As the case for constitutionality of Value Added Tax (VAT) and the appropriate authority for its collection and administration continue to rage, we deem it important to highlight the following considerations for Nigerian businesses (based on the provisions of the VAT laws already drafted/ issued by Rivers, Lagos and Ogun States), just perchance the case for VAT collection is ruled eventually by the Supreme Court in favour of the State governments:
- As should be expected, businesses will need to learn and practice all the various State VAT laws applicable in the States where they carry on business.
- More businesses will be brought into the VAT net as the State governments would be much more aggressive towards collecting VAT.
- States may have different VAT rates (as is already the case with Lagos State) – this will mean different prices for the same goods and services across different states. If the price differences are significant, customers may incline to States with lower prices and the business terrain will become much more competitive.
- Businesses will need to register for VAT and pay/ file VAT monthly, to the State or respective States where they have office/ branches and from where supplies are made.
- Online or e-commerce businesses will need to register and pay/file VAT in the place of business/ company registration, and in other respective States from where supplies of goods are made.
- Non-residents carrying on business in Nigeria would also need to register for VAT in the various States where they have subsisting contracts with customers. Their Nigerian customers will be expected to become the State’s agents for collecting/ filing VAT on behalf of their non-resident suppliers/ contractors in the currency of the transaction.
- VAT exemptions already in place in the national VAT act, e.g. exemption of small businesses from VAT, may not be available with the States.
- The accounting systems of businesses will need to be reconfigured (this will require more work where the business has various branches in different states), to take cognisance of new VAT registration numbers, new VAT rates, VATable/exempt/ zero-rated goods and services, transactions with non-residents and sales/ cost of sales – for calculating output and input VAT (and for respective State branches, where applicable).
- Businesses may be asked to pay VAT at the various State borders whenever there is shipment of goods into or across a State (States may adopt this mechanism for collecting ‘VAT on imports’ as is already contained in some State VAT laws, since VAT on imports are already being collected by Customs at the National ports / borders). This means there may be multiple layers of VAT, payable by businesses within their supply chains. If the Federal government is eventually restrained by the courts from collecting VAT on imports, States without import borders/ ports may resort to this measure to generate more revenues.
- Cost of VAT compliance/ accounting, and consequently, cost of doing business will go up.
- For trading businesses, claim of input VAT may become challenging especially where it is paid in another state (unless there will be some sort of input VAT MOU among States) or where input VAT paid is higher than output VAT charged. The same issue will arise where the goods are imported into Nigeria and the associated VAT is paid to Customs (unless the Federal government would be restrained from collecting VAT at the point of clearing imported goods).
- Accounting (and tax accounting) will become more complex for businesses, especially those operating in more than one State, and/ or where the rates of VAT differ among the States where they operate.
- Businesses will be required to stop using Federal Inland Revenue Service (FIRS)’ taxpro-max platform for filing VAT returns and will need to start learning/ adopting the compliance methods or platforms as will be prescribed by the State or respective States where they operate.
- Businesses with outstanding VAT refunds from the FIRS will not be able to apply it for offset of their future VAT liabilities. It may also become much more challenging to get such refunds in cash from the FIRS.
- Tax disputes between the taxpayers and the tax authority are to be referred first to State tax appeal tribunals (TAT). Since the State TATs would be centralised within the respective States, possibility of full autonomy from the control of the State governments may be limited, creating a situation where it may be very difficult for taxpayers to win any tax dispute against the State tax authority.
As at 14 September 2021, Rivers State, through its Attorney-General, had appealed to the Supreme Court to set aside the decision of the Court of Appeal that ordered it to maintain status quo on the collection of VAT, pending the determination of an appeal that was lodged by the FIRS.
For further enquiries about VAT or the progress of the case, or how all of these may affect your business, please do not hesitate to send an email to email@example.com.