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PEOPLES DAILY, FRIDAY, APRIL 5, 2013
Pay as you Consume: The Value Added Tax
W
hen the International Monetary Fund (IMF) team, under the technical assistance program visited Nigeria in January, 2010, one of its recommendations was that the Nigerian Tax Laws be redrafted in plain English language. Since then, various efforts including working group sessions have been held to achieve this novel feat. The most recent was the working group session on the draft Value Added Tax (VAT) law held from Wednesday, 3rdAugust to Monday 8th August, 2011. The concept of VAT in Nigeria can be traced to the Dr. Sylvester Ugoh led study group on indirect taxation in November, 1991. Thereafter, a committee was set up under the chairmanship of Mr. Emmanual Ijewere to conduct extensive research and make recommendations. VAT was finally introduced in Nigeria in 1993 by the VAT Act No 102 of 1993 as a replacement of the Sales Tax which had been in operation under Federal Capital Territory. VAT is a consumption tax payable on the goods and services consumed by any person, government agencies business organisations or individuals. VAT can also be defined as a tax on spending/ consumption levied at every stage of a transaction but eventually borne by the final consumer of such goods and services. It is levied at the rate of 5%. The consumption taxVAT- has been embraced by many countries world-wide. It is pertinent and difficult to evade. The yield from VAT is fairly accurate measurement of the growth of an economy, since purchasing power (which determines yield) increases with economic growth. VAT is a self-assessment tax that is paid when returns are being rendered. In-built in VAT is the refund or credit mechanism which eliminates the cascading effect that is a feature of the retail sales tax. The input-output tax mechanism in VAT also makes it self-policing. In essence, it is the output tax less input tax that constitutes that VAT payable. It is the equivalent of the VAT paid by the final consumer of the product that will be collected by the government. Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid. Illustration: If a product moves from raw materials producer (A) to manufacturer (B) at N1, 000.00 then to wholesale (C) at N1,500.00, then to retailer (D) at N2,000.00; and finally to the consumer who pays
N2,500 to the retailer, VAT payable to government at 5% rate of VAT on the product is as follows: Thus, the VAT paid to government in the four transactions if N125 which is 5% of the final consumer price of 2, 500 (see figure 1). Interestingly, Nigeria operates a VAT rate that is out of sync with the ECOWAS protocol. ECOWAS adopted a uniform VAT protocol due to the constant movement of people and goods across the region and the need to subject them to similar circumstances. Nigeria which then held the chairmanship of ECOWAS was a signatory to the protocol but currently operates a VAT law contrary to the ECOWAS protocol. Most critically is the fact that Nigeria operates the lowest VAT rate across the West-African sub-region – 5% VAT rate (although with Nigeria’s influence, the advisory rate has been reduced to 10%). Unlike direct tax, VAT which is an indirect tax is a consumption tax. It is tied to the cost of goods consumed from which consumers derive satisfaction. In terms of collection therefore, VAT is
rather easier to collect than other taxes. It is also of interest to know that since its introduction in 1993, the income tax burden has been reduced twice (Company income Tax from 35% to 30% and personal Income Tax from 30% to graduated rates – maximum 24%) but the VAT rate has remained static. Another issue is that of the various exemptions granted on VAT. is An exemption that distortive creates a lot of complexity, lack of transparency and arbitrariness in term of application and enforcement. Hence, the government is short-changed at two levels: high level of exemptions and low VAT rate. Beyond exemption is the issue of gross product VAT model which Nigeria adopts. The gross product model is one that tries to maximise tax by disallowing cost. It however allows for restrictions on the recovery of VAT paid on capital terms 9 since the cost of capital is amortised and spread across the item). At the moment, there are seventeen categories of goods and twenty four categories of
services that are VATable. The goods and services exempted are as follows: (1) Goods Exempted (a) Medical and permaceutical products; (b) Basic food items; (c) Books and educational materials; (d) Newspapers and magazines (e) Baby products; (f) Commercial vehicles and their parts, and (g) Agricultural equipments and products and veternity medicine; (2) Services Exempted (a) Medical services; (b) Services rendered by Community Banks and Mortgage Institutions; and (c) Plays and performances conducted by educational institutions as part of learning. Returns A manufacturer or supplier of taxable goods or services is to render a return to the Integrated Tax Office (ITO) on or before the 21st day of the month next following that in which the supply was made. Thus, every VATable person must keep records of all supplies made and received. He must also make a return on form VAT 002. He has to fill in
details of supplies made and received during the period and pay the net VAT due to the ITO or claim a refund if tax is owed to him. Every importer of goods into Nigeria is to render VAT returns on all imports into Nigeria to the ITO. The VAT returns must reach the ITO on the due date. Importers are to pay VAT on imports to the ITO while compliance is to be enforced by the Nigeria Custums Service before releasing the imported goods after a certificate of compliance issued by the VAT office is presented. Offences and penalties of registered person There are various offences with very stiff penalties under the VAT system: · Given false information on matter considered material · Failing to notify change of address · Failing to issue receipt · Failure to keep proper records There are swift and automatic penalties differentiated by the type of transgression. Some of the penalties are as follows: · Furnishing of false documents or statements. Penalty-liable on conviction is a fine of twice the amount under declared. · Evasion of tax. Penalty liable on conviction is a fine of N30, 000 or two times the amount of tax being evaded; whichever is greater, or imprisonment for a term not exceeding 3 years · Failure to notify change of address within 1 month of such change. Penalty – payment of N5, 000 · Failure to issue tax invoice for goods sold or services rendered. Penalty –liable on conviction is a fine of 50% on the invoice that was not issued. · Rising, considering, obstructing or attempting to hide or to obstruct an unauthorized officer from performing his duty on inspection. Penalty-liable on conviction is a fine of 10,000.00 or imprisonment for a term of 6 months or both fine and imprisonment. · Failure to submit returns by a taxable person. Penaltypayment of a fine of 5,000.00 for every month in which the failure continues. · Failure to keep proper records and accounts for his business transaction to allow for the correct ascertainment of tax. Penalty of N2,000.00 for every month in which the failure continues Even though the concept of VAT is largely misunderstood and often times an attempt to increase the rate trends to meet with stiff resistance, given the fact that it is one tax that affects every tax payer (since every one must consume), it is safe to state that the concept is very simple and will no doubt provide more revenue for the government if properly operated.