VAT, or Value Added Tax, is a consumption-based tax levied on goods and services at each stage of the supply chain. It is a multi-stage tax that is ultimately borne by the end consumer, as businesses collect VAT on their sales and remit it to the government. Implemented in 1993, VAT has become an essential source of revenue for the Nigerian government.
Objectives of VAT Tax in Nigeria:
- Revenue Generation: One of the primary objectives of VAT tax in Nigeria is to generate revenue for the government. VAT is a significant source of income that contributes to funding public services and infrastructure development.
- Economic Stimulation: VAT tax aims to stimulate economic growth and development in Nigeria. By taxing consumption, it incentivizes savings and investment, leading to increased capital accumulation and economic activities.
- Redistribution of Wealth: VAT tax is designed to redistribute wealth and promote equitable distribution of resources. It helps to bridge the income gap by collecting a proportionate amount of tax from individuals based on their consumption patterns.
- Reduction of Reliance on Oil Revenue: Nigeria heavily relies on oil revenue, which can be volatile. VAT tax serves as a diversification strategy by providing an alternative source of revenue, reducing the country’s dependence on oil-related income.
- Expansion of the Tax Base: VAT tax helps to broaden the tax base by bringing more businesses into the tax net. This leads to a wider tax base and a more inclusive tax system, ensuring that more economic activities contribute to government revenue.
Benefits of VAT to Small Scale Businesses
- Simplified Tax Structure: VAT tax provides a straightforward tax system that is easier for small businesses to understand and comply with.
- Input VAT Recovery: Small-scale businesses can claim refunds for VAT paid on business-related purchases, reducing their overall tax burden and improving cash flow.
- Competitive Pricing: VAT allows small-scale businesses to adjust their prices to include the VAT component, ensuring fair competition with larger businesses.
- Consumer Perception and Trust: VAT registration enhances the professional image of small-scale businesses and builds trust among consumers, positively influencing customer perception.
- Business Expansion Opportunities: VAT registration opens doors to larger markets and potential clients, indicating business growth and providing opportunities for expansion.
The current rate for Value Added Tax (VAT) in Nigeria for businesses is 7.5%. This rate was implemented by the Finance Act of 2019, which increased the previous rate of 5% to its current level. It is important for businesses to ensure they accurately calculate and collect VAT at the applicable rate on their taxable supplies to comply with the tax regulations in Nigeria.
In Nigeria, there are specific thresholds for VAT registration and exemptions that businesses should be aware of. The current threshold for mandatory VAT registration is an annual turnover of ₦25 million Naira or more. Businesses that exceed this threshold are required to register for VAT and charge it on their taxable supplies.
On the other hand, there are certain exemptions from VAT registration. Small-scale businesses with an annual turnover below the ₦25 million threshold have the option to voluntarily register for VAT. This allows them to enjoy the benefits of VAT recovery while complying with VAT regulations.
Additionally, certain goods and services are exempted from VAT altogether. These exemptions vary and can include essential items like basic food items, medical services, educational services, and some agricultural products. Businesses dealing with exempt supplies do not charge VAT on those specific goods or services.
It is important for businesses to regularly monitor their turnover to determine if they have crossed the mandatory registration threshold. Understanding the threshold and exemptions helps businesses comply with VAT regulations and manage their tax obligations effectively.
Understanding the basics of VAT tax in Nigeria is essential for businesses to navigate the tax landscape effectively and ensure compliance. By adhering to VAT regulations, businesses can contribute to the country’s economic growth and avoid penalties associated with non-compliance.
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