VAT in Nigeria: What It Is & When to Pay

A value-added tax (VAT)—also known as goods and services tax (GST), or general consumption tax (GCT)is a consumption tax that is levied on the value added at each stage of a product's production and distribution.

VAT is like a sales tax, but with a key difference. It’s an indirect tax that’s added at each stage of production, from making the product to selling it.

The final consumer pays the VAT, though it's added along the supply chain. The amount of VAT depends on the product’s price, minus any previously taxed costs.

Where Do I Need to Pay VAT Taxes?

VAT rates differ, and it's based on what people buy, not their income. In some countries, people pay more in VAT taxes than others.

Here are top countries in Europe that are considered to have the highest VATs in the world.

• Hungary: 27%
• Croatia, Denmark, Sweden: 25%
• Cyprus, Germany, Romania: 19%

The average VAT in Europe is 21%, which is approximately 6% higher than international averages.

5 countries in the world do not have VAT at all, including the United States. A factor influencing this is the economy.

The country provides for their consumers to pay sales tax only and provides relief to businesses that need boosts for production and distribution of goods and services.

Additionally, the United States provides for businesses in specific industries to levy their own goods and services taxes, such as in the hotel industry.

Countries like Canada charge VAT in the form of Goods and Services Tax (GST). The rate of the GST is legislated by the province but is typically 5% across the country. Ontario is the province with the highest GST rate, at 13%.

However, Canadians who file taxes annually will see relief and receive quarterly checks to pay for their GST costs.

And in Nigeria, the standard VAT rate is 7.5% (increased from 5% on February 1, 2020). Zero-rated items include goods and services purchased by diplomats and goods purchased for use in humanitarian donor-funded projects.

To calculate VAT on any product, you can use an Online VAT Calculator

Who Needs to Pay VAT?

Generally, businesses that supply goods or services are responsible for collecting and remitting VAT to the government.

However, the specific requirements vary from country to country. Here are some common reasons:

Businesses:

• Businesses with a certain annual turnover: Many countries have a turnover threshold. If a business exceeds this threshold, it's usually required to register for VAT and collect it on its sales.
• Businesses that supply goods or services: Any business that sells goods or provides services that are subject to VAT is typically responsible for collecting and remitting the tax.
• Businesses that import goods: VAT may be payable on the import value of goods.
• Non-resident businesses: In some cases, non-resident businesses that supply services to customers in a country may be required to register for VAT and collect it on their sales.

Individuals:

• Individuals involved in business activities: If an individual is engaged in business activities that exceed the turnover threshold, they may need to register for VAT and pay the tax on their sales.

Exemptions:

While most businesses are subject to VAT, there are often exemptions for certain goods and services, such as:

• Exported goods: Goods exported to other countries are often exempt from VAT.
• Essential goods and services: Some countries exempt basic necessities like food, medicine, and education from VAT.

Important Considerations:

• VAT rates: VAT rates vary significantly from country to country. Some countries have a standard rate, while others have multiple rates for different types of goods and services.
• VAT registration: Businesses may need to register for VAT in each country where they have a physical presence or where they supply goods or services.
• VAT returns: Businesses are typically required to file periodic VAT returns, reporting their sales and the VAT collected.

As a Nigerian Business, when is the Right Time to Pay VAT?

There are two deadlines for filing VAT in Nigeria depending on the type of return.

1. For withholding VAT returns, the due date is the 14th day of the month following the month of the transaction.
2. For other returns, the deadline is the 21st day of the month following the month of the transaction.

How To Register for Value Added Tax in Nigeria?

In Nigeria, you register VAT with the Federal Inland Revenue Service (FIRS) by completing Form 001 at their office.

The applicant must provide an application letter, incorporation documents of his/her business, and utility bill. Upon being granted a VAT registration, a unique 10-digit VAT identification number will be provided to the taxpayer to use on invoices or when submitting VAT returns.

Registering for VAT is free.

Input VAT and Output VAT: The Difference

Input VAT is paid by a business on its purchases, while output VAT is charged by a business on the sale of goods and services.

Output VAT is called "output tax" because it is the VAT the business generates or its outputs from sales.

When a business sells goods or services to a customer, it adds VAT to the price of the goods or services (or includes VAT in the price), which becomes the output VAT.

You'd notice a VAT charge when you pay for shopping goods, eat at a restaurant, or pay for courier services, for example. These businesses charge you VAT.

The business must then account for this output VAT to the government by submitting a VAT return and paying the VAT due to the tax authority.

Hence, while the business collects and reports output VAT, it is the customer that bears the financial burden.

How Do I Calculate VAT Liability Based on Input and Output Value Added Tax?

Here is an illustration to learn how to calculate VAT.

Say, you own a small business that sells electronics and is registered for VAT.

• You purchase goods (e.g., phones) from a supplier for your store for a total cost of $10,000, and your supplier charges VAT at a rate of 10%.
• You then sell these phones to customers for a total of $15,000, also charging VAT at the rate of 10%.

Step 1: Calculate Input VAT

Input VAT is the VAT you paid on your purchases.

• Purchase cost: $10,000

• VAT rate: 10%

• Input VAT = $10,000 × 10% = $1,000

Step 2: Calculate Output VAT

Output VAT is the VAT you collected from customers on your sales.

• Sales revenue: $15,000

• VAT rate: 10%

• Output VAT = $15,000 × 10% = $1,500

Step 3: Calculate VAT Liability

Your VAT liability to the tax authority is the difference between the output VAT collected and the input VAT paid.

• Output VAT: $1,500

• Input VAT: $1,000

• VAT Liability = Output VAT - Input VAT = $1,500 - $1,000 = $500

You owe $500 in VAT to the tax authority.

This amount is the net VAT collected from customers after deducting the VAT paid to your supplier.

Record-Keeping and Value Added Tax Compliance

When it comes to VAT, meticulous record-keeping is non-negotiable. Record-keeping is a critical part of tax compliance. It ensures that taxpayers report accurate income and deductions, meet tax deadlines, plan for the future, and facilitate audits.

Moreover, it is mandatory for legal compliance, and failure to comply with record-keeping requirements can result in penalties and fines. Your business records encompass a wide range of documents, including:

• Annual accounts, featuring profit and loss statements.
• Bank statements and paying-in slips.
• Cash books and other account books.
• Purchase and sales invoices.
• Credit or debit notes issued or received.
• Orders, delivery notes, and records of daily takings.
• Import and export documents.
• Relevant business correspondence.
• Documents supporting special VAT treatment.

The specific records required will vary based on your business type, but all VAT-registered businesses must maintain a VAT account and retain copies of invoices.

E-commerce businesses often fail to register for VAT in countries where they have a tax obligation, which can result in penalties and fines.

They also use incorrect VAT rates, which can lead to underpayment or overpayment of VAT that may trigger VAT audits or fines.

Misclassifying products or services as exempt or subject to a zero rate can also lead to incorrect VAT calculations, impacting profit margins.

Insufficient record-keeping is crucial for compliance and VAT audit purposes. Cross-border sales, such as selling from the U.S. to the EU, can be particularly challenging for VAT compliance.

Value-added tax is a common form of consumption tax due at every stage of a product's production, and it is important to pay as a tax.

In the end, VAT and tax laws are unique to your country of business and operations. The same is also said of individuals.

If you find your tax position too complex to handle, we suggest hiring a tax compliance officer on your team or getting a legal counsel to advise you on VAT and business-tax related matters, so you don't get into a sticky situation with the government. Non-tax-compliant businesses—and even individuals—are no friends of any government. Why? It's simple: you don't make them money.