VAT ADMINISTRATION UNDER THE NIGERIA TAX BILLS AND THE SEARCH FOR ECONOMIC JUSTICE

Introduction

Value Added Tax (“VAT”), a consumption tax imposed by the Value Added Tax Act, CAP. V1 LFN 2004 (as amended) (“Act”) on the supply of goods and services, has been a pivotal revenue stream for Nigeria.[1] In view of its economic importance, VAT administration has been a subject of intense scrutiny, especially in light of the evolving legal framework introduced by the Nigeria Tax Bill (“NTB”) and the Nigeria Tax Administration Bill (“NTAB”) (collectively, “the Bills“)[2]. This briefing note examines the significant changes proposed in the Bills, aimed at enhancing VAT administration, increasing compliance, and assessing whether the principle of derivation enshrined therein can aid in achieving economic justice.

Key Provisions on VAT Administration in the Bills

1.    Exemption of Small Businesses from VAT obligations: Section 22(5) of the NTAB subject to sub-sections (6)[3] and (10)[4] thereof, exempts small businesses from filing monthly VAT returns. A small business is defined by Section 143 of the NTAB to mean a business with a gross turnover not exceeding ₦50 million naira per annum, and with a total fixed assets value less than ₦100 million naira provided it does not offer professional services.

This provision builds upon the earlier amendment introduced by the Finance Act 2019, aimed at alleviating VAT compliance burdens for micro and small enterprises.[5] With small and medium businesses contributing 48% to Nigeria’s GDP,[6] this measure is expected to lower operational costs, enhance sustainability, and promote growth, thereby fostering innovation, job creation, attracting both domestic and foreign investments, and driving economic development.

2.    Broadening of the Tax Base: Section 149(8) of the NTB expands the scope of taxable goods to include those imported through an online electronic or digital platform operated by a non-resident supplier. This brings into the purview of VAT collection, amongst others, digital assets[7] and all taxable goods purchased via e-commerce platforms such as Amazon, Alibaba, or eBay by Nigerian consumers or businesses. This Section further provides that goods with VAT already collected by the Service[8] or the Service’s appointees will not be subject to VAT again before clearing, upon submission of proof of VAT payment. This aligns with global trends in digital economy taxation, avoids double taxation, and clarifies VAT treatment for imported digital goods.

3.    Tiered VAT Rates: Rather than the present flat rate of 7.5%  charged on all taxable goods and services, Section 146 of the NTB introduces a tiered VAT rate structure. This Section provides that subject to the provisions of Part IV of Chapter Eight of the NTB (and by a holistic reading, the Twelfth Schedule) VAT shall be charged as follows:

       a.    Total exemption of the supplies indicated in Section 187(1) of the NTB[9], and those listed in paragraph 1 of the Twelfth Schedule[10] effective January 1st 2025;

b.    Total exemption of supplies under Section 189 by virtue of an Order made by the President and published in the Official Gazette exempting supplies required for the provision of developmental financing for any project in Nigeria where a bilateral agreement provides for the exemption of supplies made for such project from VAT, effective January 1st 2025;

c.     The rate of zero percent on all supplies indicated as such in Section 188[11] under part IV of Chapter Eight of the NTB effective 1st of January 2025;

d.    Gradual Increase for other taxable supplies:

                     i.         10% from January 1, 2025, to December 31, 2025;

                    ii.         12.5% from January 1, 2026, to December 31, 2029;

                  iii.         15% effective January 1, 2030.

Whilst the exemptions have gained traction amongst the populace, the progressive increase from 7.5% to 15% raises concerns amidst existing economic challenges, such as fuel-subsidy removal, inflation, and declining living standards.

4.    New Revenue Sharing Formula: Section 77 of the NTB proposes a new VAT revenue-sharing formula amongst the federating units thus:

a.    10% to the Federal Government;

b.    55% to State Governments and the Federal Capital Territory (FCT); and

c.     35% to Local Governments.

This contrasts with Section 40 of the VAT Act, which allocates 15% to the Federal Government, 50% to State Governments, and 35% to Local Governments. This shift reflects efforts (in accordance with the 2024 Supreme Court’s judgment affirming the financial autonomy of the 774 Local Government Councils in Nigeria[12]) to decentralize fiscal power and grant greater financial autonomy to States and Local Governments.

The Derivation Principle and Economic Justice

Economic justice on one hand, is a principle that advocates for the equitable distribution of resources, including capital, labour, and economic infrastructure, to meet the diverse needs of all segments within a society. It seeks to ensure that every individual, regardless of their socioeconomic background, has access to essential services and opportunities necessary for a decent, productive, and dignified life. Recognizing the widening disparities in wealth, power, and access, often exacerbated by unfettered capitalism, economic justice calls on States to allocate resources strategically to bridge these gaps and foster regional development. By prioritizing balanced growth across all regions, this concept promotes a society where prosperity is shared, inequality is mitigated, and development is both sustainable and inclusive, ultimately benefiting the collective well-being of the population.

Whilst the derivation principle on the other hand, as it pertains to VAT, simply means that VAT is allocated to States based on the actual consumption that takes place within that State. Presently, in accordance with Section 40 of the VAT Act[13] and arguably the principle of economic justice, VAT is shared amongst States in Nigeria on the basis of 50% equality, 30% population, and 20% derivation. However, Section 22(12) of the NTAB requires that a VAT return provides the details of derivation of taxable supplies by location, and the proviso to Section 77(c) of NTAB increases the derivation percentage from 20% to 60%. It is assumed that this increment aims to address complaints of inequality by high VAT-contributing States, who argue that States with minimal VAT contributions benefit disproportionately.[14]

Under the proposed system, 60% of VAT will be allocated to States on the basis of actual consumption. To illustrate this point, goods produced in Lagos State for instance, but consumed in Cross-River State, will yield Cross-River State 60% of the VAT revenue, as it is the State of consumption. This is expected to discourage the present “Headquarters Effect,” where VAT is filed based on corporate head office locations. The Headquarters Effect is also alleged to be the reason States such as Lagos and FCT (where several corporate head offices are located) have higher VAT returns as opposed to the States where the actual consumption takes place.[15]

On the face of it, the increase to 60% could incentivize States to industrialize and develop commercial hubs, enabling them to generate more VAT revenue and reinvest it into their infrastructure. However, States heavily reliant on revenue from the Federation Account Allocation Committee (FAAC) (of which VAT is a major funding source) may struggle with the leap to 60%, potentially resorting to borrowing to bridge budget deficits.

Conclusion

The proposed changes to VAT administration under the Bills signify a bold attempt to reform the tax system, enhance compliance, and address the long-standing inequities in revenue distribution. By exempting small businesses, broadening the tax base to include the digital economy, and introducing a tiered VAT structure, the Bills seek to modernize Nigeria’s VAT framework whilst fostering economic growth and innovation. However, the progressive increase in VAT rates, amidst economic challenges such as inflation and fuel-subsidy removal, calls for a careful balancing act to avoid overburdening taxpayers. 

Also, the shift in the revenue-sharing formula and the significant increase in the derivation percentage from 20% to 60% aim to address inequities inherent in the current system. This approach prioritizes actual consumption over corporate headquarter locations, aligning with the derivation principle to ensure States benefit proportionally from the VAT revenues generated within their borders. 

Economic justice, as a guiding principle, underpins these reforms, advocating for equitable resource distribution to foster inclusive development and reduce disparities. The proposed derivation model and revenue-sharing adjustments reflect efforts to decentralize fiscal power and promote regional equity. 

Disclaimer: Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries on this should please be directed at the key contacts

For further information on the foregoing (none of which is a legal advice) or related matters, please generally contact us at info@ao2law.com, or specifically contact the key contacts.