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REGULATORY UPDATE: GOODS AND SERVICES EXEMPT FROM VAT IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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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

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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]
  8.   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
  1. All medical and pharmaceutical products
  2. Basic food items.
  3. Educational books and materials
  4. Baby products
  5. Fertilizers and locally produced agricultural chemicals and veterinary medicine
  6. All exports
  7. 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.
  8. Machinery and equipment purchased for utilisation of gas in downstream petroleum operations.
  9. Tractors, ploughs and agricultural equipment and implements purchased for agricultural purposes.
  10. Locally manufactured sanitary towels, pads or tampons
  11. Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts
  12. Petroleum products
  13. Renewable energy equipment
  14. Raw materials for producing baby diapers and sanitary towels
  15. Raw materials for manufacturing pharmaceutical products
  16. Locally produced animal feeds.
  17. Military hardware, arms and ammunition and locally manufactured uniforms used by the armed forces, paramilitary and other security agencies.
  18. 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.
  19. Agricultural seeds and seedlings
  1. Medical services.
  2. Services rendered by unit microfinance banks and mortgage institutions.
  3. Plays and performances conducted by educational institutions as part of learning.
  4. All exported services.
  5. Tuition relating to nursery, primary, secondary and tertiary education
  6. Airline transportation tickets issued and sold by commercial airlines registered in Nigeria
  7. Rental or lease of tractors and other agricultural equipment for agricultural purposes.
  8. Shared passenger road-transport service

 
Zero-rated Goods
  1. Goods and services purchased by diplomats.
  2. 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

Pavestones Regulatory Update: The Draft Revised Guidelines for the Regulation and Supervision of Microfinance Banks

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The Central Bank of Nigeria (CBN) on March 3, released its revised Microfinance Bank (MFB) draft guidelines (the “Draft Revised Guidelines”). The Draft Revised Guidelines revises the increase in the minimum share capital for MFBs which was previously announced by the CBN in a notice released in October 2018; and expands the categories of MFBs, amongst other changes.

Although the guidelines are still in draft form, it is useful for MFBs and fintechs (who utilize MFB licenses) to take note of the changes proposed whilst assessing how it will affect their operations once it takes effect.

We have set out below, the major changes made to the Draft Revised Guidelines and how it differs from the Guidelines issued in 2012 (“2012 Guidelines”).

1.Categories of MFBs

Under the 2012 Guidelines, the CBN split MFBs into 3 (three) categories namely Unit MFBs, State MFBs, and National MFBs. The Draft Revised Guidelines splits the Unit MFBs to Tier 1 and Tier 2. This brings the categories of MFBs to 4 (four) namely: Tier 1 Unit MFBs; Tier 2 Unit MFBs; State MFBs, and National MFBs.

The benefit of this revision is that Unit MFBs would no longer be restricted to one location. Tier 1 Unit MFBs would be permitted to operate in urban areas and have up to 4 (four) branches in addition to the head office, within 5 (five) Local Governments Areas (LGA) in the state. Tier 2 Unit MFBs would be permitted to have a head office and a branch within the same LGA. Note that Tier 2 MFBs are to operate in rural and unbanked/underbanked areas.

It is also useful to note that the number of branches State and National MFBs may establish at commencement is capped at 10 under the Draft Revised Guidelines. In the 2012 Guidelines, this is not capped.

2.Financial Requirements

The capitalization requirement for each category of MFB in the Draft Revised Guidelines are as follows: Tier 1 Unit – 200 million Naira; Tier 2 Unit – 50 million Naira; State MFBs – 1 billion Naira; and National MFBs – 5 billion Naira.

With this revision, MFBs would have the option to apply for a Tier 2 Unit MFB license with a share capital requirement of 50 million Naira as opposed to the 200 million Naira minimum capital requirement for Unit MFBs stated in the MFB capitalization review notice earlier issued in October 2018.

3. Licensing Requirements.

Under the Draft Revised Guidelines, promoters and investors of MFBs  would be required to make presentations on the business case of the proposed MFBs before a formal application for an MFB licence. The CBN will also inspect the premises and facilities of MFBs prior to granting a final licence.

Conclusion

The tiered Unit MFB license would be a welcome development as it has the potential to include MFBs who are unable to meet the current 200 million Naira capital requirement. It would also allow MFBs reach more customers with the introduction of branches.

Notwithstanding this, it would be useful to see regulations that are tailored to the peculiar structure of digital banks and fintech businesses, as the regulation of this space is still subject to multiple interpretation by regulators of the available laws/regulations.

Financial Services In Nigeria: Difference Between MMOs, PSBs, and MFBs

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Mobile Money Services (run by Mobile Money Operators [MMOs]), Microfinance Banks (MFBs), and Payment Service Banks (PSBs) are three different financial services under which some companies in the financial sector operate to provide the unbanked and underbanked access to beneficial financial tools. Separate licenses are acquired to provide these services.  However, due to the similarity in the financial services, the differences between them are sometimes unrecognisable. In the table below, we compare the functionalities, capabilities and restrictions of MMOs, MFBs and PSBs.

 

SERVICES  MMOs PSBs MFBs
Minimum Capital N2 Billion N5 Billion N200 Million- Unit

N1Billion – State

N5Billion – National
Service Area No restriction 25% operations in rural areas Physical restriction depending on type (Unit, State, National).
Loans Not Permitted Not Permitted Permitted
Bank

Accounts/Wallets

Bank   Led:   Bank

Account/Wallet

Non-bank   Led:

Wallet only

 Wallet only Bank   Account/

Wallet
Transfers (In/Out) Permitted Permitted [except from public and no forex transaction] Permitted   [no foreign transactions or foreign electronic transfers]
Airtime Purchase Permitted Permitted Permitted
QR Code Payments Permitted Permitted Permitted
USSD Service Permitted (subject to NCC consent) Permitted  (subject to NCC consent) Permitted (provided letter of no objection is issued by the CBN)
NIBSS Connection Required Required Required
Cards Debit Debit Debit & Credit
Agent Banking Permitted Permitted Permitted
Who Can Operate  Banks

Tech Coys

 Telcos

MMOS

Supermarkets

Courier coys

Fintech Companies

 Individuals, companies, or

foreign investors

In conclusion, MMOs, MFBs and PSBs offer services that are similar but not quite the same. It is important that investors and users of services under these platforms are aware of the functions and limitations permitted and imposed by the licenses before investing in or procuring the services of companies using these platforms.