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VAT 101: Meaning of VAT Registration Threshold as Announced by President Buhari During 2020 Budget Presentation

By Taiwo Oyedele / Image Credit: Taiwooyedele.com

Currently, section 8 of the VAT law requires a taxable person (an individual, body of individuals, companies, etc) to register for VAT with FIRS and charge VAT at 5% on the supply of their goods or services to customers. The VAT charged must be paid to FIRS together with a VAT form duly filled and submitted on a monthly basis. Failure to comply carries financial penalties.
Based on the proposed amendments, any business (company, sole trader, partnership or enterprise) whose annual turnover is less than N25m is exempted from VAT registration and by implication does not have to charge VAT on its goods and services. 
The objective of this threshold policy is to exempt micro and small businesses from the burden of VAT compliance and their customers would not be charged VAT, while FIRS can also focus their energy on medium and large businesses. 
This does not mean that such small businesses will not pay VAT when they buy goods and services that are liable to VAT, it only means they won’t have to charge VAT when they sell to their own customers.
It also doesn’t mean that the customers of such small businesses will not suffer any VAT indirectly, depending on the scenarios they could suffer less, same, or even more hidden VAT where there is an increase in VAT rate as proposed by government. 
For example, let’s assume that Bako buys non alcoholic wines from a company at N1,000 per bottle + N50 VAT making N1,050. He in turn sells each bottle for N1500 to his customers. Under existing law, Bako must charge N75 on the sale making N1575 to his customer, and offset the N50 he earlier paid (input VAT) against the N75 collected (output VAT) and pay over N25 to FIRS. 
Under the proposed threshold, if Bako’s total sales in a year is less than N25m then he will still pay N1,000 plus N50 VAT when buying the wines but will not have to charge VAT when he sells to his customer. However, because Bako is not registered for VAT, he can’t claim the N50 VAT paid. 
However, Bako’s profit under the 1st scenario is 500 (1,575 – 1050 – 25). With threshold exemption Bako will now have to sell at N1550 without charging VAT in order to maintain his N500 profit (N1,550 – 1050). So the customer saves N25, and Bako doesn’t have to worry about charging VAT or filing VAT returns every month.
If VAT rate goes up to 7.5%, then Bako’s pays 1000 + 75 for the wine and have to sell at 1575 (without charging VAT) in order to maintain his 500 profit. So the customer technically still pays the same amount as before when VAT was 5% without a threshold to exempt Bako.

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