Introduction:
Under the amended Value Added Tax Act (VATA), a tax is imposed on all goods and services supplied in Nigeria. While an exemption exists for goods and services listed in the First Schedule to the VATA, financial institutions are generally obligated to charge VAT on their services, as clarified by recent legislative modifications.
Imposition of VAT on Financial Services:
Section 66 of the Banks and Other Financial Institutions Act broadly defines “other financial institutions” to include various entities engaged in financial activities, such as discount houses, finance companies, and more. This encompasses a range of institutions like banks, insurance companies, pension funds administrators, discount houses, and brokerage firms.
In a circular issued by the Federal Inland Revenue Service (FIRS), titled “Value Added Tax (VAT) on Services of Financial Institutions” (Circular No.: 2021/04), the FIRS outlines the financial services charges that attract VAT. These include, but are not limited to:
- Commissions on forex trading or remittance
- Commissions on the sale of Bank drafts/certified cheques
- Commissions paid to brokers, reinsurers, underwriters, and other insurance agents by an insurer
- Commissions on asset trading
- Account Maintenance Fees, ledger fees, etc.
- Legal and other fees chargeable on lease arrangements
- Fees for advisory services (e.g., mergers and acquisition, financial strategy counseling)
- Fees chargeable on public/private issues
- Debt conversion fees
- Fees on asset trading
- Fees earned on fund management
- Fees earned on letters of credit/documentary collection for import/export financing
- Fees chargeable on stock-brokerage and trust services
- Fees charged on electronic banking, POS, and ATM charges
- Fees charged on electronic bill payments
- Mobile money transactions and similar transactions
However, certain financial transactions, such as interest on loans and advances, interest on savings accounts, interest on bank deposits, premium on insurance policies, dividends, and gains on disposal of securities, do not attract VAT. This exemption is due to their nature as returns on investment rather than charges for services provided by financial institutions.
Conclusion:
With specific exemptions for Unit Micro-Finance Banks and Mortgage Institutions, financial institutions in Nigeria are generally required to apply VAT to their services. The distinction between returns on investment and charges for services is crucial in determining VAT applicability, ensuring that only applicable financial service charges are subject to VAT.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Sunmola David & CO (Chartered Accountants & Tax Practitioners) at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.
