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REGULATORY UPDATE: GOODS AND SERVICES EXEMPT FROM VAT IN NIGERIA

November 5, 2021/in Pavestones Newsletters /by pavestones

By Aderonke Alex-Adedipe and Eustace Aroh

Introduction

The current regulatory regime for Value Added Tax (VAT) in Nigeria is made up of a number of laws and regulations including the VAT Act of 1993 (as amended in 1996, 1999 and 2007); the Finance Act, 2019 and 2020; and the VAT Modification Order of 2020 (“MO 20”). The Minister of Finance, Budget and National Planning, on September 21, 2021, issued the VAT Modification Order of 2021 (“MO 21”) which amends the list of goods and services exempted from VAT and eligible as zero-rated goods and services.

In this article, we evaluate the key provisions of the MO 21 and highlight the updated list of exempted goods and services.

Notable Amendment by MO 21

Microfinance Banks. Previously, all services rendered by Microfinance Banks (MFB) were exempt from VAT. The MO 21, however, narrows the exemption to Unit MFBs. Consequently, only the services of MFBs with tier 1 unit or tier 2 unit licenses qualify for VAT exemption.
Books and educational materials. Under the MO 20, books and educational materials were listed as exempt. This reference has, however, been restricted to educational books and materials in MO 21. In essence, books which are not meant for educational purposes shall no longer be exempt from VAT.
Raw materials for production. Under the MO 21, raw materials for the production of baby diapers, sanitary towels and pharmaceutical products are specifically exempt from VAT.
Agricultural Products. The MO 21 makes adequate efforts to include products and services to support the agricultural sector of Nigeria. Products such as agricultural seedlings and locally produced animal feeds have been included under the exemption list.
Electricity. To reduce the overall cost of electricity, the following products are exempt from VAT: (i) gas supplied to electricity generating companies by gas producers; (ii) electricity supplied by generating companies to the national grid or the Bulk Electricity Company; (iii) electricity supplied by transmission companies to distribution companies; and (iv) renewable energy equipment.
Petroleum products. Petroleum products such as aviation turbine kerosene, premium motor spirit, household kerosene, locally produced liquefied petroleum gas and crude petroleum oils have been included under the VAT exemption list.
Residential Leases. In a 1995 circular issued by the Federal Inland Revenue Service titled “Detailed List of Items Exempt from Value Added Tax (VAT)”, lease on residential property was listed as exempt from VAT. This has been subject to two conflicting decisions of the Tax Appeal Tribunal, on whether the FIRS possesses the power to include a service under the VAT exemption list.[i]
In MO 20, lease on residential property was also exempt from VAT. However, this has now been omitted under the MO 21.

Goods and Services Exempt from VAT

The table below identifies all Goods and Services now exempt from VAT under the MO 2021.

Goods	Services
All medical and pharmaceutical products Basic food items. Educational books and materials Baby products Fertilizers and locally produced agricultural chemicals and veterinary medicine All exports Machinery and goods imported for use in the export processing zone or free trade zone provided that 100 per cent of the production are for export. Machinery and equipment purchased for utilisation of gas in downstream petroleum operations. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes. Locally manufactured sanitary towels, pads or tampons Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts Petroleum products Renewable energy equipment Raw materials for producing baby diapers and sanitary towels Raw materials for manufacturing pharmaceutical products Locally produced animal feeds. Military hardware, arms and ammunition and locally manufactured uniforms used by the armed forces, paramilitary and other security agencies. Gas supplied by gas producing companies to Electricity Generating Companies (GENCOs). Electricity generated by GENCOs and supplied to National Grid or Nigeria Bulk Electricity Company and Electricity transmitted by Transmission Company of Nigeria to Electricity Distribution Companies. Agricultural seeds and seedlings	Medical services. Services rendered by unit microfinance banks and mortgage institutions. Plays and performances conducted by educational institutions as part of learning. All exported services. Tuition relating to nursery, primary, secondary and tertiary education Airline transportation tickets issued and sold by commercial airlines registered in Nigeria Rental or lease of tractors and other agricultural equipment for agricultural purposes. Shared passenger road-transport service
	Zero-rated Goods
	Goods and services purchased by diplomats. Goods purchased for use in humanitarian donor funded projects.

Conclusion

The issuance of the MO 21 is a step to encourage specifically those in the manufacturing and agricultural sector and generally reduce the cost of some consumables in Nigeria. Nevertheless, taxpayers are advised to consult professionals on their obligations under the new VAT regime.

[i] Chief J.W. Ellah, Sons & Company Ltd v. Federal Inland Revenue Service (Unreported Judgment) in Appeal No: TAT/SSZ/001/2019; and Ess-ay Holdings Limited v. Federal Inland Revenue Service (Unreported judgment) in Appeal No: TAT/LZ/VAT/029/2019

NIGERIA’S VALUE ADDED TAX (“VAT”) REGIME; REGULATORY UPDATE

September 10, 2021/in Pavestones Newsletters /by pavestones

By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

The Federal Inland Revenue Service (FIRS) as an agency of the Federal Government, has been solely responsible for the administration and management of VAT assessment and collection in Nigeria. The judgment delivered by the Federal High Court, Port- Harcourt Division on 9th August, 2021, in AG Rivers State v. FIRS & AG Federation[1] has effectively barred the FIRS from administering, Nigeria’s VAT regime.

This newsletter discusses the implications of the decision of the Federal High Court as well as subsequent events which have occurred after the court’s decision.

What is VAT?
VAT is a consumption tax paid on all goods and services provided in or imported into Nigeria. VAT, which is currently charged at the rate of 7.5% is payable by individuals, companies, and government agencies. Certain goods and services including medical and pharmaceutical products, medical services basic food items, books and educational materials, exports e.t.c. are exempt from VAT. The VAT Act, 1993 (as amended) vests the FIRS with the power to administer the collection VAT from taxable persons in Nigeria.

Implications of the Judgement of the Federal High Court
In the case of AG Rivers State v. FIRS & AG Federation, the Federal High Court provided a literal interpretation of the Constitution of the Federal Republic of Nigeria, 1999 as amended (the “Constitution”), holding that the National Assembly is only empowered to enact laws in relation to stamp duties and the taxation of income/profit and capital gains. The court also held that pursuant to the Constitution, the Federal Government or any of its agencies, lacks the powers to impose and collect VAT, or any other tax not specifically provided for in the Constitution.

The decision of the Federal High Court, until upturned by a superior court, essentially renders the VAT Act and its amendments, void.

By implication therefore, individual states are entitled to enact laws for the administration of VAT and can appoint their respective tax agencies to supervise the collection of taxes within the state. The VAT Act will, however, still be applicable in the Federal Capital Territory and the FIRS will continue to be responsible for the administration of its VAT.

In addition, every state will be entitled to the revenue accruing from the VAT collected by it and VAT from each state will no longer be pooled into the Federation Account.

Lagos State VAT Bill
By virtue of the Federal High Court’s decision on VAT, states like Lagos State and Rivers State have raced to the drawing board to develop their own VAT laws which will govern the administration of VAT in the state.

Lagos State for example, has passed a bill to impose and charge VAT on certain goods and services and to provide for the administration of VAT in Lagos state. The Value Added Tax Bill (“Bill”) has been passed by the Lagos State House of Assembly and awaits the assent of the Lagos State Governor. Some key provisions of the Bill are highlighted below.

1.Rate of Tax: 6% of the value of goods and services as opposed to the current rate of 7.5% imposed by the Finance Act, 2019.

2.Administration of VAT: The Lagos State Internal Revenue Service (LIRS) has been vested with the power to administer VAT in Lagos State. All taxable persons are required to register with the LIRS within 6 months of the commencement of the VAT Law. Failure to comply is considered an offence and is punishable by a fine of N50,000 (Fifty thousand naira) for the first month of default and N100,000 for each subsequent month of default.

3.Returns to the LIRS: Taxable persons are required to render returns to the LIRS on or before the 21st day of the subsequent month after provision of goods and services. Failure to comply will make such person liable to a fine of N500,000. (Five Hundred Thousand Naira) for every month of default.

4.Treatment of non-resident companies: Companies that carry on business within Lagos State but are not resident in the state are required to register with the LIRS using the address of the person with whom it has a subsisting contract for the provision of goods and services. The non-resident company is to make provision for VAT in its invoice and the person to whom the services were rendered or the goods were provided is required to remit the tax to the LIRS.

5.Establishment of the Value Added Tax Tribunal: The Bill also establishes a Value Added Tax Appeal Tribunal which shall assist the LIRS in resolving disputes arising from tax assessments.

6.Sharing formular for revenue accruing from VAT: The Bill provides that the revenue obtained by the Lagos State Government from VAT will be distributed between the state and local governments in the ratio of 75% to 25%.

Conclusion

Many have raised concerns as to the practicability of the administration of VAT at the state level with respect to the taxation of non- residents of the states, the treatment of output and input tax, as well as the taxation of goods imported into the country. The FIRS has also appealed the judgment of the Federal High court on grounds that it is the appropriate agency to administer VAT in the country given the above listed complications. In the event that the appellate court decides against FIRS, it is recommended that the states take up the mantle that has been handed to them and effect necessary measures to ensure that the VAT is administered efficiently.

[1] FHC/PH/CS/149/2020

2020 LIST OF GOODS AND SERVICES EXEMPTED FROM VALUE ADDED TAX IN NIGERIA

August 7, 2020/in Pavestones Newsletters /by pavestones

Value Added Tax (VAT) is a consumption tax levied at the rate of 7.5% on goods and services supplied to consumers for a fee. The primary law governing VAT in Nigeria is the Value Added Tax Act 1993 (the “Act”), which provides for the administration of VAT and states the Goods and Services exempted from it. In addition to the Act, the Finance Act 2019 and the Value Added Tax (Modification Order), 2020, also guide the administration of VAT in Nigeria and contains provisions clarifying the list of goods and services which are exempt from VAT or zero rated VAT.

From a joint reading of the Act, the Finance Act 2019 and the Value Added Tax Act (Schedule Modification) Order 2020, the following are exempted from VAT:

all medical and pharmaceutical products;
basic food items;
books and educational materials including educational performances and tuition from nursey to tertiary education;
baby products;
all exported goods and services;
imported machines for use in the Export Processing Zone (EPZ) or free trade zone;
fertiliser and locally made agricultural medicines and agricultural equipment;
life insurance;
transportation services for public use;
lease on residential property;
equipment for utilisation of gas in down-stream petroleum operations;
microfinance banks people’s bank and mortgage institutions services; and
locally manufactured sanitary towels.

Provisions of the Order

The Order adopted the description of basic food items as contained in the Finance Act as agro and aqua based staple food. However, where these items are purchased in restaurants, hotels, eateries, lounges and other similar premises, they are not subject to the exemption. The Order further provides that basic food items sold by contractors, caterers and other similar vendors are not eligible for exemption.
The Order provides that baby products refers to products made for children under three years including baby activity, entertainment products, clothing and even raw materials for diapers production.
Educational books and materials: The Order expands the exemption to include electronic books. It also accommodates music materials, maps and charts, and materials used in vocational and religious education.
Medical Products and Services: healthcare related services for both humans and animals are exempted from VAT. Furthermore, the raw materials used in manufacturing pharmaceutical products were included in the exemption list
Transportation: only public road transport services shared by passengers are VAT exempt. Rented transportation for private use does not qualify for the exemption.
Lease: the Order specifies that lease by individuals for residential purposes alone are VAT exempt. A lease by a corporate entity seeking residential accommodation for its staff will be subject to VAT.
Petroleum Products: the Order exempts petroleum products from VAT including spirit, kerosene, natural gas, other liquefied petroleum gases and gaseous hydrocarbons.
Renewable energy equipment such as wind and solar energy generators have been included in the exemption list.
The Order provides the Common External Tariff (CET) Code for the products under the exemption list. This will provide clarity to importers, Nigeria Customs Service and other port authorities on the appropriate VAT treatment of the affected items and, hopefully, expedite their clearance at the ports.

However, on June 24^th,2020, the Federal Inland Revenue Service (“FIRS”) issued a public notice to clarify enquiries it had received from taxpayers on the VAT exempt status of certain goods listed in the Order. In its clarification, the FIRS stated that certain items, which had been exempted from VAT by the Order, did not have the exemption status as they were not listed in the Act or a previous ministerial order. The items include: a) Natural gas; b) Essential raw materials for the production of pharmaceutical products; c) Renewable energy equipment; and d) Raw materials for the production of baby diapers and sanitary towels.

EFFECT OF THE FIRS NOTICE

The contradiction between the provision of the Order and that of the FIRS public notice on whether the items listed above are to be subject to the 7.5% VAT presents a conundrum for taxpayers, especially manufacturers and importers, in assessing their VAT liability. It is however pertinent to note that a public notice issued by the FIRS cannot override a subsidiary legislation promulgated by the Minister of Finance. Therefore, the provisions of the Order will be deemed to stand, pending the time the Ministry of Finance provides further clarity.

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