Ever visited a wholesale shop to buy something as mundane as a bathing sponge and the price got you wondering if it will actually wash your sins away? Or followed your friend to a thrift store at Ojuelegba where he purchased sturdy brogues for 3,000 naira and wondered if those who buy for five to ten times that price are marching with it to Jerusalem?
Or passed by an FIRS office thinking you have no business with it without realizing that you are an indirect tax payer and the sponge, brogues and almost everything you buy regardless of how expensive or cheap, has a 5% tax rate added to the original price?

A hearty congratulations, dear reader, you not only steadily pay a Federal tax called Value Added Tax (VAT), as the final consumer/buyer, you bear the burden of the tax to a large extent.

VAT was introduced by the Value Added Tax Decree in 1993 by the Federal Military Government as a solution to different problems of the Sales Tax which had a limited scope among other things.

VAT is simply an indirect tax levied on the value added on a good or service at each stage of production – from raw materials to finished product. It is thus a tax imposed on the supply/consumption of goods and services in Nigeria from the manufacturer to the final consumer except those exempted. These are:

1. Goods and services relating to medicine and pharmacy;

2. Basic food items (uncooked and unprocessed);

3. Books and educational materials;

4. Baby products;

5. Agricultural and medical machinery;

6. All exported goods and service

7. Downstream gas utilization s. machinery;

8. Services rendered by Community Banks and Mortgage Institutions.

Lawyers can thus and must definitely charge VAT for supply of their services to Clients.
As the final consumer, when a good or service is supplied to you, you pay a flat rate of 5% VAT. No shaking. It is worthy of note that our 5% VAT rate is one of the lowest in the world. VAT is governed by the Value Added (Amendments) Act of 2007 and administered by the Federal Inland Revenue Service (FIRS) as it is a federal tax – although it is shared amongst all three tiers of Government.



Those authorized to collect VAT are called Taxable Persons. A Taxable Person is simply anyone who manufactures or supplies goods and services either as a wholesaler or retailer. They must be registered as such with FIRS within six months of the commencement of business.

They include:

1. Government Agencies at all levels;

2. Statutory Bodies; and

3. Non-resident Companies (To register using the address of a person who it transacts with in Nigeria).

Failure to register attracts a fine of 10,000 naira for the first month of default and 5,000 naira for each subsequent month.

Upon Registration, the Taxable Person must keep records sufficient to determine the correct amount due. Returns must be made on or before the 21st day of the following month.

Failure attracts penalty of 5% of the sum due plus interest at the prevailing commercial rate in addition to the Tax.

Failure to render returns or rendering false returns makes FIRS assess based on its Best of Judgement. Before assessment, reasonable notice must be given to the tax payer or the assessment can be voided.



VAT is a multi-stage Tax with a single effect. This means that every person in each stage of the chain of distribution of goods is a VAT Taxable person who can get a refund on the VAT they paid but the final burden of paying VAT without a refund is borne by the final consumer.

This is because the FIRS put in place a system to protect VAT Taxable persons so that when they collect VAT on the goods they manufacture or resupply (Output VAT), they can get a refund of the difference from FIRS on the amount they paid in the first place as VAT in manufacturing or resupplying these goods (input VAT) if the VAT they paid is more than VAT they collected.

So, Sisi Nene, an Ankara bag manufacturer pays input VAT of ₦2,000 for supply to her of raw materials (Ankara fabrics, leather, glue, etc) and collects output VAT of ₦1,000 on the value of supply of her finished product (Hand-made Ankara bags) to the Wholesaler.
If the money she paid as input VAT for the raw materials to make the product – ₦2,000, is more than the money she collected as output VAT from the Wholesaler – ₦1,000 to sell the product, FIRS gives her a refund of that difference, so she doesn’t lose anything. She gets ₦1,000 back.

But if the amount paid as input VAT, say 1,000 is less than the amount she collected as output VAT say 2,000, she doesn’t suffer any loss already, so Sisi Nene remits the excess to the FIRS.

This is how the VAT is collected and refunded/remitted from the manufacturer all the way down to the retailer. The aim of the multiple stages is to reduce the burden of tax on the final consumer. So by the time it gets to him, it remains at 5% flat rate but he gets no refund.

Very importantly, Input VAT allowed to be deducted from Output Vat is limited to Vat on “goods purchased or imported directly for resale and raw materials used for manufacturing a new product.”

This makes sense because if everything a Sisi Nene paid VAT for from the bottled water she bought on the way to supply her Ankara bags to the Yoyo bitters she used to invigorate her body after supplies were delivered was taxed, there would perpetually be a floodgate of applications to FIRS for refund and never any excess to remit to FIRS.

This also means that the Taxable persons are not totally protected from bearing the burden of VAT. Since they don’t get refunds on all their input VAT relating to the supply of their goods or service, they are not totally indemnified and so bear some hidden burden. They are in a somewhat similar position as the final consumer who bears most but not all the burden of paying VAT without refund.

Non-Oil exports are Zero-rated. This means that their output VAT is Zero.

So they can perpetually claim a refund of input VAT from the FIRS as the input VAT is continually more than the output VAT which is Zero. This is done to encourage Non-oil exports and to boost the economy.

Refunds can be claimed by:

1. Credit Method: Here the refund is credited directly to Taxable Person’s subsequent Tax liability.

2. Direct Cash Method

3. Combination of Both



As stated earlier, VAT is shared among the Federal, State and Local Governments at 15, 50 and 35% respectively. Minister of Finance, Kemi Adeosun said Lagos alone generates 55% of Nigeria’s VAT returns, Federal Government generates 20% while the remaining 35 States generate just 25%.

Thus said, it becomes unfortunate when Lagos State gets almost the same VAT allocation as States with about 1% total VAT contribution. This happens because of the relatively large number of local governments in these other States but it doesn’t seem like the way forward in getting those not so productive states to sit up as regards VAT.

To make the sharing formula more equitable, the Value Added Tax (Amendment) Act No 12 of 2007 was amended so that not less than 20% of the revenue distribution among the States and Local Government would reflect the principle of derivation. The amendment has made an impact but not one so significant as to reduce the inequity.

Grievances of any Taxable Person or Taxpayer with an assessment may file an objection with the FIRS to be determined within 30 days. Appeals go from the FIRS decisions to the Tax Appeal Tribunal (TAT) established by the FIRS (Establishment) Act. Appeals lie from the TAT to the Federal High Court.



VAT is definitely here to stay. When it was introduced, its success surpassed all expectations including that of the International Monetary Fund (IMF) and it is still a significant income source in Nigeria today. It is definitely a principal consideration in Government’s efforts to diversify the Economy and as long as the market forces of Demand and Supply subsist, VAT will too.

In light of this, TSE had a recent discourse on Voluntary Assets and Income Declaration Scheme (VAIDS). VAIDS applies to VAT and as such any Taxable Person not yet registered for VAT or who registered and collects VAT but has not regularly been remitting to the FIRS should seize the opportunity of the VAIDS amnesty period to regularize their tax defaults before June 30.