Administration Of Value-Added Tax In Nigeria: Goods And Services Exempt

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VAT is a consumption tax that has been embraced and adopted by many nations across the globe. Because it is a consumption tax, it is difficult to evade and relatively easy to administer.  From a buyer’s perspective, VAT is a form of consumption tax. From the perspective of the seller, it is a tax only on the value added to a product, material, or service while from an accounting point of view, by the stage of its manufacture or distribution.  It is levied on the value-added that results from each exchange. It is an indirect tax collected from someone other than the person who bears the cost of the tax or the tax burden.

Nigeria’s VAT rate since the introduction of VAT through the VAT Decree No. 102 of 1993 has been 5% up until January 2020 when it was increased to 7.5%. The decision by the Federal Executive Council (FEC) to approve the proposed increase did not come as a surprise given the several attempts by recent and past administrations to increase the rate of VAT.  The Value Added Tax (VAT) rate of 7.5 per cent took effect immediately after the Finance Act 2019 was signed into law by President Muhammadu Buhari on 13th January 2020.

Taxable Persons

Under Section 12, which is the definition section of the Value Added Tax (Amendment) Act of 2007, a taxable person includes an individual or body of individuals, family, corporations, sole trustee or executor or a person who carries out in a place an economic activity, a person exploiting tangible or intangible property to obtain income therefrom by way of trade or business or a person or agency of government acting in that capacity. This definition as contained in the amended Act is more elaborate and the scope of a taxable person is wider, unlike the provisions of Section 46 of the VAT Act where the words “a person who independently carries out economic activity” are used. Such words are capable of so many interpretations. Some may refer to it only as an individual not a corporate entity or body of individuals. Flowing from the amended Act the word ‘person’ is defined to include artificial persons such as corporate entities, families, a body of individuals, sole trustees, executors, etc.

A taxable person is obliged to register with the FIRS for VAT collection “within six months of the commencement of the Act or within six months of the commencement of business, whichever is earlier.” Failure to register attracts a penalty of N50,000.00 for the first month in which the failure occurs; and N25,000.00 for each subsequent month. Since a period of six months has elapsed after the promulgation of the Act, it presupposes that every taxable person is now obliged to register as soon as it commences business. VAT can only be lawfully collected after registration; it means that until then the taxable person will not have any output VAT against which the input tax can be offset. 

Meanwhile, Section 10 mandates a non-resident company, carrying on business in Nigeria to register for VAT by using the address of the person with whom it has a subsisting contract.  A non-resident company shall include the tax in its invoice while the person to whom the goods and services are supplied shall remit tax in the currency of the transaction.  

Exemption and Zero Rating

Outright exemption of VAT on some goods and services entails that there is no obligation of VAT and no attempt at charging VAT from the outset. Exempted goods and services attract neither input nor output VAT. Therefore, the deduction of the former from the latter, and remittance of the difference to FIRS does not arise. VAT exempt items are outlined in Parts I and II of the First Schedule to the Act.

On the other hand, a zero rate of VAT means that the item is liable to VAT but at zero per cent. This implies that while the supplier pays input VAT, there is no output VAT from the consumer as the zero rates are actually on the output VAT. Hence, there is always a 100% excess of the input VAT over output VAT, and the entire input VAT incurred is claimed from FIRS as a refund.

A taxable activity for VAT includes any activity, other than those in the exempt list, conducted as business, vocation, trade, and profession. It includes the activities of public or government authorities, associations, and clubs. It does not matter whether or not the activity is carried out for profit, but it should involve the supply of goods and services to another person for consideration. Besides those expressly exempted by law, several activities are not taxable activities for VAT purposes. These are:

a)        Wages and salary from employment;

b)        Hobby activities;

c)        Private transactions such as the occasional sale of household or domestic articles, furnishings, personal effects, etc. and

d)        House rent.

Section 3 of the VAT Act read in conjunction with section 47 of the Finance Act 2019 and section 45 of the Finance Act 2020 explicitly exempt the following goods and services from VAT:

Goods Exempt

1.         All medical and pharmaceutical products.

2.         Basic food items.

3.         Books and educational materials.

4.         Baby products.

5.         Locally produced fertilizer, agricultural and veterinary medicine, farming machinery and farming transportation equipment.

6.         All exported goods.

7.         Plant and machinery imported for use in the Export Processing Zone.

8.         Plant, machinery, and equipment purchased for the utilization of gas in downstream petroleum operations.

9.         Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes.

10.       Locally manufactured sanitary towels, pads and tampons.

11.       Commercial aircraft, commercial aircraft engines commercial aircraft spare parts.

Services Exempt

1.         Medical services;

2.         Services rendered by Microfinance Banks, People’s Banks, and Mortgage Institutions;

3.         Plays and performances conducted by educational institutions as part of learning; and

4.         All exported services.

5.         Tuition relating to the nursery, primary, secondary and tertiary education.

6.         Airline transportation tickets issued and sold by commercial airlines registered in Nigeria.

7.         Hire, rental or lease tractors, ploughs and other agricultural equipment for agricultural purposes.

Practical Implications

There were seven exempted goods and three exempted services at inception. Initially, the trend was to extend the exempted goods and services from time to time ostensibly in response to the lobby from interest groups. However, following the Finance Acts 2019 and 2020, the number of exempt goods was increased to eleven while exempt services were increased to seven. The Finance Act 2019 defined essential food items to include additives (honey), bread, cereals, cooking oils, culinary herbs, fish, flour and starch, fruits (fresh or dried), live or raw meat and poultry, milk, nuts, pulses, roots, salt, vegetables, water (natural water and table water). Others included in the Act are locally manufactured sanitary towels, pads or tampons. It also included services rendered by microfinance banks, tuition fees relating to a nursery, primary, secondary and tertiary education. 

Disputes have arisen in recent times between the FIRS and taxable persons as to what constitutes the definition or explanation of the items in some categorizations. A very recent case in reference is the one in respect of what the definition of ‘basic food item’ is as the VAT Act in previous times did not provide such answers in terms of explanations or definitions.

This lacuna gave rise to several attempts to define the concept of basic food for a better understanding of the impact and issues on basic food items as used in the VAT Act.  For example, an author defined food as any nutritious substance that people or animals eat or drink or that plants absorb to maintain life and growth. Food is also defined as an edible or potable substance (usually of animal or plant origin), consisting of nourishing and nutritive components such as proteins, fats, carbohydrates, vitamins, and essential minerals, which (when ingested and digested) provides growth, generates energy and sustains life. While many foods can be eaten raw, many also undergo some forms of preparation for reasons of flavour, safety, palatability, or texture. This may involve cutting, washing, trimming, or adding other ingredients, such as spices at the simplest state. It may also involve mixing, heating or cooling, pressure cooking, fermentation, or combination with other food.

As a response to the concerns as to what constitutes basic food items, FIRS released an information circular in 2009 on VAT exemption which defined basic food items as follows: “any unprocessed staple food item, whether or not it is packaged.” This, to FIRS, means that for a food item to be exempted from VAT, it must be a staple food item, and it must be unprocessed. What then does “staple food” mean? It is the name given to food that can be easily stored, and eaten throughout the year by a dominant part of a population. Early civilizations usually ate staple foods because they could be stored for an extended period without having to worry about them going bad.

Some examples of staple foods include carbohydrates, wheat, barley, rice, potatoes, tinned food, milk, and things that do not need to be refrigerated. Staple foods are regularly eaten even daily since they supply a significant proportion of nutritional and energy requirements.  A staple food, in other words, is a fundamental food item in the typical diet of a group of individuals.  Dwelling on the foregoing clarifications, it is apparent that the factors to bear in mind when ascertaining whether a food item is a staple or not is not the level or form of processing the food has undergone; instead, it is the nature of consumption, nutrients formulation, and proportion of the populace that routinely consume the food item.

There were other concerns, especially as relates to the ambiguity in FIRS’ application of the “processed and unprocessed” rule.  For example, FIRS included semi-milled or wholly milled rice as part of the recognized VAT exempt food items. However, in another instance, FIRS attempted to assess some companies involved in the production of cassava-based flour to VAT. In a further scenario, FIRS sought to classify this ‘non-special bread commonly referred to as ‘Agege loaf of bread’, preferred by the low-income earning class, as an essential food item while classifying sliced loaf as non-basic, which is typically preferred by the high-income or middle class. Worthy of note, however, is that there is no evidence in the Act to show that the applicability of the VAT Act does not lay any specific emphasis on luxury items or services and goods that the rich or poor in the society consume.

In a FIRS Information Circular released in 1997, the basic food item was later described to include “any unprocessed staple food item, whether or not it is packaged.” However, the Federal High Court Coram Honourable Justice Ibrahim Buba in its 2015 ruling in Lagos in the case between Warm Spring Waters Nigeria Ltd & Ors. v FIRS held that FIRS cannot amend the provisions of a statute by issuing a circular. It also held that water is a basic food item and therefore exempt from VAT regardless of whether it has been processed or packaged. Contrarily, Justice Adamu Hobon had earlier given judgment in a 2004 ruling in the case of Monamer Khod Enterprise v FIRS which was said to have “erroneously focused exclusively on the question whether packaged water was a manufactured good and therefore taxable, rather than on the more relevant inquiry whether water is a basic food item within the meaning of paragraph 2 of Part 1 of Schedule 1 to the VAT Act.” The judgment also was even though FIRS argued bottled water is a luxury good and was not exempted by the VAT Act. This coupled with FIRS’ predisposition that all luxury items should be taxed the VAT was not primarily targeted at the low-income earners in Nigeria.  Thus, the two judgments are conflicting, but neither of them aligns with the FIRS Circular’s bid to choose one mode of packaging over another in determining where to apply VAT.

In view of the fact that the content of the FIRS Circular does not bound taxpayers, it goes to show that taxpayers could justify the notion of basic food items using other acceptable means. For example, the dictionary definition of ‘basic’ means ‘fundamental’, and as highlighted earlier, basic food items are fundamental food items in the typical diet of a group of people; often eaten at every meal, and consumed in large quantities.

In the absence of a clear definition of what constitutes a basic food item, the Finance Act 2019 had extended the list of goods and services exempted from VAT and has included clarifications on basic food items to include milk, nuts, bread, cereals, water (natural water and table water), among others. Nonetheless, FIRS is encouraged to further look into its current position and application thereon to enable a more realistic and settled treatment around the concept of basic food items as exceptions to the imposition of VAT, for example, the application of natural and table water in the Finance Act 2019. This will ensure that the target beneficiaries of this exemption are not excluded via a strained interpretation or application of the provisions of the VAT Act.

Medical services are also at the centre of the controversy in Nigeria’s VAT policy. In the case of medical services, the VAT Act or the Federal Inland Revenue Service (FIRS) circulars failed to explain the scope of the term. Recent breakthroughs in the world of medical technology have brought about an increase in cosmetic surgeries and procedures. A general exemption of medical services is no longer sufficient in light of these developments.


While a review has been made on some of the areas shrouded in ambiguity in the Finance Acts 2019 and 2020, this has not completely laid to rest the many controversies surrounding the administration of the tax. With lapses here and there and taxpayers having studied the loopholes inherent in the VAT, legislation has continued to capitalize on these to evade the payment of VAT. The consequence of failure to provide enough clarification and other crucial delimitation is the frequent dissension between FIRS and taxpayers.

This is even worrying because an amendment was made as recent as 2020 with the introduction of the Finance Act. To this end, FIRS and other concerned entities should make efforts to galvanize the views of the numerous stakeholders in the tax practice and administration chain and further make attempts to provide clarity on the subject matter. However, this should not be at the neglect of necessary legislative amendments as ambiguities in tax laws, once identified, are best solved by legislative amendments. In this regard, it is also crucial that taxpayer education and enlightenment as parts of the roles and functions of the Federal Inland Revenue Service should be improved. This should be done by emphasizing the recent amendments such as the introduction of a VAT exemption threshold for businesses with a turnover of less than N25 million per annum and the expansion of the list of VAT exempt items and services to include locally manufactured sanitary towels, pads and tampons as well as tuition relating to the nursery, primary, secondary and tertiary education.

1 Comment

  1. Reuben Dadar says:

    Weldon CITN for this. It makes one more updated. Thank you.