IMPACT OF PROPOSED VAT REFORM ON COST BUDGET

We had a very productive session with the Organised Private Sector of Nigeria (OPSN) on Friday, 20 Dec. 2024 hosted by the Manufacturers Association of Nigeria (MAN).

A participant who works for a manufacturing company asked to know when the reforms are likely to take effect and whether to include higher costs due to the proposed VAT rate increase in the company's 2025 budget.

This question reflects the general perception of the VAT reforms, whereas the overall impact is actually a cost reduction. 

Below is a comparative analysis of a typical manufacturer's budget with explanatory notes.
  
1. Raw materials - no impact as any VAT is currently claimable, similar to the proposed VAT law
2. Manufacturing overhead - VAT on absorbed manufacturing assets is claimable
3. Training and development - any applicable VAT will be eligible as input VAT
4. Salaries and wages - no impact. This item is outside the scope of VAT
5. Professional fees - VAT will become claimable
6. Communications - VAT becomes claimable
7. Marketing & distribution - VAT becomes claimable 
8. Finance cost - negligible impact as the bulk of this item is not VATable
9. Plant & equipment - VAT becomes claimable 
10. Right of use assets - any VAT becomes claimable
11. Overall impact - The total cost borne by the company reduces from 1000 to 967 (a cost decline of 3.3%) despite the rate increase.

NOTE: The comparative analysis is based on the difference between the CIT deduction or capital allowance for non claimable VAT under the current law vs. input claim under the proposed VAT reform, including the rate increase.

Free advice: Kindly pass if maths or accounting is not your thing 😀