Nigeria: Stock-in-trade not limited to raw materials for claiming input VAT (tribunal decision)

The Tax Appeal Tribunal (Lagos) held that stock-in-trade is not limited to raw materials.

Claiming input VAT (tribunal decision)

The Tax Appeal Tribunal (Lagos) held that stock-in-trade—pursuant to section 17 of the Value Added Tax (VAT) Act for the purpose of determining input VAT allowable as a deduction from output VAT—is not limited to raw materials, but includes the input VAT incurred on the purchase of natural gas and diesel, short-term spare parts, and other manufacturing consumables used in the direct production of the taxpayer’s products.

The case is: CHI Ltd. v. Federal Inland Revenue Service

KPMG observation

The tribunal’s decision is expected to have significant implications for VAT returns filed by taxpayers—especially manufacturing companies. The judgment changes the long-held basis for interpreting qualifying items under section 17 of the VAT Act for input VAT recovery. The VAT principle underscores that the ultimate burden of the tax is to be borne by the final consumer; therefore, companies are entitled, as much as possible, to recover the input VAT incurred during the production process.

The judgment also provides precedent for what would constitute stock-in-trade for manufacturing companies. The practice and position of the tax authority equated stock-in-trade to only raw materials used in the production process while treating other direct costs as overhead (that do not qualify for input VAT recovery). This position has been implemented by most manufacturing companies until now. However, the judgment clarifies that stock-in-trade extends beyond raw materials and includes tools, supplies and production equipment, work-in-progress, and finished goods to the extent that they have a direct link with the production of a new product on which output VAT is charged.

Read a February 2022 report prepared by the KPMG member firm in Nigeria


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