The VAT rate is as low as 7.5%, and despite annual revisions, VATA does not keep track of the evolution of corporate operations and business models.
According to data provided by the National Bureau of Statistics (NBS), the telecommunications sector is the largest sector in the information and communication technology (ICT) sector, contributing over $75 billion to approximately 17% of Nigeria's gross domestic product (GDP). doing.
The rapid growth of the telecommunications sector has had a positive impact on several other sectors of the Nigerian economy, including e-access to banking services (bank mobile apps), e-health and e-learning platforms for Nigerians. Masu. During the COVID-19 pandemic, the communications sector has become a trusted ally for individuals, businesses, schools, and health organizations. This has created a new normal for virtual conference learning activities and healthcare delivery. Despite its growth and innovation, Nigeria's telecommunications industry is not without its challenges, ranging from multiple taxation to overregulation, vandalism, theft, land use fees, and more.
The issue of multiple taxation is that of value-added taxes on telecommunications products and services. Value added tax (VAT), levied at a rate of 7.5%, is paid by companies operating in Nigeria's telecommunications industry on taxable goods and services consumed. He is also obliged to collect and account for his VAT on taxable supplies to his customers. The above is based on the Value Added Tax Act 2007 (VATA or the Act) as amended by the Finance Act 2020 and the Finance Act 2021. You are required to charge and pay VAT on (exempted by law).
VAT is multi-layered as it is levied at every stage of value addition in the trade value chain, from production to final consumption. All suppliers of goods and/or services that are subject to VAT must include VAT on their invoices, unless the supplier is a small business that manufactures supplies that are taxable in any calendar year. You will be required to collect VAT. This VAT is considered 'output VAT'. However, the exemption from VAT registration and subsequent compliance obligations that applies to small and medium-sized enterprises with an annual turnover of less than his 25 million naira (US$29,411.76) does not apply to companies engaged in upstream oil business, regardless of turnover. Not applicable.
The VAT paid by the purchaser on the goods is recognized as “input VAT”. Input VAT is deducted from output VAT and the remainder (net output) is paid to the Federal Inland Revenue Service (FIRS) within 21 days from the month following the month in which the purchase or supply took place.
Input VAT can be set off against output VAT in the following situations: where goods are purchased or imported directly for resale, and in trade where goods are used in the direct production of new products to which output tax is applicable. Charged when making up inventory.
Input VAT incurred on expenses that do not meet any of the above conditions and cannot be recovered from production VAT, but is incurred on overhead, services and general administration, or is capitalized as part of the cost of assets. It is expensed through the income statement. When it occurs on fixed assets (tangible fixed assets). In other words, only trade or manufacturing activities related to goods are subject to input VAT claims from output VAT.
A taxpayer is entitled to a VAT deduction if the eligible input VAT incurred exceeds the output VAT received. Although the above principles are well-established, there are concerns about what constitutes a qualified input VAT claim. The Tax Appeals Tribunal (TAT), in the case of CHI Limited v. Federal Inland Revenue Service (FIRS), resolved a dispute over the interpretation of section 17 of his VAT Act as a qualifying basis for an input VAT claim. The appellant, CHI Limited, submits that the term “stock in trade” as used in section 17 of the VAT Act has no further definition and cannot be strictly and exclusively interpreted to mean stock only. insisted. The company believes that the usual meaning of the term is more inclusive than inventory, and that items such as gas, spare parts and consumables used in the direct production of products are considered trading inventory in the context of Article 17 of the VAT Act. I claimed I was eligible.
The court ruled in favor of the appellant that “trade stocks” could not be reduced to simply raw materials and stocks. Since the VAT Act provides for “shares in trading”, the same has to be interpreted in its ordinary meaning. The TAT further held that in the absence of a legislative definition of the term, the appellant was justified in relying on the ordinary dictionary definition, as dictionaries are sympathetic and imaginative discoveries of legislative intent. Stated.
Also read: Paying VAT in Nigeria: What you need to know
Challenges of applying VAT in the telecommunications industry
Operators in the telecommunications industry face several challenges regarding the application of VAT on purchases and supplies. Some of the major challenges are:
1. Inability to recover input VAT from output VAT
The non-recovery of VAT generated through input-output mechanisms is a major issue affecting the cash flow and profitability of the telecommunications sector. Given the strict conditions for offsetting input and output VAT, telecommunications companies are not able to recover the entire input VAT incurred on purchases.
This is independent of the fact that VAT is incurred on the cost of services that form part of a company's direct costs. This has an impact on cash flow as more cash is parted with each month while the input VAT expense on the income statement reduces the annual profit.
2. Recognition of VAT on interconnection charges
Network operators in the telecommunications industry typically pay interconnection fees to use other operators' networks to complete calls originating from their networks and terminating on other networks. The operator on the network from which the call originated will bill the customer and terminate a portion of the bill to the operator on the network from which the call was originated. These charges usually include his VAT. In practice, the carrier prefers to offset her VAT incurred on interconnection charges from the output VAT charged to the customer for the services provided. In contrast, the FIRS frowns upon this practice, requiring payment of the full amount of VAT on revenue earned from customers, while insisting that VAT accrued on interconnection fees be charged or expensed in the statement of comprehensive income. There is.
conclusion
The issues identified above demonstrate that there remains a significant gap between current business realities and VATA regulations. While business continues to evolve, tax law has not been sufficiently considered to address new business exigencies and realities, despite the reforms introduced by the Finance Acts of 2019, 2020 and 2021. yeah.
Although the VAT rate is as low as 7.5% and has been revised annually since 2019, the VAT regime and VATA in its current form do not capture the evolution of the operations and business models of companies, including operators in the telecommunications industry. has not been completed. .
The discriminatory provisions of VATA have caused much controversy as they affect input VAT claims in the service industry. Services industries must be given the opportunity to claim input VAT in the same way as businesses operating in the trading and manufacturing sectors. Therefore, there is an urgent need for a review and amendment of the VAT Act to address the issues identified above.
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