The rules governing VAT under the New Tax Act have been updated, clarified and expanded.
Whether you’re a consumer wondering why things feel more expensive, or a small business owner trying to make sense of what you must charge and remit, understanding the new VAT rules is now more important than ever.
What Is VAT and How Does It Work?
The words ‘Value Added Tax’ are ones most Nigerians see on receipts but rarely stop to think about. You’ve likely noticed that little line showing 7.5% added to your bank transaction or your online shopping. But VAT has always been more than a small surcharge, it’s one of the most important taxes funding Nigeria’s public services.
Value Added Tax, or VAT, is a consumption tax. That means it’s ultimately paid by the final consumer, while businesses act as collectors on behalf of the government. Each business in the supply chain charges VAT when it sells goods or services, and each buyer in the chain (if also a business) can claim back what they paid.
For example, imagine a baker who buys flour from a wholesaler:
- Wholesaler to baker: The wholesaler charges VAT, which the baker pays
- Baker to supermarket: The baker charges VAT on bread sold to the supermarket
- Supermarket to consumer: The supermarket adds VAT to your bill when you buy the bread
At each stage, businesses deduct what they already paid in VAT (called an input tax credit) and remit only the balance to the government. The final burden rests on you, the buyer, who cannot claim back VAT and therefore bears the full cost.
What’s New Under the 2025 Act
1. Digital Services Are Now Covered
For the first time, foreign companies offering digital services to Nigerian customers—like streaming platforms, cloud storage and e-commerce marketplaces—are now required to register for VAT in Nigeria, collect it from users, and remit it here.
This means if you subscribe to a music or video service hosted abroad, you may now see VAT added to your subscription fee. It implies that those services may now cost more by January 1, 2026, when the new laws enter into effect.
2. Stricter Remittance Rules
The Act strengthens rules around remittance timelines. Businesses collecting VAT are required to remit it to the tax authority on or before the 21st day of the month following the month of sale. Late remittances attract interest and penalties, making compliance even more crucial.
3. Expanded Scope and Clarity
The new 2025 Tax Act provides much more clarity about how VAT applies to newer sectors, especially digital services, foreign providers and previously ambiguous categories of goods.
Understanding Exemptions vs. Zero-Rated Supplies
Not everything you buy comes with VAT. Some goods and services are exempt, while others are zero-rated. It’s important to understand the distinction.
Exempt Goods and Services
Exempt goods and services are those that are outside the scope of VAT entirely. These include:
- Basic foodstuffs (bread, rice, beans, yams)
- Educational materials and tuition fees
- Medical and pharmaceutical products
- Rent for residential accommodation
- Public transportation fares
Key point: If you sell exempt goods or services, you don’t charge VAT on your sales and you also cannot claim input tax credits on what you buy for the business.
Zero-Rated Goods and Services
Zero-rated goods and services are taxable at 0%. This usually applies to exports and certain specified products.
Key advantage: If your business sells zero-rated items, you don’t charge customers VAT, but you can still claim input tax credits for VAT you paid on your purchases. This makes zero-rating especially favourable for exporters and helps keep Nigerian products competitive abroad.
Input Tax Credits: How Businesses Can Now Recover VAT
One of the most beneficial features of VAT for registered businesses is the ability to claim input tax credits. This means you can offset the VAT you paid on purchases against the VAT you collected on sales, and pay only the difference to the government.
How It Works
Suppose your company collected ₦500,000 in VAT from customers last month but paid ₦300,000 in VAT on raw materials and other inputs. You only remit ₦200,000 to the tax authority.
Important Limitations
You can only claim input tax on expenses that are directly related to your taxable business activities. If you use goods or services partly for private purposes, you can only claim a proportion of the VAT paid.
What This Means for Consumers
For the average Nigerian consumer, VAT is an unavoidable part of daily life. Every time you buy goods or services from a VAT-registered supplier, you pay it.
Why Prices Might Feel Higher
The 2025 Act doesn’t increase the standard rate of 7.5%, but by expanding the scope of VAT to cover digital platforms and reinforcing compliance, it could lead to more visible VAT charges, especially in the online and informal sectors.
It’s also likely that more businesses will start issuing proper VAT invoices and passing the tax on to customers, now that enforcement is tighter. This may create the perception that prices have gone up, even if the underlying cost of goods hasn’t changed significantly.
The Bigger Picture
Improved compliance and fairer application of VAT could lead to better public revenue, enabling the government to invest more in infrastructure, health, and education with the goal of ultimately benefiting everyone.
Practical Implications for Different Groups
For Business Owners
Registration requirements: If your annual turnover exceeds the VAT registration threshold, you must register for VAT and start collecting it from customers.
Compliance benefits: Understanding and applying these rules correctly can save you from costly penalties and even improve your cash flow through input tax credits.
Record-keeping: Maintain proper VAT records and issue compliant invoices to avoid penalties.
For Consumers
Digital purchases: Expect to see VAT added to more online services and digital subscriptions.
Informed decisions: Knowing what is exempt and what is taxable can help you make more informed spending decisions.
Receipt awareness: Pay attention to VAT on receipts as it’s not just a random charge but a structured part of the tax system.
For Exporters
Competitive advantage: Zero-rating on exports helps keep your products competitive in international markets.
Input tax recovery: You can claim back VAT paid on business inputs even though you don’t charge VAT on exports.
Common VAT Scenarios Explained
Scenario 1: Restaurant Bill
When you eat at a restaurant, the 7.5% VAT you see is collected by the restaurant and remitted to the government. The restaurant can claim input tax credits on the VAT they paid for food supplies and equipment.
Scenario 2: Online Shopping
If you buy from a Nigerian e-commerce platform, you’ll pay VAT. If you buy from a foreign platform offering digital services, you may now also pay VAT under the new rules.
Scenario 3: Business Purchases
If you’re a registered business buying office supplies, you pay VAT to the supplier but can claim it back as an input tax credit when you file your VAT returns.
Key Compliance Points for Businesses
Registration and Display
- Register for VAT if your turnover exceeds the threshold
- Display your VAT registration number prominently
- Issue proper VAT invoices for all taxable supplies
Collection and Remittance
- Collect VAT from customers on taxable supplies
- Remit collected VAT by the 21st of the following month
- Maintain proper VAT accounts and records
Input Tax Claims
- Keep receipts for all business purchases
- Claim input tax only on business-related expenses
- File VAT returns on time to avoid penalties
The Bottom Line
VAT is often misunderstood as just another arbitrary tax. But it’s designed to be a fair way of taxing consumption rather than production, making it less punitive for businesses and more progressive in the long run.
The Nigeria Tax Act 2025 modernizes VAT administration, brings digital transactions into the fold and clarifies exemptions and rights for businesses. If you’re a business owner, understanding and applying these rules correctly can save you from costly penalties and even improve your cash flow through input tax credits. As a consumer, knowing what is exempt and what is taxable can help you make more informed spending decisions.
In this new era, VAT is no longer just a number on your receipt, it’s a signal of a more structured, transparent economy. And knowing how it works is the first step to making it work for you.
How Taxpal Can Help with VAT Compliance
Managing VAT compliance can be complex, especially with the new digital service requirements and stricter remittance rules. Taxpal provides comprehensive VAT support for businesses of all sizes. They offer:
- Automated VAT calculation for all types of transactions
- Digital invoicing systems that ensure VAT compliance
- Input tax credit tracking to maximize your recoveries
- Remittance scheduling to avoid late payment penalties
- Registration assistance for new businesses
- Compliance monitoring to keep you on track with changing regulations
Whether you’re a small business just starting with VAT or a large company managing complex VAT scenarios, Taxpal tools and expert guidance ensure you stay compliant while optimizing your tax position. To get started, visit their website and choose the option that suits you best, whether it’s a consultation or portal access. They will help you navigate VAT requirements so you can focus on growing your business.
