Overview of the Nigeria Value Added Tax
1. Introduction
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is ultimately borne by the final consumer, while businesses collect and remit it to the government. In Nigeria, VAT is a major source of non-oil revenue, helping to fund infrastructure, public services, and social development.
VAT was introduced in Nigeria in 1993 to replace the Sales Tax regime. Since then, it has undergone various reforms to improve efficiency, widen its base, and increase government revenue. Today, the VAT system is administered and enforced by the Federal Inland Revenue Service (FIRS).
2. Legal Framework of VAT in Nigeria
The principal legislation governing VAT in Nigeria is the Value Added Tax Act, Cap V1, LFN 2004, as amended by the Finance Acts of 2019, 2020, 2021, and 2023. These reforms modernized the VAT regime by redefining taxable persons, expanding the scope of VATable goods and services, and improving compliance mechanisms.
The Federal Inland Revenue Service (FIRS) is the statutory body responsible for VAT collection and enforcement. The agency issues guidelines, registers VATable persons, audits compliance, and imposes penalties for default.
3. Scope of VAT in Nigeria
VAT in Nigeria applies to the supply of most goods and services, whether locally produced or imported. The law categorizes goods and services as:
a. VATable
These include electronics, furniture, clothing, professional services, telecommunications, hotel accommodation, and more.
b. Exempted
The following items are exempt from VAT:
Basic food items (e.g., rice, beans, bread)
Educational materials
Medical services and products
Rent on residential buildings
Exported goods
c. Zero-Rated
These items are taxed at 0%, allowing businesses to reclaim input VAT. Examples include exported goods and certain agricultural products.
4. VAT Registration Requirements
All businesses with an annual turnover of ₦25 million and above are mandated to register for VAT with the FIRS.
a. Who Must Register
Individuals, partnerships, and companies supplying taxable goods/services
Foreign companies offering digital services to Nigerian customers
b. Registration Process
Obtain a Tax Identification Number (TIN)
Register with FIRS via the TaxPro Max portal
Submit corporate documents (e.g., CAC certificate, memo & articles)
c. Penalties for Non-Registration
Failure to register within six months of commencing business attracts a fine of ₦50,000 for the first month and ₦25,000 for each subsequent month of default.
5. VAT Rate in Nigeria
The standard VAT rate in Nigeria is currently 7.5%, increased from 5% in 2020 under the Finance Act 2019. This rate is applied on the value of goods and services supplied within the country.
Why the Increase?
To boost revenue generation
To reduce reliance on oil income
To meet budgetary and developmental needs
6. Mechanism of VAT Operation
VAT operates on the input-output system:
Output VAT: VAT collected by a business when it sells goods or services.
Input VAT: VAT paid on purchases or expenses incurred during business operations.
Net VAT Payable = Output VAT – Input VAT
Businesses are allowed to offset their input VAT against their output VAT and remit the difference to the FIRS.
7. Filing and Remittance of VAT
VAT returns must be filed monthly, not later than the 21st day of the following month.
Filing Steps:
Log into the TaxPro Max portal
Declare output and input VAT for the month
Pay the balance due via online banking or approved FIRS payment agents
Penalties for Late Filing or Payment:
Interest at the commercial rate
Fine of ₦50,000 for the first month and ₦25,000 for subsequent months
Additional enforcement actions by FIRS
8. VAT in E-Commerce and Digital Services
The Finance Act 2020 expanded VAT coverage to digital services provided by non-resident companies to Nigerian consumers. This includes:
Streaming platforms (e.g., Netflix)
Online advertising (e.g., Google Ads)
Cloud computing and software services
Such foreign entities are required to register for VAT, charge Nigerian users 7.5%, and remit to the FIRS.
9. VAT Withholding Mechanism
Designated agents such as government ministries, banks, and large corporations are required to withhold 50% of VAT charged by their vendors and remit directly to FIRS.
Process:
Deduct 50% of the VAT invoice
Remit to FIRS
Issue a VAT credit note to the supplier
This helps ensure compliance among vendors and provides a mechanism for VAT remittance where collection is challenging.
10. VAT Refunds and Credits
VAT refunds arise when input VAT exceeds output VAT, particularly for exporters and zero-rated transactions.
How to Claim Refund:
Submit written application to FIRS
Provide documentation (invoices, returns, evidence of overpayment)
FIRS verification and approval
Refunds are typically processed within 90 days, though delays are common.
11. VAT and Federal-State Revenue Sharing
VAT is collected centrally by FIRS and shared among the three tiers of government:
Federal Government: 15%
State Governments: 50%
Local Governments: 35%
Notable Legal Disputes:
Rivers and Lagos State vs FIRS: Dispute over the right to collect VAT at the state level
The matter is under judicial review and has implications for Nigeria’s fiscal federalism
12. Challenges in VAT Administration
Widespread Evasion: Many businesses operate informally and fail to remit VAT
Multiple Taxation: Businesses face local levies in addition to federal VAT
Low Tax Morale: Skepticism about government utilization of revenue
Poor Record-Keeping: Affects input VAT claims and accurate reporting
13. Impact of VAT on Businesses and Consumers
a. For Businesses
Need for proper accounting systems
Increased compliance costs
Risk of penalties for errors or delay
b. For Consumers
Higher cost of goods and services
Price sensitivity in low-income households
However, VAT is considered more efficient than income tax and easier to collect across multiple sectors.
14. International Comparison
Nigeria vs UK:
Nigeria: 7.5% VAT, collected centrally
UK: 20% VAT, administered by HMRC, with extensive digital tracking
Nigeria vs South Africa:
South Africa: 15% VAT, with exemptions on necessities
Similar to Nigeria in structure but more advanced in enforcement
Nigeria vs Ghana:
Ghana: 12.5% VAT, plus National Health Insurance Levy
Better integration with social services funding
15. Conclusion
Value Added Tax plays a crucial role in Nigeria’s fiscal policy and economic sustainability. As a broad-based consumption tax, it ensures that revenue is raised from both individuals and businesses based on usage rather than income.
With proper administration, technological integration, and wider public education, VAT can serve as a reliable and equitable source of funding for Nigeria’s development needs.
Contact Us
Whether you’re a startup, established business, or offering digital services, understanding Nigeria’s VAT system is crucial for avoiding penalties, building credibility, and scaling successfully.
At Chaman Integrated Ltd, we offer expert VAT consulting services — from registration to monthly filing, audit support, VAT credit processing, and compliance with the latest Finance Acts.
📞Phone: 08065553671, 08096888818
✉ Email: chamanlawfirm@gmail.com
📍 Address: 115, Obafemi Awolowo Way, Allen Junction, Ikeja, Lagos, Nigeria
🌍Click here to learn more about Chaman Law Firm
Let us help your business stay compliant, save costs, and grow with confidence.
Contact us today and simplify your VAT journey.