Section 36 of the recently passed Finance Act, 2019 introduced an amendment to section 4 of the Value Added Tax (VAT Act). The said amendment stipulates as follows: “Section 4 is hereby amended by substituting 5 per cent with 7.5 per cent”. The implication of this amendment is that the erstwhile VAT rate of 5% has now been increased to 7.5%.
The Minister of Finance recently announced that the implementation of the new section 4 of the VAT Act will commence on 1st February 2020. This thus implies that as from 1st February 2020 the rate of VAT to be charged will be 7.5% and no more 5%. This new enactment has however occasioned a debate on how much rate should be charged as VAT on transactions already completed before 1st of February 2020 but are yet to be invoiced.
At a recently held breakfast Forum organized by Pedabo on 22nd January, 2020 where the implications of the various amendments in the Finance Act were discussed, the representative of the Federal Inland Revenue Service (FIRS) explained that all invoices issued from 1st February, 2020 should carry a 7.5% VAT charge for all vatable transactions. This thus means that regardless of when the transaction was consummated or the purchase order was issued, all invoices issued for payment after 1st February 2020 should carry a 7.5% VAT charge for transactions that are Vatable
The above explanation poses a serious challenge in commercial business transaction as it infers that the new VAT rate of 7.5% could be charged on a consumer not minding that the consumer received the value before the new VAT rate was implemented. For instance, if an accounting service was rendered to a consumer in March 2019 and the consumer is now paying the fees for the service in March, 2020, such consumer will be charged the Value Added Tax rate of 7.5% not minding that the Value Added Tax rate when the consumer received value for the service was 5%.
In any case, a possible way to tax plan and avoid applying the new VAT rate for already concluded transaction is to issue invoices before 1st February 2020 for already consummated transactions; not minding that the payment for the transaction could be made after the kick off of the implantation of the new VAT rate.
It is however not certain that this tax plan will be accepted by the tax authorities as they can still insist that: if the payment is made after 1st February 2020, then the new VAT rate of 7.5% should apply. In this case, an option that will be open to the taxpayer is to challenge the taxman’s position at the tax Tribunal.