Value Added Tax (VAT) is tax on goods and supply which is eventually borne by the final consumer but collected at each stage of the production and distribution chain.
In the 2019 Financial Act signed into law by President Muhammadu Buhari, the Finance Act amends the major tax statutes in Nigeria to align with the Federal Government of Nigeria’s monetary and fiscal reform policies.
The introduction of a new Value Added Tax (VAT) system is of great concerns to the Taxpayer considering the increase in the VAT rate from 5% to 7.5% which did not come as a surprise as there have been several attempts by past and recent administrations to increase the VAT rate. The increase in the VAT rate will be more accepted if other factors are put in place that would cushion the effect of the increase on businesses and taxpayers. There are other changes/amendments that Taxpayers need to recognize in their day-to-day transactions to avoid falling at the wrong side of the law.
Here are some of the challenges associated with VAT amendments and how to avoid them.
Filing of Returns/Remittance:
Taxpayers who have achieved the threshold for VAT filing has an obligation to file VAT returns on or before the 21st day of the month in which the threshold was met and subsequently file its VAT returns for every month going forward.
Failure to file VAT returns on or before the 21st day of every month now attract initial penalty of N50,000 and N25,000 subsequently. To avoid this, company should ensure they file their VAT returns whether payment has been received for goods and/or services rendered or not on or before deadline.
Change of Address/Cessation of Business:
A Taxpayer who fails to notify the FIRS of a change of address or permanent cessation of trade or business within 30 days now attracts a fine of N50,000 for the first month of default and N25,000 for each subsequent month of default. Taxpayers in this category should endeavor to officially communicate with the FIRS of such changes to avoid the associated penalty.
N25million Revenue Threshold for VAT Returns:
Company with an annual turnover of N25million or less are classified as small companies according to Finance Act and are exempted from including VAT in their invoices, collecting and remitting VAT and filling monthly VAT returns to FIRS. Though, this is good for the small companies but the challenge lies with how they will recover the input VAT that may occur in carrying out their operation. The input VAT can be expensed; in other words, it can be recognized as part of cost of operation.
VAT Reversed Charge:
The finance act introduces the “reverse charge” method of collection in respect of goods and/or services provided by a non-resident company to a Nigeria based customer. Here a reverse charge method requires the recipient of taxable goods and/or services to withhold and remit the applicable VAT on the transaction instead of the supplier. The Finance Act imposes an obligation on a non-resident company to include VAT on its invoices for the supply of goods and/or services to a Nigeria resident entity.
The Nigeria resident Taxpayer to whom such goods and/or services are supplied in Nigeria should withhold the applicable VAT and remit same directly to the FIRS in the currency of payment.
Transfer of Assets used for Trade or Business between ‘Related Parties’:
To minimize the cost of business restructuring between related parties, the Finance Act exempts asset in respect of trade or business transferred among related parties from VAT if the prescribed conditions are met. The acquiring company should not dispose of such assets within 365 days after the date of transaction or else the VAT exemption shall be rescinded, and the companies shall be treated as if they did not qualify for exemption as at the date of the initial transaction.
It is imperative that Nigeria Taxpayers take note of this challenges and associated pitfalls to avoid unnecessary exposures and incurring additional Tax liabilities.
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