Value-Added Tax application and management

Value-Added Tax application and management

Tuesday, October 25, 2016 4:16 pm

Dada Adefolami

Dada Adefolami

By Dada Adefolami

Value-Added Tax (VAT) is a tax on consumer spending. It is collected by VAT-registered traders on their supplies of goods and services affected within the nations, for consideration, to their customers. Generally, each such trader in the chain of supply from manufacturer through to retailer charges VAT on his or her sales and is entitled to deduct from this amount the VAT paid on his or her purchases.

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. VAT is most often used in the European Union. The amount of VAT that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.

For example, when a television is built by a company in Europe, the manufacturer is charged VAT on all of the supplies it purchases to produce the television. Once the television reaches the shelf, the consumer who purchases it must pay the applicable VAT.

VAT applies to goods and services consumed in a particular Economy. The standard VAT rate is 10% and a lower rate of 5% is applicable to provision of essential goods and services. For exported goods and services, the rate is 0%.

Value-added taxation is based on a taxpayer’s consumption of goods rather than his income

The present period of rapid social and economic change, so do the nation’s laws, Tax governance and policy reform are crucial for the development of the tax sector as well as the economy, and they are a rising priority for both local and foreign businesses in the country. But, the lawmakers have set and amended tax law in the country; it has become more complex, particularly for corporate.

Tax framework has had to work fast to keep pace with development, while also maintaining budget revenue for the state. Currently, we relies heavily on indirect tax as a key source of revenue.

VAT is applied either to actual or presumed turnover. This has a cascading effect as
VAT is not able to be claimed as an input,’ according to Tom McClelland, partner and tax leader at Deloitte McClelland has been heavily involved in tax policy since 1998 and contributes to the effective development of tax regime.

Traditional trading
Types of industry and business vary but there are countless family run stores and small businesses both in cities and rural areas in Nigeria.. Despite rapid changes in the retail landscape with the introduction of modern trade and supermarkets, traditional trade is still predominant.

Cash is still the most popular means of payment, which means it is easy for suppliers to under-declare VAT-taxable revenue by not issuing invoices to consumers,’ ‘This causes a lot of difficulties for the government in trying to collect taxes, with complicated mechanisms aimed at controlling and monitoring the output and input invoices.’

The direct method of VAT is complicated and has caused issues for banks and businesses alike, but there was a reason it was introduced.

The direct method was no doubt introduced to accommodate the large number of individual, and particularly household businesses,

Since introduced VAT, we all agree that more needs to be done. More effective solution would be to encourage the use of electronic payment in transactions and from there, more effectively control transactions in the economy, reducing the complexity in the VAT system.

It’s commonly agreed that complicated tax systems impact the economy negatively. But are there any benefits?

‘There are no advantages in complexity; however there are advantages in more detailed tax legislation where it gives taxpayers more certainty. Government should objective and work towards this. We should have Policy to managed and create a model which kept tax revenues for the government at the same level, but with reduced tax collection costs.

Leading the way
Meanwhile, the Federal Island Revenue to present the objective of reforming the tax system, to the National Assembly. Ultimately, it aims to improve administrative procedures to the point where Nigeria would be a leading in African countries in terms of its tax system. The Federal Island Revenues should hopes to have all enterprises using e-tax services; carrying out tax registration and declaration via the internet; and perhaps the taxpayers satisfied with services provided by tax offices.

Activities exempt from VAT include:
1. The transfer of land use right.
2. Certain credit services, loans, finance leasing, investment fund, capital assignment and securities trading.
3. Medical examination and treatment services.
4. Public passenger transportation by bus.
5. Teaching and training.
6. Life insurance, student insurance, livestock insurance, and types of non-commercial insurance activities.
7. Certain agricultural production.
8. Imports for humanitarian and non-refundable aid.
9. Transfer of technology and computer software.
10. Post, telecommunication and internet services under government programmes.
11. Machinery and equipment and special means of transport which are not yet produced in Vietnam and which are imported by a foreign-invested enterprise (FIE) or business cooperation contract (BCC) parties as fixed assets of the enterprises (
12. Construction materials not yet domestically produced and imported to form fixed assets of a FIE or to carry out a BCC.
13. Goods and services of business with income below a certain threshold.
14. Materials of a FIE or BCC imported to produce products to supply to an enterprise which directly produces products for export.

In order to take full advantage of this opportunity it is a good time to review your VAT records, returns and systems in place. To assist you in this please find below a list of common areas that lead to VAT errors. 

Record keeping
Errors can occur on the VAT return as a result of poor record keeping. The VAT returns must be backed up an appropriate level of records and documentation. Errors could occur on the input tax or the output tax side leading to mistakes like:

1. Omissions
2. Mis-posting/mistakes
3. inaccurate returns
4. Over declaration
5. Under declaration
6. Duplications
7. Timing errors
8. Incorrect VAT codes
9. Gross values used instead of net values
10. Misunderstanding.

Misunderstanding, for example, output tax can be due on items where no consideration is received such as private used assets, non-business use, assets given away or barter transactions. The records should be able to support a claim for input tax and that it is claimed at the correct time. Input tax claimed on expenditure that remains unpaid after six months has to be added back, often missed.

Time of supply
It is the tax point that determines the point at which VAT needs to be accounted for. It is important to make sure that correct output tax is declared in the right VAT return. On the other side it is important to make sure input tax is recovered in the right VAT return. It is important to understand the basic tax points, actual tax points and the difference between tax points for goods and services. Common problems with time of supply relate to:

1. Deposit received;
2. Cash accounting, has the output tax in the right VAT return been declared;
3. Cut off, sales towards the end of a VAT return period can often be missed.

Supply, purchases, expenses and liability
Activities outside the normal business activities can be generally ignored for VAT purposes. The need for charging output tax on non-main stream activities is often missed and misunderstood. Similarly, input tax is claimed when is should not be.

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