7 Shocking Truths About VAT and Other Indirect Taxes in Nigeria You Need to Know
Introduction
Nigeria, Africa’s most populous nation, boasts a diverse and complex tax system—one that has evolved significantly in the past few decades. While direct taxes like Personal Income Tax (PIT) and Companies Income Tax (CIT) are familiar to most, it is the VAT and other indirect taxes in Nigeria that have emerged as the silent but significant revenue lifelines for the government.
Indirect taxes are often hidden in the cost of goods and services, making them less obvious but equally impactful. The average Nigerian might be unaware that each time they buy a sachet of water, recharge airtime, or enjoy entertainment services, they’re paying a portion in taxes.
This article dives deep into the shocking reality behind VAT and other indirect taxes in Nigeria—how they operate, who pays them, how they are collected, and most importantly, how they shape the economic landscape of the country.
What Are Indirect Taxes?
Indirect taxes are taxes imposed on goods and services rather than on income or profits. Unlike direct taxes, which are paid directly to the government by the individual or organization, indirect taxes are collected by intermediaries (e.g., businesses) and then forwarded to the government.
Examples of Indirect Taxes in Nigeria:
Value Added Tax (VAT)
Customs Duties
Excise Duties
Stamp Duties
Telecommunication Taxes
Tertiary Education Tax (though often contested as semi-direct)
VAT and Other Indirect Taxes in Nigeria: The Backbone of National Revenue
1. Value Added Tax (VAT)
Legal Basis and Administration
VAT is governed by the Value Added Tax Act Cap V1, LFN 2004 (as amended). The Federal Inland Revenue Service (FIRS) is responsible for its collection and enforcement.
Current VAT Rate
As of 2020, the Nigerian government increased VAT from 5% to 7.5%, citing the need to expand government revenue in the face of falling oil prices.
Mechanism of VAT
VAT is a consumption tax charged at each stage of the production and distribution chain, but ultimately borne by the final consumer. Businesses collect VAT on behalf of the government and remit it monthly.
Illustration:
A retailer sells a television set for ₦100,000.
7.5% VAT = ₦7,500.
Total = ₦107,500.
The ₦7,500 is remitted to FIRS.
Goods and Services Subject to VAT
Virtually all goods and services in Nigeria are vatable, except those explicitly exempted by the law.
VAT-Exempt Items Include:
Basic food items (e.g., yam, beans, rice)
Baby products
Medical services and pharmaceuticals
Educational materials
2. Customs Duties
These are taxes on goods imported into the country and are administered by the Nigeria Customs Service (NCS). It includes:
Import Duty
Export Duty
Excise Duty (on locally manufactured goods)
Customs duties serve as a form of protection for local industries and as a revenue source for the federal government.
3. Excise Duties
Excise duties are levied on locally produced goods, such as:
Alcoholic beverages
Tobacco
Carbonated drinks
Recently, the government expanded excise taxes to cover non-alcoholic sugary drinks, citing health concerns and the need for diversified revenue sources.
4. Stamp Duties
Stamp duties are levied on instruments and documents, such as legal agreements, loan documents, and even electronic transfers. It is governed by the Stamp Duties Act.
Recent Controversy
The FIRS and the Nigerian Postal Service (NIPOST) engaged in a jurisdictional battle over who has the authority to collect stamp duties—a dispute that underscores the fragmented nature of Nigeria’s tax administration.
5. Other Forms of Indirect Taxes
Telecommunication Taxes
Nigeria has introduced taxes on telecom services like SMS, data, and voice calls. Though technically charged to service providers, the cost is passed to consumers.
Tertiary Education Tax (TET)
Though sometimes categorized under direct taxes, it behaves like an indirect tax when companies pass the 2% of assessable profit surcharge down the supply chain.
The Legal Framework Governing VAT and Other Indirect Taxes in Nigeria
Value Added Tax Act
Customs and Excise Management Act
Stamp Duties Act
Companies Income Tax Act (as it affects TET and other levies)
Finance Acts (2019, 2020, 2021, 2022, 2023)
The Finance Acts have been pivotal in reforming Nigeria’s tax laws, introducing and amending provisions on indirect taxes.
Case Law Illustrations on VAT and Indirect Taxes
1. AG Lagos State v. Eko Hotels Ltd & Anor (2018) LPELR-43713(SC)
This case revolved around whether states have the right to collect VAT. The Supreme Court reaffirmed FIRS’s jurisdiction as the appropriate authority under federal law.
2. AG Rivers State v. FIRS (2021)
This case, which reached national attention, challenged the exclusive rights of the FIRS to collect VAT. Rivers State argued it should collect VAT within its territory, leading to a temporary legal vacuum and multiple court orders.
The Federal High Court ruled in favor of Rivers State, but the matter remains under appeal, and the legal uncertainty persists.
Challenges in the Administration of VAT and Other Indirect Taxes in Nigeria
1. Multiplicity of Tax Authorities
FIRS
State Boards of Internal Revenue (SBIR)
Local Government Councils
This overlapping of responsibilities has led to confusion, duplication, and taxpayer harassment.
2. Low Tax Morale and Compliance
Many Nigerians view taxation as punitive due to lack of visible government services. Compliance is further reduced by:
Corruption
Poor record-keeping
Lack of digital tax literacy
3. Inefficient Tax Collection Systems
Though the FIRS has improved technology adoption, manual processes still dominate in many state tax agencies.
Impacts of VAT and Other Indirect Taxes in Nigeria
1. Revenue Generation
Indirect taxes form a significant chunk of the government’s non-oil revenue. In 2023 alone, VAT contributed over ₦3 trillion to federal coffers.
2. Burden on the Poor
Because they are regressive in nature, indirect taxes affect lower-income individuals disproportionately.
3. Influence on Consumer Behavior
Excise taxes on alcohol, tobacco, and sugary drinks have led to:
Reduced consumption
Rise in contraband goods
Public health advocacy
How Businesses Can Ensure Compliance with VAT and Other Indirect Taxes in Nigeria
1. Registration with FIRS
Any business with an annual turnover of ₦25 million or more must register for VAT.
2. Proper Record Keeping
This includes:
VAT invoices
Evidence of input VAT
Monthly remittances
3. File Monthly Returns
Returns are due by the 21st of every month.
4. Engage Qualified Tax Professionals
Having a licensed tax consultant ensures accuracy and timely compliance, minimizing the risk of penalties.
Reforms and Recommendations
1. Harmonization of Tax Authorities
Creating a Unified Tax Administration Platform will reduce the burden of multiple collections and improve data sharing.
2. Increasing the Threshold for VAT Exemption
Raising the turnover threshold will protect small businesses and encourage informal sector participation.
3. Digital Transformation
Adopting AI and blockchain technologies in tax enforcement could reduce fraud and boost efficiency.
Conclusion: The Real Cost of Indirect Taxes
The shocking reality is that every Nigerian, regardless of income level, is a taxpayer—often unknowingly. While VAT and other indirect taxes in Nigeria are vital to economic stability and growth, they must be managed transparently and equitably.
Policymakers must strike a balance between revenue generation and social welfare. Businesses must strive for full compliance, and citizens must demand accountability for how tax revenues are spent.
If Nigeria hopes to transition from a mono-economy to a sustainable tax-driven economy, tax justice, clarity, and efficiency in the collection of indirect taxes will be non-negotiable.
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At CHAMAN Law Firm, we specialize in tax advisory, VAT compliance, and regulatory support for businesses across Nigeria. Get in touch with our expert team today for personalized assistance.
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