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VAT is acronym for Value Added Tax, which is a kind of tax imposed on goods and services paid for by a consumer. It is also referred to as Goods and Services Tax (GST) in some countries and is usually charged on goods and services that are bought and sold for local consumption. That is, goods produced for export are not usually subject to VAT for example, as they are often exempted.

The first ever VAT was introduced as a general consumption tax by Germany and France during the First World War and remained in use until 1954 when France experimented the current VAT regime in Ivory Coast, which it subsequently adopted four years after. Currently, about 170 UN member countries are using VAT, including Nigeria.

To have a better grasp of the scheme, you may go through the following information provided about VAT by the European Union Taxation and Customs Union:

1) It is a general tax that is applicable to all commercial activities that involve the production, distribution, and sale of goods as well as provision of services to final consumers.

2) It is a consumption tax because in the long run, the final consumer bears the tax amount. In other words, it is not a charge on businesses.

3) It is charged as a percentage of the selling price. That is, the actual tax burden manifests at each production and distribution process.

4) It is collected fractionally through a system of partial payments, by which taxable persons (VAT-registered businesses) deduct from the VAT they have collected from their customers on behalf of the government, the amount of tax they have paid to other taxable persons on purchases for their business activities.

5) It is paid to the revenue authorities by the seller of the goods who is the taxable person, but it is actually paid by the buyer to the seller as part of the price. It is therefore an indirect tax

Based on the foregoing, it is the final consumers that pay all the VAT on the products and services they consume, not the producer. Therefore, a state that pays to consume most of the VATable goods and services is more entitled to the VAT than the state that produced same, because the producers have been refunded all the VAT they have paid along with the profits for their goods and services. I will give a detailed example. Meanwhile, let us briefly examine how the VAT is administered in Nigeria.


The Value Added Tax Act is one of the existing tax legislations in Nigeria and was last amended by the National Assembly in April of 2007. It is a statutory duty of the Federal Inland Revenue Service (FIRS) to control and administer the VAT in Nigeria. Part I, paragraph (2) of the Federal Inland Revenue Service (Establishment) Act, 2007 states that:

“The object of the Service shall be to control and administer the different taxes and laws specified in the First Schedule or other laws made or to be made from time to time by the National Assembly or other regulations made there under by the Government of the Federation and to account for all taxes collected.”

The First Schedule referred to in the above paragraph enumerates about 11 legislations the FIRS is empowered to administer, some of which are:

1) Companies Income Tax Act
2) Petroleum Profits Tax Act
3) Personal Income Tax
4) Capital Gains Tax Act
5) Value Added Tax Act

The most relevant section of the VAT Act for this writeup is Part III (Returns, Remittances, Recovery and Refund of Tax) from which the following noteworthy points are extracted:

1. A taxable person shall pay to the supplier the tax on taxable goods and services purchased by or supplied to him

2. The tax paid by the taxable person shall be known as input tax

3. A taxable person shall on supplying taxable goods and services to his accredited distributor, agent, client, or consumer, as the case may be, collect the tax on those goods or services at the rate specified in the act (5% previously, 7.5% recently)

4. The tax collected by the taxable person shall be known as output tax

5. A taxable person shall render to the FIRS, on or before 30th day of the month following that in which the purchase or supply was made, a return of all taxable goods and services purchased or supplied by him during the preceding month in such manner as the FIRS may, from time to time, determine

6. A taxable person shall, on rendering a return:
a. If the output tax exceeds the input tax (tax profit made), remit the excess to the FIRS
b. If the input tax exceeds the output tax (tax loss made), be entitled to a refund of the excess tax from FIRS on production of such documents as the FIRS may, from time to time, require

By the provisions of the above Act and the previous explanations therefore, the consumer pays the VAT and is hence more entitled to it than the producer. He pays for the goods and services and even refunds the VAT of the producer. That means the consumer’s local city deserves the VAT paid by him.

Please read the following examples carefully to understand how the VAT is charged. We will assume a VAT rate of 10% ease of calculations only.


Part 1:
Let us assume that Barrister Wike has a manufacturing company in Rivers and he bought raw materials worth N5,000 from an extractor. If the VAT is 10%, Wike was charged N5,500. The extractor should then pay FIRS the N500. But assuming the extractor has bought N1,100 worth of tools for his work in the same accounting period, including N100 VAT, the extractor is only required to remit N400 to FIRS (that is, he should subtract his N100 from N500 and pay only the balance). Because FIRS has already received N100 from the tools’ supplier, the extra N400 makes it N500 – the correct VAT due on the supply of raw materials. So far:

• Supply: N5,500
• VAT on Supply: N500
• VAT on purchases: N100
• Net VAT to pay FIRS: N400

Which means Wike bears the entire tax burden

Part 2:
Wike has paid N500 to the extractor and, maybe, another N300 as VAT on purchases of other items he needed to process the raw materials. So, if Dr Ganduje from Kano went to buy Wike’s finished products worth N12,000, he is charged N13,200 including N1,200 VAT. Wike will then deduct the N800 already spent on his inputs and remit the balance of N400 to FIRS. The FIRS has now received this N400 from Wike plus N400 from the extractor plus N100 paid by the tools’ supplier to the extractor plus N300 paid by the supplier of processing tools to Wike. That is:

• Supply: N13,200
• VAT on Supply: N1,200
• VAT on purchases: N800
• Net VAT to pay FIRS: N400

Which means Ganduje from Kano bears the entire tax burden after paying Wike back his taxes.

In the case where Wike recorded loss, instead of profit, he will claim a refund of his VAT paid to FIRS.

With the above example, it should be easy to understand that the VAT is contributed by Ganduje, the consumer from Kano and not by Wike, the producer in Rivers. Wike was only enabled by the Act to add the VAT amount to his selling price and collect same on behalf of FIRS. That does not in anyway make Wike the contributor, because Ganduje has refunded him what he had contributed. Therefore, that VAT amount should be the entitlement of Kano and not Rivers.


Assume that Mr Sanwo-Olu owns a commercial bank with headquarters in Lagos and other branches nationwide. Assume also that Professor Zulum in Borno, subscribes to the banking services rendered by Sanwo-Olu’s bank branch in Borno. For all the banking services used by Zulum on which VAT is applied, the amount should be the contribution of Borno, where the services are rendered, not Lagos where the headquarters is situated. So, the commercial bank should not collect VAT from all branches and claim that it is the contribution of the headquarters’ location.

Therefore, this VAT issue is an excellent opportunity for shortchanged states to aggressively push for reforms in the VAT Act especially as it relates to collection by taxable persons. They should fight for a better, fairer, and more transparent collection method that will give them the value for their contributions. Even if it means embracing the upcoming eNaira, let there be a mechanism for direct payment by the consumers rather than through the taxable persons who, more or less, serve as mere intermediaries.

This should be a wakeup call.

Yusuf Muhammad-Tukur Illo is currently a PhD student in the United Kingdom

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