Introduction

The Value Added Tax Act (VATA), as amended, imposes VAT on all goods and services supplied in Nigeria. A supply is considered to have occurred in Nigeria when an invoice or receipt is issued by the supplier, when the supplier receives consideration, or when the consideration becomes due from the buyer. However, certain goods and services listed in the First Schedule to the VATA are exempt from VAT.

The Finance Act of 2019 modified the VAT exemption for financial services, specifically stating that services rendered by microfinance banks, people’s banks, and mortgage institutions are exempt from VAT. The Value Added Tax (Modification) Order, 2021, further refined this exemption to include only services rendered by Unit Micro-Finance Banks and Mortgage Institutions. Consequently, all other financial institutions are required to charge VAT on their services.

Imposition of VAT on Financial Services

Section 66 of the Banks and Other Financial Institutions Act defines “other financial institutions” as entities licensed under this Act or any related Act to conduct various financial activities, such as discount houses, finance companies, money brokerage, factoring, project financing, equipment leasing, debt administration, fund management, private ledger services, investment management, and more. Therefore, the term “financial institutions” encompasses banks, insurance companies, pension fund administrators, discount houses, and brokerage firms

According to FIRS Circular No: 2021/04, dated 31st March 2021 and titled “Value Added Tax (VAT) on Services of Financial Institutions,” all charges arising from the services of financial institutions attract VAT. These services include but are not limited to:

• Commissions on forex trading or remittance
• Commissions on the sale of bank drafts or certified cheques
• Commissions paid to brokers, reinsurers, underwriters, and other insurance agents by an insurer
• Commission on asset trading
• Account maintenance fees, ledger fees, etc.
• Legal and other fees chargeable on lease arrangements
• Fees for advisory services, such as mergers and acquisitions, financial strategy counseling, etc.
• Fees chargeable on public or private issues
• Debt conversion fees
• Fees on asset trading
• Fees earned on fund management
• Fees earned on letters of credit or documentary collection to finance import/export
• Fees chargeable on stock-brokerage and trust services
• Fees charged on electronic banking, POS, and ATM charges
• Fees charged on electronic bill payments
• Mobile money transactions and other similar transactions

On the contrary, certain financial activities are considered returns on investment rather than consumption of services and thus do not attract VAT. These include:

• Interest on loans and advances
• Interest on savings accounts
• Interest on bank deposits
• Interest on interbank placements
• Premium on insurance policies
• Dividends
• Gains on the disposal of securities

These activities are exempt from VAT as they are considered returns on investment and are subject to income tax in the hands of the beneficiary.

Conclusion

In Nigeria, services supplied by financial institutions are generally subject to VAT, except for those rendered by Unit Micro-Finance Banks and Mortgage Institutions. It is essential to distinguish between returns on investment and fees for financial services to determine VAT obligations accurately. While returns on investment are not subject to VAT, commissions and fees for financial services are taxable. This distinction ensures that VAT is applied appropriately, maintaining clarity and compliance within the financial sector.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, or www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.