The operation of the tax law is universally administered. Every person (corporate or individual) is a taxable entity no matter how, when and what method is used to conduct the business. The Federal Inland Revenue Service (FIRS) has adequate mechanisms to assess and bring all taxable entities into the tax net. Among these methods is cordial dialogues with stakeholders during enlightenment drives to achieve mutual understanding and promote voluntary compliance.
Registration by Taxable Persons
Section 8(q) of the Federal Inland Revenue Service Establishment Act, 2007, directs the Service to issue a taxpayer identification number to every taxable person in Nigeria in collaboration with State Boards of Internal Revenue and the Local Government Revenue Boards.
Section 8(1) of the Value Added Tax Act (VATA) Cap V1 LFN, 2004 as amended in 2007 also requires taxpayers (individuals, enterprises or corporates) to register for VAT.
However, when the tax identification number (TIN) is generated, it suffices and covers all the tax types as no other registration number for any tax type will be required. Reference to Section 8(1) of the VATA as amended, it is specifically stated that “A taxable person shall, within six months of the commencement of the Act or within six months of the commencement of business, whichever is earlier, register with the Board for the purpose of the tax (VAT).”
The phrase whichever is earlier, that specifies the time for registration, has caused a lot of pain for taxpayers in VAT administration. It is not practical to expect that a business just recently incorporated (say in 2011) to have registered in 1994 for the purpose of the tax. Hence, a business incorporated after 1994 is expected to register within six months of the commencement of business.
Therefore, penalties (and other sanctions) for late registration for VAT would start counting immediately after the six months of commencement of business if the taxpayer fails to register for VAT and not six months from the commencement of the VAT Act when the business was probably not in existence.
Historical Antecedents of VAT
VAT was first introduced as consumption tax in 1919 in Germany, France (1954), UK 1973 etc. Introduction was occasioned by the impacts of 1st and 2nd World Wars. The adverse effects of direct taxation on the economy, individuals and businesses. The introduction of consumption tax was later modernized into VAT. The high point of VAT is that it has no noticeable impact on the taxpayer because of its indirect nature.
In arriving at what constitutes a VATable income, all income from sales, rentals, charges and fees relating to activities enjoyed by customers are VATable and should be charged with VAT. The law did not make provision for any activities or services that is non-VATable in the industry.
First Schedule of the Act stated Goods and Services Exempt from VAT in Nigeria. The implication of the schedule is that any other business activity in the form of buying and selling or rendering of services or enjoying any rights which are not stated in the schedule are liable to VAT.
Duration of Remittance
All VAT charges should be remitted to an FIRS office within 21 days in arrears on a prescribed form 002. This is supported by Section 15 of the Act. Meanwhile, a taxable person who does not remit the tax within the time specified above, will be liable to 5% penalty and interest at commercial rate, added to the tax and the provision relating to collection and recovery of the unremitted tax, penalty and interest shall be employed.
Similarly, a taxable person who fails to collect tax is to pay 150% of the amount not collected plus 5% interest above the Central Bank of Nigeria rediscount rate.
Concept of Voluntary Compliance
FIRS encourages voluntary compliance instead of the use of coercion. Tax compliance relates to the degree to which a taxpayer complies (or fails to comply) with the tax rules of a country, for instance, by declaring income, filing returns and paying the tax due on or before the due date.
Voluntary tax compliance is a situation where a taxable person or entity files returns without the tax authority resorting to using the instruments of the law and force to ensure compliance. It is voluntary when a taxable person discharges the statutory obligation of tax payment on self-conviction and as a call to duty without notice or reminder within the time line allowed by law.
FIRS’ Means of Enhancing Voluntary Compliance
Through education and sensitization of operators. Business owners should have open an mind and seek clearance from FIRS when in doubt and seek further legal advice when not satisfied. Regular monitoring/audit visitations to check compliance and enlighten taxable entities on their roles and responsibilities. FIRS ensures that the principle of know your tax payer (KYTP) is adhered to, so that it would be easy for taxpayers to reach schedule officers for information and guidance/assistance.
Regular provision of VAT forms 002 for monthly rendition of returns. Encourage voluntary compliance to avoid infraction of the law. Consistency and civil enforcement of the provisions of the tax law Imposition of interest and penalties and enforce compliance where default occurs. Improvement in the work process of the tax office to make compliance easier. Compliance with the Taxpayer Identification Number requirements by business owners.
Monthly rendition of returns and payments on or before 21st of each month in arrears, to the nearest FIRS office. Proper documentation and record keeping of VAT charges taken at source, returns and payments vi-a-vis correct profiling of income sources. Businesses should note that they are not the party suffering the VAT, but a mere agent of collection and remittance.
It is better to charge wrongly and remit to FIRS, than not to charge at all, because when the actual liability is established, it is owner of the business that would bear the entire burden.
Consequences of Non-Compliance
Out of the entire VAT Act, of 47 sections, about one third of the provisions are on offences and penalties. Statute based consequences are highlighted from section 25 to 37 of VAT Act Cap VI, 2004 as amended in 2007. Some examples of offences and penalties are: failure to submit returns attract a fine of N5,000 for each month the failure continues.
Failure to collect tax attracts penalties of 150% of the amount not collected plus 5% interest above CBN rate. VAT evasion attracts N30,000 or twice the amount of tax evaded whichever is greater or imprisonment for a term not exceeding 3 years.
Failure to keep proper records of accounts would attract N2,000 fine for every month the failure continues. Failure to issue tax invoice attracts fine of 50% of the cost of goods and services for which an invoice was not issued. Offences by body corporate: Every officer, manager, secretary and other similar officer including partner in partnership shall be severely guilty of an offence under the act, etc.
Second categories of consequences of non-compliance are reputational and reporting risks. Apart from reputational damage arising from actions by FIRS to enforce compliance via distrain, search and seizure, and litigation, amongst others. Reporting risk involves the imposition of interest and penalties. All the interest and penalties imposed on any of the aforementioned offences would be enforced.
FIRS tries to avoid enforcing compliance because of the Service’s slogan, “Taxpayers are King” except on recalcitrant taxpayers. It is necessary to once again emphasize that nightclub and event center activities are not exempted from VAT. Consequently, taxpayers are encouraged to embrace voluntary compliance since the consequences of non-compliance are enormous; ranging from statute based sanctions to reputational damage/reporting risk.