TAX WATCH: DEDUCTION OF VAT AT SOURCE AND ITS IMPLICATION

TAX WATCH: DEDUCTION OF VAT AT SOURCE AND ITS IMPLICATION

Value Added Tax (VAT) is a type of tax imposed on consumption of goods and services in Nigeria. Therefore, it can also be referred to as consumption tax. It is administered in accordance with the Value Added Tax Act, 2007 (see S 1 of Value Added Tax Act, 2007). It is chargeable at the rate of 5% on the sales value of all goods and services except those listed in the first schedule of the Act.

VAT is normally to be charged by the supplier of goods/services on the invoice raised, and be remitted to the Federal Inland Revenue Service (FIRS) within the first 21 days of the subsequent month of deduction.

However, there are some entities allowed to withhold the VAT upon making payment to the supplier and pay same directly to the FIRS instead of having to first pay it to the contractor or supplier that raised the invoice. These entities are:

  • Government’s Ministries, Departments and Agencies [section 13(1) and (2) of the VAT Act]
  • Oil and Gas companies operating in the upstream petroleum sector including oil service companies (FIRS Circulars)
  • Resident entities in respect of transactions with non-residents [Section 10 (1) and (2) of the Act]

The implication is that the contractor/supplier only get the value for its good/services and not for the VAT included on it. The customer will then be responsible to making the payment to the FIRS and making available to the contractor/supplier, copies of payment evidence and schedule submitted to the FIRS upon payment.

Apart from these entities, no other entity is expected to withhold VAT on its contractor’s/supplier’s invoice.

If a company allows its contractee or customer (not in the list above) to withhold VAT charged on its invoice, it creates serious issues for such company when the FIRS start pushing it for compliance. Interest of 19% and penalty of 10% of whatever amount the company failed to have remitted at the appropriate time in line with the law are also applicable.

We therefore advise that taxpayers consult their tax consultants each time they are at a loss of clear position of the law on any area of tax

For more information on this publication and any other thing in the areas of taxation, audit, economy, business, finance, company registration, secretarial services etc., kindly relate it with us at Habile Consulting and OFC Professional Practice on 0818 564 1411 or email: partners@habileconsulting.com or visit our website