Nigeria: Inside Tax : Issue 35 - VAT Exemption Status: The Controversy On Basic Food Items

Last Updated: 20 February 2014
Article by Yomi Olugbenro
Most Read Contributor in Nigeria, July 2017

Value Added Tax (VAT) is a consumption tax imposed on the value of the supply of taxable goods and services produced and consumed in Nigeria. The statutory framework for the imposition of the tax is the Value Added Tax Act Cap V1, Laws of the Federation of Nigeria, 2007 (as amended). The applicable rate is 5%. However, there are exceptions to the application of VAT under the legislation. One of these exceptions is basic food items.

While the VAT Act lists basic food items as an exempt item, the term was not defined in the VAT Act. However, Federal Inland Revenue Service (FIRS), in exercising its function of enlightening the public, published an information Circular No 9701 (the Circular) on VAT exemption. This Circular defined basic food items as "any unprocessed staple food item, whether or not it is packaged". This definition is ambiguous and has resulted in a lot of controversies. Based on the above definition and in the opinion of FIRS, for a food item to be exempt from VAT it must be a staple food item and it must be unprocessed. But these then raise the following further questions:

  • What are staple food items?;
  • What does processing entail?
  • What level of processing should be involved

The Food and Agriculture Organisation (FAO) of the United Nations defines staple food as ''one that is eaten regularly and in such quantities as to constitute the dominant part of the diet and supply a major proportion of energy and nutrients needs''. The United States Agency for International Development (USAID) also considers basic food as staple foods which provide the most important nutrients required by the body; they form part of the largest ration used in humanitarian aid. Staple food may also be defined as food that is eaten routinely and in such quantities that it constitutes a dominant portion of a standard diet in a given population; supplying a large fraction of the needs for energy-rich materials and generally a significant proportion of the intake of other nutrients as well. In very simple terms, a staple food is a fundamental food item in the common diet of a group of people. It is a food item that is consumed in large quantities and often eaten at every meal.

Following from the definition given by FAO, it is very clear that the factors to consider when determining whether a food item is staple is not the form or level of processing originating the food has undergone. Rather, it is nutrients content, pattern of consumption and quantum of the populace that consumes the food item routinely.

The other requirement is the processing. "Process" (in relation to food) has been defined to mean as "to make food, materials, or goods ready to be used or sold for example by preserving or improving them in some way"". Particularly, industry experts have defined food processing in simple terms as "the conversion of raw materials and ingredients into a consumer food product".

The pertinent issue therefore is whether FIRS would limit its interpretation of processing of food to "industrial operation" or it would cover all forms of processing ranging from slaughtering, fermenting to sun drying etc. The reality is that there are very limited basic food items that can be put up for sale without any form of processing. For example, the washing of fruits and root tubers with water and certain chemical substance  to clean and preserve them while in  transit and on display is a value adding process. Also, the act of transporting and marketing the basic food items is a value-adding process.

Furthermore, there have been inconsistencies in the application by FIRS of the "processed and unprocessed" rule. For example, FIRS included semi-milled or wholly milled rice as part of the recognised VAT exempt food items. But in another situation, FIRS attempted to assess some companies involved in the production of Cassava-based Flour to VAT. In a further scenario, FIRS sought to classify this "non-special" bread popularly referred to as "Agege loaf of bread", preferred by the low income earning class, as a basic food item while classifying sliced loaf typically preferred by the middle and high-income class as non-basic.

In view of the fact that tax payers are not bound by the content of FIRS  Circular, tax payers can justify the notion of basic food items using other acceptable means. For example, the dictionary definition of "basic" includes fundamental and as  described above, basic food items are fundamental food item in the common diet of a group of people; consumed in large quantities and often eaten at every meal.

The USAID also considers basic food as staple foods which provide the most important nutrients required by the body; they form part of the largest ration used in humanitarian aid FIRS is encouraged to revisit its current position and application thereon to enable a more realistic and settled treatment around "Basic Food Items" as exceptions to the imposition of VAT. This will ensure that the target beneficiaries of this exemption are not unwittingly excluded via a strained interpretation or application of the provisions of the VAT Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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