Introduction

On 1 September 2024, the Federal Government of Nigeria took a major step towards transforming the tax landscape by issuing the Value Added Tax (VAT) (Modification) Order 2024. Signed by the Honorable Minister of Finance and Coordinating Minister of the Economy, the Order introduces significant amendments to the VAT Act in line with Nigeria’s broader economic and energy transition objectives.

While the new VAT Order does not replace previous regulations, such as the 2021 VAT (Modification) Order, it introduces targeted adjustments that reflect the government’s ongoing focus on encouraging clean energy, promoting economic growth, and providing relief to businesses struggling with high energy costs. This article provides a summary of the key changes introduced by the VMO 2024, as well as their potential implications for businesses and the Nigerian economy. View a copy of the VMO here.

Key Changes in the 2024 VAT (Modification) Order

1. Expansion of VAT-Exempt Goods and Services

One of the most significant updates in the VMO 2024 is the expansion of VAT-exempt goods and services, especially in the energy sector. The new exemptions include:

• Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG) conversion kits, equipment, and infrastructure.
• Electric Vehicles (EVs), parts, and semi-knockdown units for EV assembly.
• Biogas and biofuel equipment for clean cooking and transportation.
• CNG and LPG conversion and installation services.
• Manufacturing, assemblage, and sale of electric vehicles.

These exemptions align with the Federal Government of Nigeria’s (FGN) ongoing energy transition strategy and reinforce its commitment to promoting cleaner, more sustainable energy alternatives. The move will likely boost the adoption of natural gas as an alternative fuel and support the growth of the electric vehicle market in Nigeria.

2. Removal of VAT on Automotive Gas Oil (Diesel)

In a bid to provide relief to businesses burdened by rising energy costs, the VMO 2024 eliminates VAT on Automotive Gas Oil (AGO), commonly known as diesel, effective 1 October 2023. This is expected to reduce transportation and production costs, which could ultimately lower inflation rates, particularly in the food sector, where transportation plays a critical role.

However, the retroactive application of this provision (i.e., backdating to 1 October 2023) raises practical questions. Specifically, how will businesses and consumers who have already paid VAT on diesel between October 2023 and September 2024 receive refunds? A clear and efficient refund mechanism will need to be established by the relevant authorities to ensure a seamless process and avoid legal challenges.

3. Expanded Definition of “Petroleum Products”

The Order revises the definition of “Petroleum Products” to include:

• Feed gas for all processed gas.
• Aviation turbine kerosene.
• Premium motor spirit (PMS or petrol).
• Automotive gas oil (AGO or diesel).
• Household kerosene.
• Locally produced and imported liquefied petroleum gas (LPG).
• Compressed natural gas (CNG).
• Crude petroleum oils.

This clarification helps to bring consistency to the classification of petroleum products for tax purposes and aligns with Nigeria’s energy diversification strategy. However, the VAT status of domestic sales of crude oil still needs further clarification, as ambiguity remains over the interpretation of “crude petroleum oils” in this context.

Addressing Concerns Over Retroactive Application and Refunds

A significant issue raised by stakeholders is the retroactive application of certain provisions, such as the removal of VAT on diesel. Retroactive tax changes can create confusion and complexity for businesses that have already complied with previous regulations. The Federal Inland Revenue Service (FIRS) will need to provide clear guidelines on how refunds will be processed for businesses and individuals who have already paid VAT on diesel within the specified period.

Furthermore, the current refund process often ties VAT refunds to comprehensive tax audits, which can delay the repayment. Stakeholders have called for a streamlined process where VAT refunds, especially those related to diesel, are processed independently of broader tax audits.

Strategic Importance of the VAT Exemptions for Nigeria’s Energy Transition

The FGN’s 2020-2030 Decade of Gas initiative seeks to harness Nigeria’s abundant natural gas resources and promote cleaner energy alternatives to reduce reliance on traditional fossil fuels like petrol and diesel. The new VAT exemptions on gas-related equipment and services, as well as electric vehicles, are part of this broader strategy. These incentives are expected to drive investment in domestic gas infrastructure and the clean energy sector, furthering the country’s energy transition goals.

By supporting the growth of the CNG, LPG, and electric vehicle markets, the VAT exemptions not only reduce energy costs but also create new opportunities for businesses in these emerging sectors. In addition, by making imported LPG VAT-exempt, the government aims to ensure a steady supply of cooking gas, which could help alleviate household energy costs in the short term.

The Need for Clearer Tax Policy Implementation

Despite the positive changes introduced by the VMO 2024, there remain concerns about the clarity of the tax policies and their implementation. For example, there is ongoing debate over the interpretation of terms such as “feed gas” and how they apply to VAT exemptions. The FGN and FIRS must ensure that these terms are clearly defined to avoid disputes and confusion among taxpayers.

Additionally, the importance of ensuring timely and transparent communication with taxpayers cannot be overstated. The National Tax Policy (NTP) recommends that tax law changes come with a 3-6 month transition period to allow businesses time to adjust and ensure compliance. While the VAT Order officially takes effect on 1 September 2024, retroactive provisions and delayed implementation of certain clauses could complicate compliance for businesses. Clear implementation guidelines are needed to ensure a smooth transition.

Conclusion

The 2024 VAT (Modification) Order represents a significant milestone in Nigeria’s economic and energy transition journey. By expanding the list of VAT-exempt goods and services, particularly in the energy sector, the Order aims to drive investment, reduce energy costs, and promote sustainability. The removal of VAT on diesel, in particular, is expected to provide much-needed relief to businesses struggling with high operational costs.

However, to fully realize the benefits of these changes, the government must address the challenges associated with retroactive application and provide clear, detailed guidelines for implementation. Businesses, in turn, should stay informed about these developments to take full advantage of the incentives provided under the Order and align their strategies with Nigeria’s evolving tax and energy policies.

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