Nigeria: Microfinance Banks And The VAT Legislation: Is There A Case For Exemption?

Last Updated: 22 August 2017
Article by Taiwo S. Okunade
Most Read Contributor in Nigeria, October 2018

Introduction

The primary aim of new National Tax Policy is to introduce new strategies that will enable government achieve its objectives of creating an enabling environment for businesses to thrive while simplifying the tax system. This underlying principle is expected to be applied in the purposive interpretation of ambiguous provisions of the tax laws.

Nigeria's banking sector has few controversies resulting from ambiguity in the tax laws. One of the most prominent of these controversies is the applicability of value added tax (VAT) to financial services rendered by microfinance banks. Federal Inland Revenue Service (FIRS) typically expects microfinance banks to charge VAT on services rendered to their customers based on relevant provisions of the Value Added Tax Act, Cap V1, LFN 2007, as amended (VATA or the Act). However, many microfinance banks have challenged FIRS' position on the grounds of alternate interpretation of VATA that supports exempting VAT on services rendered by these institutions.

This paper examines the current legislative provisions guiding the applicability of VAT on services of banks and other financial institutions and arguments against the imposition of VAT on services rendered by microfinance banks in Nigeria.

History of Microfinance banks

Microfinance banks metamorphosed from three types of financial institutions – Universal Banks, Community Banks and Non-Governmental Microfinance Banks. The erstwhile community banks were introduced in the 1990s under the Community Banking Decree of 1992 to bridge the gap in credit capacity between high-income earners and low-income earners in Nigeria. The community banks were small-scale and non-discriminatory in their dealings with customers. They were established to assist the Federal Government in improving the ability of grass root customers in the informal sector to access credit facilities.

In December 2005, the Central Bank of Nigeria (CBN) released a microfinance policy known as Microfinance Policy, Regulatory and Supervisory Framework ("CBN Policy"), which serves as the framework for the establishment of microfinance banking in Nigeria. According to the CBN, the formal financial system only provided financial services to about 35% of the economy, while the remaining 65% were excluded. This 65% were serviced by the informal financial sector such as non-governmental organization microfinance institutions, money lenders, credit unions, etc.

The CBN Policy provides for two categories of microfinance banks; namely, micro finance banks licensed to operate as a "unit banks" and micro finance banks licensed to operate in a State. All existing licensed community banks at the time were required to transform to micro finance banks within 24 months from the effective date of the CBN Policy, subject to meeting the specified capital and other conversion requirements.

VAT and microfinance banks

VATA, being the primary legislation governing the imposition and administration of VAT in Nigeria, provides for the imposition of VAT at 5% on all supply of taxable goods and services except those specifically exempted in the First Schedule to the Act.

Generally, VAT is applicable to fees and commissions charged by banks and other financial institutions for services rendered. However, it was clarified in FIRS Information Circular that rewards for activities of these institutions that constitute returns on investment are not liable to VAT. These rewards include interest on loans/advances, overdraft facilities, savings accounts, bank deposits and interbank placements, dividends, profit on disposal of securities, etc.

Considering that there is no specific VAT exemption for microfinance services in VATA, the above may therefore suggest that VAT would apply to microfinance services. This supports the current practice by FIRS of requesting microfinance banks to charge VAT on fees earned from services rendered to their customers, provided the rewards do not constitute returns on investment. However, this FIRS' practice may not be consistent with the tax laws for the following reasons:

  • Part II of First Schedule to VATA specifically exempts services rendered by Community Banks, People's Banks and Mortgage Institutions from VAT. However, VATA does not define what constitutes a "community bank" for VAT purposes.

A working definition in Paragraph 6.0 of the CBN Policy refers to community banks as microfinance banks licensed to operate as unit banks. Given that operations of unit banks are required to be community-based, it could be argued that the provisions of VATA relating to community banks are also applicable to microfinance banks licensed to operate as unit banks.

  • From the legislative sequence of events, one may argue to a large degree of conviction that services provided by microfinance banks (or at least, those licensed to operate as "unit banks") should be clearly exempt from VAT.VAT became part of Nigerian tax regime in 1993. The original legislation, VAT Decree No. 102 of 1993 includes services rendered by Community Banks, People's Bank and Mortgage Institutions as exempt services. At the time this legislation was promulgated, Nigeria used to have community banks and People's Bank but not microfinance banks. These categories of financial institutions have now been replaced by microfinance banks following the CBN's directive in December 2005.

Although, there have been amendments to VATA post-2005, failure to replace community banks and People's Bank with microfinance banks on the list of exempt services was a clear oversight. As the successor in title to erstwhile community banks, with the transition necessitated by legislation (i.e. the CBN Policy), microfinance banks should naturally enjoy the VAT exemptions that community banks and People's Bank enjoyed.

  • The CBN Policy provided a framework for certain fiscal and regulatory incentives to be granted to microfinance banks that emerged as a consequence of CBN's directive of December 2005, including exemption from VAT. Paragraph 12.1 of the CBN Policy states that "CBN shall collaborate with appropriate fiscal authorities in providing favorable tax treatment of microfinance banks' financial transactions including exemption from VAT on lending and tax on interest income and revenue". There is no evidence that CBN and FIRS have collaborated in implementing this policy.

Though, the CBN Policy is not a law in itself; it, however, provides a guide as to the intentions of the CBN when issuing the directive for the establishment of microfinance banks in Nigeria, one of which was to exempt financial transactions of the banks from VAT, in consonance with the provision of VATA as it relates to services provided by the defunct community banks.

Conclusion

There is no doubt that the erstwhile community banks are similar, if not the same, as microfinance banks, given the nature of their operations and the strategic intent behind their establishment. Hence, the provision of VATA which exempts services rendered by community banks from VAT is also applicable to microfinance services.

Further, in order to support the Federal Government in actualizing its objective of promoting Nigeria's economic development through microfinance banking, the FIRS must suspend its current practice of subjecting financial services rendered by microfinance banks to VAT. The FIRS may consider issuing a circular or guideline to provide clarity to stakeholders in this regard. Also, there may need to update the list of exempt services in Part II of First Schedule to VATA by replacing the term "Community Banks" with "Microfinance Banks".

The foregoing will go a long way towards resolving the existing controversy. It would also ensure fair treatment of microfinance banks and promote compliance with extant VAT legislation in Nigeria.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Taiwo S. Okunade
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions