TYPES OF INDIRECT TAX
The main reason why an indirect tax is referred to as such is that the party who eventually bears the levy is different from the party that would remit the same to the Federal Inland Revenue Service. In Indirect taxation, the tax is not exactly collected as a tax but as a part of the amount payable for the goods or services. This means that when purchasing an item, a customer cannot decide whether or not he desires to pay indirect tax as it is automatically added to the cost price of the goods and presented as the purchase price.
The types of indirect taxes payable in Nigeria include:
1. Value Added Tax (VAT): this tax is generally referred to as consumption tax. It is the tax payable by a consumer on goods and services purchased in Nigeria. It accrues on the product or service at each stage where value is further added to the product or service. It is the principal indirect tax in Nigeria and it was first introduced in Nigeria in 1993 by the Value Added Tax Decree No 102 of 1993 and became operational in January 1994. The Value Added Tax replaced the Sales Tax that was introduced by the Federal Government in Decree No. 7 of 1986.
A Taxable person includes individuals or bodies that engage in the sale of goods and services to make a profit. The VAT rate in Nigeria was originally fixed at 5% which was one of the lowest rates available globally by the VAT Decree No 102 of 1993. After many unsuccessful attempts to increase the rate, it was upwardly reviewed to a fixed rate of 7.5% by the Finance Act 2020 which came into force on the 1st of February, 2020.
As earlier mentioned, there are goods and services that are described as VAT-able. This includes all consumption goods and services except those expressly described as exempted.
The VAT Decree No 102 of 1993 provided a list of exempted products and the Finance Act 2020 added a few other products to the list. The exempted goods include: Medicinal products (Human and veterinary in nature), agricultural and agro-allied equipment and tools, trade plants and machines, downstream gas processes plants and equipment, learning materials, essential food items including seasoning, animal protein, tubers, nuts and other essential food items. The exempted services include: services by community and microfinance banks and educational events. Businesses with a turnover of less than N25 million are also exempted from paying VAT.
The sharing formula is as follows: 15% of the total VAT received for the year goes to the Federal government, 50% to the state and 35% to the local government, accounting for part of the generated revenue.
Taxable persons duly registered with the Federal Inland Revenue Service are expected to make payment and file VAT returns not later than the 21st day of the following month after the transaction occurred.
2. Custom Duties: This is further categorized into import and export duties. The Nigeria Customs Service is saddled with the responsibility of collection of custom duties. When products are imported into Nigeria, import duties are paid to the Nigeria Customs Service and export duties are paid on products exported from Nigeria to other countries.
Depending on the product, custom duties can be a fixed percentage or payable in proportion to the quality or value of the product with rates between 5% -35%. The calculation is usually based on the Cost, Insurance, and Freight valuation method.
3. Excise duty: this is another form of indirect tax. It is levied on certain manufactured products to discourage the sale and use of such products or services. It was introduced in Nigeria in 1962 with subsequent alterations to the list of products that excise duties can be charged on to serve as a form of deterrent to the prevalent use of certain products.
These products and services are deemed as harmful and excise duty is charged ad valorem (a fixed percentage on the value of the product) or an amount according to the specifications of the product or even a fixed charge to increase the purchase price and discourage patronage. The fifth Schedule to the Customs and Excise Tariff, Etc. (Consolidation) Act provides for excisable goods to include Tobacco, Alcohol, bleaching creams, and gambling, amongst others.
An amendment has been made to this list by The Fiscal Policy Measures and Tariffs Amendments 2022 with an inclusion of a 5% excise duty on telecommunication services. The Finance Act has also amended the Customs and Excise Tariff Act to impose excise duties on imported excisable goods only.