VAT on petroleum products: Will the “change” era bring relief?
One polemic that has confronted
companies engaged in the marketing
and distribution of PMS, AGO, DPK and
aviation fuel around VAT is whether or
not VAT is/should be chargeable on these
petroleum products
Today’s reality is that despite an
installed capacity of 445,000 b/d, Nigeria
is struggling to achieve adequate and
stable supply of refined products. The
nation’s refineries have not at any time
aggregately operated at full capacity and
have over the years fallen into a state of
disrepair due to neglect, irregular and/or
shabby turn around maintenance
regimen. Reliance has been placed on
importation to make up the short-falls in
daily supply of refined petroleum
products domestically.
Eleven (11) years ago, the Federal
Government opted for full deregulation
in the downstream sector. This agenda
was touted to be motivated by three
main objectives. First was the need to re-
appraise government involvement and
participation in the downstream sector.
This was reflected in Government’s
desire to reduce and e/or eliminate
subsidies to the sector to enhance the
prospects cost reflective prices to
emerge. Second was the need to engage
private capital in the ownership and
operation of assets in the sector. Third
was the need to achieve security of
supply through free interplay of the
forces of demand and supply.
It was then expected that market forces
would have free rein in determining the
retail prices of petroleum products
principally kerosene (DPK), automotive
gas oil (AGO/diesel), and premium motor
spirit (PMS/petrol) rather than for
government to fix their retail prices
respectively. Eleven years on the reality
is not different. Indeed, the level of
subsidies in the sector has horribly
exceeded the 2004 levels!
Nevertheless, the activities in the
downstream sector are such that the
Federal Government should be able to
assess and collect both direct and
indirect taxes. At the center of the
collectible indirect tax is value added tax
(VAT). The VAT Act, Cap V1, Laws of the
Federation of Nigeria, 2007 (as
amended) provides the legal basis for the
imposition of VAT on supply of all goods
and services in Nigeria except those
specifically exempted.
VAT is a multistage consumption tax,
which is charged and payable on the
supply of all goods and services, other
than those listed in the First Schedule
(exempted items) to the Act. Goods
exempted include, but are not limited to,
basic food items, baby products, all
exports, books and educational
materials. Since its introduction in 1993,
Value-added Tax (VAT) has become an
important source of revenue to the
Federation which is available for
distribution amongst the federating
units. VAT accounts for about 20% of the
total tax revenue generated in the
country.
One polemic that has confronted
companies engaged in the marketing
and distribution of PMS, AGO, DPK and
aviation fuel around VAT is whether or
not VAT is/should be chargeable on these
petroleum products. Industry practice
appears to be not to charge VAT.
However, FIRS has not accepted this
practice on the basis that refined
petroleum products are not on list of
items expressly exempted from value
added tax (VAT) in Nigeria. Is this matter
that simple?
Marketers and distributors appear to
have relied on a letter of 2005 from the
Petroleum Product Pricing Regulatory
Agency (PPPRA) not to charge VAT given
the regulation of retail pricing and
provision of subsidy to reduce the cost
burden to citizens in relation to these
“essential” products. Naturally, the
imposition of VAT will increase the
amount payable by the final consume
and this may contradict the objective of
the subsidy. There is need for marketers
and distributors of these petroleum
products to be able to manage their
exposure to penalties, interests and other
risks arising from a potential allegation
of non-compliance with the provisions of
the VAT Act.
In this regard, the following questions
beg for response:
• Does the relevant PPPRA letter of 2005
have any status under the VAT Act?
• Is there not a need for FIRS and PPPRA
to provide clarity on this matter to guide
affected taxpayers?
• Is the constructive VAT exemption
applicable only to subsidized petroleum
products or does this extend to AGO in
its post-regulation era?
• Is the constructive VAT exemption on
PMS and DPK to those sold at filling
stations or does this extend to contract
for supply of same? If yes, why?
No doubt, taxation remains a sustainable
source of Government revenue due to
“the stability and certainty of the tax
system”. Thus, the expectation of the
National Tax Policy is to resolve the
following issues amongst others:
• Who collects what?
• How is it collected?
• Who controls what is collected?
• How is what is collected shared?
• Who is responsible for spending what
is collected?
• Who is ultimately responsible and
accountable to taxpayers for the revenue
collected and its expenditure?
Taxpayers would only understand and
trust the tax system when taxes and
related compliance requirements are
kept simple, certain and clear.
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