Tax Education: The A.B.C of Input and Output VAT

Input VAT is the VAT a taxable person pays on taxable goods and services purchased from a supplier. This VAT is usually paid to the supplier alongside the value of goods and services supplied.

Output VAT is simply the VAT on sales of good and services, collectible by the seller. Section 14 (4) states that where a person to whom taxable supplies is made in Nigeria is issued an invoice on which no tax is charged, such a person should self-account for the tax payable and remit the output VAT to FIRS.

Set-Off of Input VAT against Output VAT

The extant law permits a taxable person to set-off the input VAT paid on taxable goods/services purchased, from the output VAT received on good/services supplied/sold, and remit the excess to FIRS.

Example 1:

Ahmed Enterprise purchases goods worth N5million (with an input VAT of N250,000) and sold the goods for N7million (collecting an output VAT of N350,000).

The above scenario means that Ahmed Enterprise, while filing its VAT returns, is expected to remit the sum of N100,000). This is the excess of the output VAT over the input VAT.

However, if the input VAT exceeds the output VAT, Section 16 (1b) of the VAT Act (as amended) permits the taxable person to utilize the credit against subsequent months.

Input VAT not allowed for set-off against Output VAT

The VAT Act specifies the input VAT that will be allowed as a deduction from output VAT. Section 17 states the allowable deduction shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for direct production of any new product on which the output VAT is charged.

The section however provides the treatment of input VAT on costs not allowed as deduction from output VAT as follows:

  1. Input VAT on any overhead, service, and general administration of any business should be expended through the income statement (profit and loss accounts); and
  2. Input VAT on any capital item and asset should be capitalized along with cost of the capital item and asset.  

Example 2:

Jide Enterprises has the following sales and cost records:

  1. Sales of goods                            –           N7million (output VAT of N350,000)
  2. Purchase of goods for resale  –           N5million (input VAT of N250,000)
  3. Purchase of Office Generator –           N500,000 (input VAT of N50,000)
  4. Audit Fees                                   –           N1million (input VAT of N100,000)

Based on provisions of the extant law, the company will set-off the input VAT of N250,000 on the purchase of goods for resale against the output VAT of N350,000 on goods sold and remit the sum of N100,000 to the FIRS.

However, while the input VAT on the audit fees will be expended into the income statement, the VAT on the purchase of generator will be capitalized with cost of the asset. In other words, both input VAT are not allowed as deduction from output VAT.

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