 Naira is the output VAT. (This is constant because we assume that 5% VAT is always added on every goods and services sold).
Output VAT = 5% of 250,000 Naira
Output VAT = 12,500 Naira.
Since the manufacturer spent 100,000 Naira to buy the raw materials, 5% of that amount is called the input VAT.
Input VAT = 5% of 100,000 Naira
Input VAT = 5000 Naira.
The total VAT payable = Output VAT – Input VAT
Total VAT payable = 12,500 – 5000
Total VAT payable = 7500 Naira.
In April 2018, Mr Jide bought goods for N200,000 and sold same for N400,000. Calculate the total VAT he should pay for the month of April.
Output VAT = 5% of his sales
Output VAT = 5% of 400,000 Naira
Output VAT = 20,000 Naira.
Input VAT = 5% of inventory purchase
Input VAT = 5% of 200,000 Naira
Input VAT = 10,000 Naira.
Total VAT payable for the month of April is;
Output VAT – Input VAT
Total VAT Payable
= 20,000 – 10,000
= 10,000 Naira
This amount is payable where the output tax exceeds the input tax. In a situation where the input tax exceeds the output tax, the deficit can be claimed by refund.
There are three ways to claim your refund:
1. The credit method
2. Direct cash refund method and
3. A combination of the two.
The application of the credit method is the most widely used because of the difficulty that may be encountered with cash refunds.
GOODS EXEMPTED FROM VAT
Certain goods and services are not VATable. The implication is that VAT charges are not applicable to it. On the other hand, certain goods and services are considered zero rates. This implies that the goods are VATable, but the application is zero percent.
Examples of Goods exempted from VAT
• Medical and pharmaceutical products
• Basic food items
• Books and educational materials
• Baby products
• Commercial vehicles and their spare parts
• Agricultural equipment and products and vertinary medicine
• Fertilizers, farming machinery and farming transportation equipment
• All exports
• Plants and machinery used in export processing zone
• Plant, machinery and equipment purchased for utilization of gas in downstream petroleum operations
• Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes
Services Exempted From VAT
• Services of Community Banks, Peoples Banks and primary Mortgage Institutions
• Plays and performances conducted by educational institutions as part of learning
• Services related to education
• Medical services
• All exported services
Form in use by the Tax Payer
The following forms are in use by the tax payers:
1. Form VAT 001
2. Form VAT 002
Form VAT 001 – VAT Registration Form
This is the standard registration form for VAT. It is supposed to be completed by a potential VAT payer within six months of the commencement of business.
VAT Form 001 usually contains the following information:
• The name of the taxpayer
• The principal place of business of the taxpayer
• Other branches or units where business is carried on
• The date of incorporation of business
• The date of commencement of business
• The registration number of the business
• The nature of business
• Types of goods/services dealt in
• The local VAT office where registration is sought
• The name and designation of a principal officer of the business
• The date application is filled.
The application must also bear the official stamp of the business, a formal written application for registration on the business letter-headed paper as well as the signature of the principal officer. A copy of the registration certificate must be attached but the original would be presented for sighting.
FORM VAT 002 – Value Added Tax Returns
This is the standard value added Tax returns to be filled every month. A typical form 002 contains the following information.
• VAT identification number
• Name and address of the VAT payer
• The local VAT office where the return is being filled
• The month for which return is related
• Total VATable supplied made
• The zero-rated supplied included in the VATable supplies
• The total supplied subjected to VAT
• VAT charged
• Any adjustments
• Total tax output
• VAT on domesticated supplies received
• VAT adjustments on supplies received
• VAT on import
• Total VAT payable
• VAT on purchases not wholly used to be backed out of total VAT payable
• VAT taken at source, also to be backed out of VAT payable
• Total input tax
• Amount payable or refundable
• A declaration by an official of the taxpayer that the particulars in the returns are true and correct.
NOTE: VAT Returns must be filed with the FIRS on or before the 21st day of the month following the month of transaction. Failure to comply will attract the following penalties:
i. For businesses not registered for VAT: A penalty of N10,000 for the first month in which the failure occurs and N5,000 for each subsequent month. An unregistered business that fails to remit VAT after a period of time will be sealed up by the FIRS.
ii. For businesses registered for VAT: A penalty of a sum equal to 5% per annum plus interest at a commercial rate payable within 30 days of notification by the Tax Authority.
Thank you for reading. I hope you learnt one or two things?