A CASE ON HOW THE TAX AUTHORITY CAN MAKE THE VALUE ADDED TAX (VAT) ADMINISTRATION MORE EFFECTIVE

It is now a notorious fact that the low income obtainable from oil revenue has made the government shift a particular attention to revenue from other sectors particularly income from tax. There is pressure on the Federal and State revenue services to increase the tax base and ultimately increase revenue from the sector.

The problem with tax administration is not so much about the number of available businesses but on the compliance nature of the people. Statistics show that compliance with tax laws is majorly by registered companies in Nigeria thereby excluding billions of Naira that could be generated from other businesses.

It is true that the tax authorities have become aggressive in pursuing tax compliance but a case can be made that the people the tax authorities continue to harass are still those presently in the tax net even with the various incentives the government has created. We await the number of new tax payers captured by the Voluntary Asset and Income Declaration Scheme (VAIDS) to see if people are now more receptive to paying taxes in the country.

I am of the opinion that for there to be an effective administration of the tax laws and compliance with it, a lot more individual participation has to be encouraged. I will give a practical example of one of our tax laws; Value Added Tax (VAT) Act can be made to be more effective. The VAT is administered by the Federal Inland Revenue Service (FIRS).

VAT is charged on the supply of goods and services in Nigeria. What this means is that for every time someone sells an item or provide a service to you, VAT should be charged on it. The supplier in turn has to remit the higher of the VAT he had earlier paid to be able to supply the goods or service to you called “Input VAT” and the VAT which you paid to him called “Output VAT” to the Tax authority. So now we are aware everybody in the production stage pays VAT.

In other for a supplier be able to charge VAT on goods and services as directed by the VAT Act, the supplier has to register with the Tax Authority within six months of commencing business. It is an offence not to register to collect VAT for the tax authority. Failure to so register attracts a penalty of N10,000 (Ten Thousand Naira) for the first month of default and N5,000 (Five Thousand Naira) for every subsequent month in which the failure to register continues. The business of such supplier may also be shut down by the tax authority.

After such registration, a supplier should start to charge VAT on their supply. Typically items liable to VAT are called VATable items. The tax is charged at 5% of the value of the goods and services for qualifying transactions as some items are exempt from VAT namely:

1)      Part I of the First schedule to the VAT Act exempt certain goods from VAT notably; baby products, basic foods items (which is very controversial in claiming), books and educational materials etc.

2)      Part II of the same schedule also exempt certain services from VAT notably Medical services. 

3)      Part III of the same schedule then classifies some items as Zero rated goods- It isn’t that VAT is not charged but the rate charged is 0% which might as well be nothing. Items that qualify under this heading are:

a)       Non-oil export- for every item exported that isn’t oil, VAT is not charged on it. This is to encourage the economic development of other goods and services in Nigeria.

b)      Goods and services purchased by Diplomats, and

c)       Goods purchased for use in humanitarian donor funded project- typically because this is not a business transaction, organizations or individuals that engage in it do it to help others. It will not be fair on them if they have to pay tax to help others.

In other words, if an item of supply does not fall in the above category, the registered supplier must charge VAT and issue a tax invoice appropriately. Failure to issue the tax invoice then mean that no VAT will be paid by the purchaser and the Supplier will be penalized for this. The penalty is 50% of the cost of goods and services for which the invoice was not issued.

The provisions and penalties in the Act seem sufficient and one would expect easy compliance. Unfortunately, compliance has proven to be more difficult. One would find that:

1)      A lot of suppliers are not registered for VAT

2)      A number of unregistered suppliers for VAT collect VAT and fail to remit to the Tax Authority

3)      A number of suppliers will actually remit the VAT to the tax authority but will refuse to file their returns making it difficult for the tax authority to determine the statistics that complied with the law.

An argument might be made by the tax authority that the above defaults have sanctions provided for them in the law but the reality is that there is a wide level of tax evasion in the country because people know they will get away with it and the tax authority does not have sufficient resources to tackle offenders.

This then brings me to my recommendation. The tax authority should not make the payment and remittance of VAT the sole responsibility of the supplier. Shift some of the responsibility on the taxpayer by replicating some of the methods of the Withholding tax system (which I will address in the future). While no credit notes have to be issued for VAT paid, purchasers may be made to insist

insist on their receipt of payment from vendors and such receipts can be exchanged as some sort of tax clearance certificate (TCC) from the tax authority. Our existing economic landscape has made a TCC an essential requirement in processing a number of things in the country. So rather than relying on only income tax as a basis for issuing TCC’s, other effective methods of generating revenue such as this may be explored.

By making this provision, more taxpayers will make extra efforts in ensuring the vendors they patronize are legitimately registered. This will then trigger more vendors to be compliant with the law as most businesses want to make turnovers by ensuring customers don’t leave to their competitions who are registered. The tax authority on its part can then easily monitor VAT collected by Vendors based on evidence of payment provided to them in the form of copies of receipts which they now have in their database and proceed to ensure remittances of them have been made. It then becomes easier to enforce sanctions provided in the law on defaulting parties.