How To Calculate Vat Remittances In Nigeria

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VALUE ADDED TAX is an indirect form of taxation that is based on the consumption pattern of
individuals and companies. In Nigeria, VAT is a 5% charge on all goods and services except for
those exempted. Organisations are by law expected to remit VAT charged to invoices on behalf
of the Federal Inland Revenue Service. However, in remitting the taxes to the FIRS, organisations
are also expected to deduct certain VAT expense (called Input) VAT that they also incur.
HOW TO DEDUCT: Companies typically include a 5% VAT on invoices for services rendered or for
sale of goods. For example, if you buy a Television set from Mega Plaza for N100, 000, that
amount will include a VAT of N4, 761.90. That is N 100,000/1.05 = N95, 238.10. N100, 000 less
N95, 238.10= N4, 761.90. But surely Mega Plaza is not in the business of Manufacturing TV’s since
they are mainly a retail outlet. This means Mega Plaza must have purchased the TV at a lower
price before adding their Mark up and VAT to arrive at the selling price of N100, 000. Supposing
that the TV cost Mega Plaza N85, 000 inclusive of VAT of 5%? Therefore Mega Plaza paid a sum
of N4, 047.62 in VAT.
Based on the above, we can now calculate how much Mega Plaza is to remit to the Federal Inland
Revenue Service.
VAT Input (VAT included in invoices paid to suppliers)
– N4, 047.62
VAT Output (VAT included in invoices paid by customers)
– N4, 761.90
VAT Remittal to Federal Inland Revenue Service
– N714.28
Note: Basically, the Law only includes in the VAT input tax on goods purchased or imported
directly for resale and goods which form the stock in trade used for the direct production of any
new product on which the output tax is charged. It therefore does not include input VAT on any
overhead, services, admin and general expenses pf any business. The belief is that these
expenses will be deducted before arriving at taxable profits.
WHAT DOES THIS MEAN? Not all items can be classified as VAT Inputs. For example, apart from
paying 5% VAT on the TV set purchased for resale, Mega Plaza may also have incurred marketing
cost & advertising before the TV set is sold. Let’s assume they spent N1, 000 in marketing cost to
sell the TV for N100, 000. The N1, 000 marketing cost includes a 5% VAT which is N47.62. This
amount cannot be offset against the VAT Output above of N4, 761.90. This extends to VAT paid
to lawyers, consultants, furniture and fittings, bank charges etc. What you therefore need to
include as Input VAT are items that are directly related to the item or service that you are selling.

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