Value Added Tax with simple analysis

Value Added Tax (VAT) is a tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. It is charged on the sale of specified goods and services and it is also referred to as a consumption tax.

 

Based on our previous study, it is a form of indirect tax, hence the amount might not be significant to you as an individual when purchasing small quantity of an item and that's why it is mostly borne by the final consumer of products.

 

ADMINISTRATION

The Federal Inland Revenue Service (FIRS) is the sole body that is vested with the power of administration and management of VAT in Nigeria. Hence, VAT is remitted to the FIRS.

 

VAT has so many updates surrounding it but the important facts to know as professionals/business owners/student et al are:

 

VAT RATE

Recently, the Federal Government of Nigeria approved a 50% increase in VAT rate, causing the rate to increase from 5% to 7.5%. The new rate at 7.5% took effect from Feb 2020.

 

FILING DEADLINE

VAT is expected to be filed with the FIRS on/before the 21st day of the following month after a transaction has occured. This means, VAT on transactions done within 1st to 30th of April 2020 must be filed on/before 21st of May 2020. A failure to do this attracts a penalty.

 

PENALTY ON DEFAULT

Recently, the Finance Act 2019 in a bid to ensure compliance hoisted the penalty charges for defaulters from N5,000 to N50,000 in the first month of default. Then if default continues, your company would be further exposed to additional N25,000 for every month, as long as you do not pay up. (Let's do a simple analysis)

 

Example:

 Let's say the cos of an item liable to VAT is N100,000.

 

VAT on the item will be N7,500 (N100,000 × 7.5%).

 

If you do not file the VAT before the deadline, you will pay N50,000 as penalty for the first month. If you still do not file after that, you will be requested to pay additional N25,000 for every month as long as you don't remit it. So, can you see it pays to quickly remit your VAT returns before the deadline.

 

SUMMARY

- VAT rate is now 7.5%.

- It is charged on specific goods and services. There are exemptions to certain basic item. Hence, it's not charged on all goods.

- Penalty for default is N50,000 in the first month of default and N25,000 for every month in which default continues.

 

Source: Richard Okunola

Thanks for sharing! Very insightful

more grace