VAT Recovery in Nigeria’s Oil Service Sector

Value Added Tax (VAT) is a consumption tax levied at each stage of the supply chain and ultimately borne by the consumers. The tax was introduced in Nigeria in 1993 via the Value Added Tax Act (VATA), after a recommendation by a study group that was set up in 1991 to review the Country’s entire tax system. It is worth knowing that before the introduction of VAT, sales tax was in operation in Nigeria. However, VAT is different from sales tax, as it has a broader scope and includes most supplies, professional services and banking transactions.

The Tax is managed by the Federal Inland Revenue Service (FIRS) and is charged on the supply of goods and services other than those exempted in the first schedule to the VATA. It operates on a credit mechanism such that each producer along the value chain can claim the tax paid at the previous stage of production, when passing the product of his effort to the consumer at the next stage (provided that the producer and the merchant deal in goods on which the input VAT is claimable). The operation of the credit mechanism, however, stops at the stage where the item is purchased by the final consumer, who bears the full tax burden. In essence, merchants offset the total VAT paid on purchases (called ‘input tax’) in a given period (usually one month), against the total VAT charged on sales (i.e. ‘output tax’) and pay the excess to the FIRS. For companies operating in the oil and gas industry however, the law requires service recipients to withhold the output VAT charged by their vendors and remit it, directly to the FIRS. This requirement of the law has pitched the tax authorities against oil service companies who are legitimately entitled to claim their valid input VAT against the output, before remitting the excess to the Federal Inland Revenue Service (FIRS). In response, the latter has always maintained that the affected companies should file a claim for the refund, for processing and payment. However, there has been some controversies on the process for the recovery of such input VAT, given the provision of the VATA. Thus, this article is focused on breaking the myth of the challenges faced by companies operating in the Nigerian oil and gas sector, in recovering valid input VAT on cost incurred against the output VAT on their supplies. Allowable Input VAT: In 1998, the VAT Act was amended to restrict the scope of allowable input VAT. T through section 6 of the Finance (Miscellaneous Taxation Provisions, Act No. 18, 1998, which introduced section 13(a) (now section 17) of the VAT Act, Laws of the Federation of Nigeria (LFN), 2004). Section 17 of the amended VATA provides that: “………..the input tax to be allowed as a deduction from output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged”. The provision also excluded the input VAT incurred on overheads, services and general administration of any business from being claimed against a company’s output VAT. Rather, such input VAT should be expended through the company’s profit or loss account. The input VAT on capital items and fixed assets are to be capitalized with the cost of the items. Deduction at Source: VAT charged by a vendor is expected to be paid to it by the service recipient, together with the invoice value for the goods sold or services received. However, section 13(2) of the VATA provides that for companies operating in the oil and gas sector, VAT charged them by their vendors should be deducted at source and remitted directly to the FIRS. This position was further clarified and corroborated by the FIRS via paragraph 13(2) of its information circular .


Source: This days