Value added tax (VAT) is definitely the most known tax in Nigeria. This is because we find it on most receipts given to us almost everywhere – at the mall, the cinemas, etc.

A friend was confused as to why he had to pay VAT every time he purchased goods at a store. He was of the very strong opinion that the store was the one making profits from his product, and so it should ordinarily pay VAT or any other related tax whatsoever. This position of his is however, not entirely correct.

VAT is not a tax payed by the person who makes profit or income, it is an indirect tax that is paid when there is a supply of goods and services. It is levied at a rate of 5% and administered by the Federal Inland Revenue Service.

As the name implies, Value Added Tax is levied and paid at each value adding stage of a transaction. This means that in my confused friend’s scenario, – the manufacturer, the wholesaler, the store who sold his products to him (the retailer), and my friend, the final consumer are all required to pay VAT. There is however a catch. This is that the law actually allows the manufacturer, the wholesaler and the retailer to transfer their VAT burden onto the final consumer. Allow me to explain further.

Imagine with me, that Mr. A, owns land and is in the business of selling trees. He intends to sell a log of wood to Mr. B for 500 naira. Mr. B is required by law to pay VAT of 5% (25 naira) in addition to the 500 naira. Mr. B thus pays 525 naira to Mr. A. Mr. A then remits the 25 naira to the tax authority as VAT.

Mr. B, fashions and processes this log of wood and intends to sell to Mr. C for 1000 naira. Mr. C is required by law to pay VAT of 5% (50 naira) in addition to the 1000 naira. Mr. B thus pays 1050 naira to Mr. A.

You would recall that Mr. B paid 25 Naira to Mr. A as VAT. He is allowed by law to collect his 25 naira from the VAT of 50 naira paid to him by Mr. C. In effect, Mr B also remits 25 naira to the tax authority as VAT.

Mr. C, a brilliant woodcarver now whittles this wood into a magnificent chair and intends to sell to Mr. D for 1500 naira. Mr. D is required by law to pay VAT of 5% (75 naira) in addition to the 1500 naira. Mr. D thus pays 1575 naira to Mr. B.

You would recall that Mr. C paid 50 Naira to Mr. B as VAT. He is allowed by law to collect his 50 naira from the VAT of 75 naira paid to him by Mr. C. In effect, Mr. C also remits 25 naira to the tax authority as VAT.

The tax authority has now received 25 naira from three people which equals 75 naira. You would realise, that this 75 naira is the same amount paid by Mr. D, the final Consumer. Do you have any idea why?

This is because the person who stops adding value, bears the entire VAT liability in a chain of supply. Mr. D, by ending the chain of supply, pays the entire tax payable by Mr.’s A, B and C before him. The three have since gotten their money they paid as VAT from the next person below them on the chain of supply. VAT is thus called a multi-stage tax with a single effect. It is multi-stage because everyone at every stage of supply pays it, but with a single effect because the last person bears the effect/ burden of everyone’s VAT. So, the more value that is added to a transaction or the longer the chain of supply, the greater the burden on the final consumer.

The Value Added Tax Act currently regulates the administration of VAT. It divides goods and services into three: VATable goods and services, exempt goods and services and zero-rated goods.

VATable goods and services are those goods and services not exempt by the VAT Act. Exempt goods and services are goods that VAT does not apply to. They include: (i) medical and pharmaceutical products; (ii) baby products; (iii) basic food items; (iv) books and other educational materials; (v) agricultural products; (vi) medical services, (vii) All exported services.

Zero rated goods and services have VAT at the rate 0% levied on them. They (i) include non-oil exports; (ii) goods and services purchased by diplomats and (iii) goods purchased for use in humanitarian donor funded projects.

Every person, whether resident in Nigeria or non-resident in Nigeria, who sells goods or renders services in Nigeria whether the items are exempt or not, must register for VAT within six months of its commencement of business in Nigeria with the Federal Inland Revenue Service (FIRS) as the body primarily responsible for the administration of VAT in Nigeria. The taxable person must remit VAT collected to the FIRS otherwise, penalties apply.

Although consumers pay VAT, it is vendors who are VATable persons in the eye of the law. VAT is not a tax prone to evasion due to its indirect nature; however, non-remittance is a common occurrence. You may have paid VAT but are you quite sure that your tax has been remitted?


Opara Chizaram Adaobi is a premium graduate of law from the University of Ibadan. She is the immediate past president of the Tax Club, University of Ibadan. Chizaram is an ardent tax enthusiast who hopes to see an improvement in the Nigerian tax sector. Her goal to impact the world is what inspired her to join the taxville team, a platform she believes will not only educate people on salient tax subjects, but also convert them into tax enthusiasts.

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