The Honourable Minister of Finance, Budget and National Planning ("the Minister") recently issued the Value Added Tax (Modification) Order, 2021 ("2021 Order"), which is effective from 30th July, 2021. The Order modifies and expands the list of exempted goods and services in the First Schedule to the Value Added Tax (VAT) Act and provides clarification on the exempted items already listed in the VAT Act.
Section 38 of the VAT Act ("the Act") empowers the Minister to amend, vary or modify the list set out in the First Schedule to the Act. Recall that in 2020, the Minister, pursuant to this provision, issued the VAT (Modification) Order 2020 ("2020 Order") that defined certain items contained in the list of exempted items provided in the First Schedule to the VAT Act and further expanded the list. The Minister has now issued the VAT (Modification) Order 2021 which revokes and supersedes the VAT (Modification) Order 2020 and all other VAT (Modification) Orders issued before the commencement of the 2021 Order.
Similar to the VAT (Modification) Order 2020, the 2021 Order modifies and expands the list of exempted items provided in the First Schedule of the VAT Act and sets out their Common External Tariff (CET) codes. The Order also provides definitions to the VAT exempt items listed in the First Schedule to the VAT Act. The 2021 Order is largely similar to the 2020 Order with a few changes.
Some of the changes introduced by the 2021 Order are highlighted below:
– "Commercial aircrafts, commercial aircraft engines, commercial aircraft spare parts" which is listed as VAT exempt in the VAT Act has been defined to mean –
- in the case of a commercial aircraft, an aircraft used in shared air transportation in Nigeria excluding private aircrafts; and
- in the case of commercial engines and commercial aircraft spare parts, engine and spare parts for use on commercial aircrafts;
– "Books and educational materials" which is listed as VAT exempt in the VAT Act was rephrased as "Educational books and materials";
– "Airline Transportation Tickets" which is also listed as VAT exempt in the VAT Act has been defined to exclude hired or rented aircrafts or private jets;
– "Fertilizer" which is also listed as VAT exempt in the VAT Act was streamlined to mean "all Fertilizers for Agricultural purpose";
– Petroleum products, which is listed as VAT exempt in the 2021 Order, has been defined to mean aviation turbine kerosene, premium motor spirit, household kerosene and locally produced liquefied petroleum gas and crude petroleum oils;
– The definition of "lease of residential accommodation" which previously excluded leases by corporate persons from VAT exemption has been deleted;
– The VAT exemption for services rendered by Micro-Finance banks has been restricted to those rendered by "Unit Micro-Finance Banks" and a "Unit Micro-Finance Bank" has been defined to mean a "micro-finance bank categorized by the Central Bank of Nigeria as Tier 1 or Tier 2 Unit Micro-Finance Bank;
– The 2021 Order also inserted the following into the First Schedule to the VAT Act as VAT exempt items:
- Petroleum Products;
- Renewable energy equipment;
- Raw Materials for the production of baby diapers and sanitary towels;
- Raw materials for the production of pharmaceutical products;
- Locally produced animal feed;
- Military hardware, arms, ammunitions and locally manufactured uniforms used by the Armed forces, para-military and other security agencies of governments in Nigeria;
- Gas supplied by gas producing companies to Electricity Generating Companies (GENCOs). Electricity generated by GENCOs and supplied to National Grid or Nigeria Bulk Electricity Company and Electricity transmitted by Transmission Company of Nigeria to Electricity Distribution Companies;
- Agricultural seeds and seedlings;
- Shared passenger road-transport service.
The Order seeks to modify the First Schedule to the VAT Act by effectively expanding it and providing relevant interpretations of terms that had previously led to contentions between tax authorities and taxpayers. Thus, it is important for taxpayers to note specific developments such as the deletion of the definition of "lease of residential accommodation" from the VAT Modification Order. Based on this development, it is our view that given that the VAT Act excludes land and buildings from the application of VAT, all transactions involving lands and buildings (including leases) should be exempted from VAT whether undertaken by corporate entities or individuals.
The above notwithstanding, concerns have been raised in recent past regarding the Minister's powers to issue the VAT Modification Order (Read our tax alert on this here). It is therefore important for taxpayers to tread cautiously and consult with their tax advisors in discharging their VAT obligations in view of the ongoing disputes surrounding the administration of VAT 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.