Value Added Tax Mechanism

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The idea of introducing   VAT in Nigeria came from the study group set up by the Federal Government in 1991 to review the entire tax system. VAT was proposed and a committee was set up to carry out feasibility studies on its implementation. In January, 1993, the then government agreed to introduce VAT by the middle of the year. It was later shifted to 1st September, 1993 by which time the relevant legislation would have been made and proper ground work done. The actual implementation however, did not commence until January 1994 after the promulgation of the Value Added Tax Decree No. 102 of 1993

According to the decree, a ‘VATable’ organization is an existing manufacturer, distributor, importer or supplier of goods and services. VAT as Replacement for Sales Tax. The rationale behind replacing Sales Tax with VAT was informed by a number of factors and considerations, notable among these are: The base of the Sales Tax in Nigeria as operated under Decree No. 7 of 1986 is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments. The narrow base of the tax negates the fundamental principle of consumption tax which by nature is expected to cut across all consumable goods and services. VAT base is broader and includes most professional services and banking transactions which are high profit-generating sectors. Only locally manufactured goods were targeted by the Sales Tax Decree of 1986, although this might not have been the intention of the law. VAT is neutral in this regard. Under VAT; a consideration part of the tax to be realized is from imported goods. This means that under the new VAT; locally manufactured goods will not be placed at a disadvantage relative to imports. Since VAT is based on the general consumption behaviour of the people, the expected high yield from it will boost the revenue collectible by governments with the minimum resistance from taxpayers. Definition VAT is a consumption tax payable on the goods and service consumed by any person, whether government agencies, business organizations or individuals. The target of VAT is consumption of goods and services and unless an item is specifically exempted by law, the consumer is liable to the tax. It 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 Nigerian VAT System has the Following Features: It is a Multi-Stage Tax System Under this principle, VAT is imposed at every stage of the production chain from the manufacturer to the consumer (see below example). Credit Mechanism In order to eliminate the cascading effect of taxation at every stage of production, a credit mechanism system is installed to allow VAT paid on imports or purchases of raw materials (input taxes) to be deducted from the VAT charged on sales (output taxes) and therefore, the tax to be paid by a taxable firm is the difference between output tax and input tax.

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