Value added tax (VAT) is a multistage consumption tax, which is charged and payable on the supply of all goods and services. VAT is payable by individuals, body corporates, and organisations that buy, procure or import taxable goods and services. VAT applies on all goods and services except those specifically listed as exempt in the law. The First Schedule to Value Added Tax Act, Cap V1, LFN 2007 (as amended) (VATA) contains the list of exempted items. Goods exempted include basic food items, baby products, all exports, books and educational materials.
In addition to VATA, which is the core legal framework for the administration of VAT, the Federal Inland Revenue Service (FIRS) which administers VAT, has in the past released ‘Information Circulars’ which have assisted in the effective administration of VAT.
Since the introduction of VAT in 1993, it has become an important source of revenue to the country and the proceeds are distributed amongst the federating units. VAT also accounts for a significant percentage of the total tax revenue generated in the country. The Revenue Authority’s approach in the administration of VAT is that, what is not specifically exempted in Schedule 1 of the Act is taxable. This has been their mantra. To give effect to this understanding and interpretation of Schedule 1 of the Act, FIRS released an information circular 2007/02 ‘‘Detailed list of items exempted from VAT”.
One of the many grey issues associated with VAT is the uncertainty in its application for companies operating in the Nigeria Electricity Supply Industry (NESI) and more specifically, those engaged in electricity generation, with many questions remaining unanswered. Some of the recurring questions confronting the industry are; whether VAT is chargeable by transmission companies and the bulk purchasers? At which point in the value chain should VAT be charged? Was VAT envisaged at the point the Multi-Year Tariff Order pricing was fixed?
The Electric Power Sector Reform Act (EPRA) created opportunities for private companies to engage in these three segments; electricity generation, transmission, and distribution. The Act birthed the Nigerian Electricity Regulatory Commission (NERC), as an independent regulator of the electric power sector. As a result of the reform, Power Holding Company of Nigeria (PHCN) was unbundled into six generating companies (GenCos), one transmission company and eleven electricity distribution companies (DisCos). After the privatisation of the power sector, GenCos now sell power to Nigeria Bulk Electricity Trading Plc (NBET) at agreed prices stated in the Power Purchase Agreements (PPA) while NBET resells to the DisCos, who in turn deliver to the final consumers.
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