The Tax Appeal Tribunal ("TAT" or "the Tribunal") sitting in Lagos, on 10 February 2022, delivered a landmark judgement on what constitutes "stock-in-trade", for the purpose of determining allowable input VAT which can be claimed against output VAT. The decision arose from an appeal by Chi Limited (Chi/the Company) against the Federal Inland Revenue Service (FIRS).
Without prejudice to the ongoing dispute on constitutional legitimacy of the VAT Act, the key issue for determination in this case was the construction and interpretation of Section 17 of the VAT Act (VATA) as to what constitutes stock-in-trade for the purpose of claiming input VAT. In this article, we have analyzed the decision of the TAT and the potential implications on businesses, particularly those operating in the manufacturing sector.
Background
For the purpose of allowing businesses recover the input VAT initially suffered and to ensure that the ultimate tax burden is borne by the final consumers, Section 16(1) of the VATA as amended by the Finance Act 2019, provides that a taxable person shall remit excess VAT to the tax authority, where the output tax collected exceeds the input tax paid or utilize the excess tax as a credit against subsequent months, where the input tax paid exceeds the output tax collected. Provided that the taxable person would be entitled to a refund from the tax authority, of excess tax not utilized as a credit, upon provision of such documents as the tax authority may require.
Section 17 further provides that the input tax to be allowed as a deduction from output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged.
Since there is no statutory definition of "stock-in-trade" in the VAT Act and the Finance Acts, the determination of what constitutes allowable input VAT on stock-in-trade used for the direct production of new products has been subjective. In addition, by virtue of practice and interpretation by FIRS, this has been limited to raw materials used in the production of the new products on which the output tax has been charged. However, the recent judgement of the TAT has put the matter to rest.
Overview of the Appeal and Decision
The principal business activity of Chi Limited is the production of fruit juices, dairy and other products in the beverage and snack categories. The Company had, in September 2020, written to FIRS requesting a ruling permitting it to recover input VAT incurred on the purchase of gas, short term spares and consumables against the output VAT it charged on its products.
FIRS rejected the Company's request by responding that natural gas and diesel, "short term" spares and other manufacturing consumables are not allowable deductions against the output VAT collected from the sale of the Company's products, as they do not form stock-in-trade or constitute raw materials. FIRS held the view that since the Company produces fruit juices, dairy and other beverage products, the items instead formed part of the Company's production overheads (which should be expensed to the income statement).
Chi Limited was displeased with the FIRS' position and thus, the Company appealed to the TAT, challenging the FIRS' position and seeking among others, the TAT's declarations that FIRS' ruling and construction of Section 17 is wrong in law and that natural gas, short term spares and other consumables used by the Company in the production of its products constitute the Company's stock-in-trade.
The Company's argument at the TAT was premised on the fact that the objective of Section 17 of the VAT Act is to deter businesses from reclaiming input VAT when there is no direct link between the input VAT incurred and the output VAT charged by the business. However, once there is a direct link with the output VAT, businesses can fully recover their input VAT.
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