It will be recalled that the Honourable Minister of Finance recently, in exercise of the powers conferred on her by the Value Added Tax (VAT) Act, expatiated the scope of exempt items as enshrined in the First Schedule to the Value Added Tax (VAT) Act via the Value Added Tax (Modification) Order 2020 (“VAT Modification Order”). The Order provided clarification on the different categories of exempt items under the First Schedule and included new items which were not originally included in the list.
Specifically, Paragraphs 1 and 2 of the VAT Modification Order clearly provide for:
i. A modification of the First Schedule to the VAT Act; and
ii. An extended list of items exempted from the VAT Act.
The Federal Inland Revenue Service (FIRS) has now issued a Public Notice stating that items which are not contained in the First Schedule to the VAT Act or in a previous Ministerial Order but were included in the VAT Modification Order as exempt items remain liable to VAT at the newly prescribed rate, that is, 7.5% until otherwise provided in an appropriate legislation.
In the Public Notice, FIRS stated that some items which although were included in the VAT Modification Order but remain subject to VAT are:
i. Natural gas
ii. Essential raw materials used to produce pharmaceutical products
iii. Renewable energy equipment
iv. Raw materials used to produce baby diapers & sanitary towels
The Notice further enjoined taxpayers and other stakeholders to comply accordingly to avoid penalties.
The VAT Modification Order was published in furtherance of the Minister’s power as conferred upon the office by Section 38 of the VAT Act which allows for the amendment or modification of the list set out in the First Schedule to the Act by the Minister. This power has previously been exercised by the Minister via the promulgation of the VAT (Exemption of Commissions on Stock Exchange Transactions) Order which was published in the Federal Gazette in 2014, exempting capital market transactions from VAT even though these were not in the First Schedule, and this did not generate any controversy.
The stand of FIRS that the inclusion of the four contentious classes of exempted goods in the Order was merely for guidance of Customs, importers and other stakeholders, does not reconcile with the clear provision of Paragraph 2 of the Order which clearly refers to the list as the “extended list of items exempted from Value Added Tax Act…”.
It is the duty of the FIRS to administer the tax laws as enacted by the National Assembly and constituted delegated authorities (such as the Minister). A Public Notice issued by the FIRS cannot therefore override an Order issued in line with the extant law. The Notice is therefore of no legal effect. Otherwise, taxpayers who may have planned their businesses in line with the Order would have been unfairly treated.
In circumstances where FIRS believes that a validly enacted Ministerial Order may have contained an error, the expectation is for FIRS to review its observations with the Office of the Minister and if possible, have the Order re-issued. This will ensure coherence and certainty in government policy and improve taxpayers’ confidence.