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The Value Added Tax Challenge in Nigeria’s Electricity Industry

The VAT Challenge in Nigeria’s Electricity Industry

Liquidity is arguably the most important issue in Nigeria’s fledgling power industry. It is, therefore no surprise that stakeholders have spent significant amount of time brainstorming on how this issue can be resolved.

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A number of reasons have been adjudged as responsible for the liquidity challenge, but only rarely is the impact of Value Added Tax (VAT) discussed.

Nigeria’s VAT Act provides for input VAT to be recovered against output VAT, only when incurred on stock-in-trade used in the direct production of a new product or on goods purchased for re-sale. A significant percentage of the energy generated in Nigeria today comes from gas fired power plants whose key stock-in-trade i.e. natural gas, is liable to VAT. Generating Companies (Gencos) should therefore be able to recover the VAT paid to gas suppliers from that collected on energy sold (a new product) to the Distribution Companies (Discos) or to the bulk trader, the Nigeria Bulk Electricity Trading Company (NBET).

The Discos should also be able to recover the input VAT paid to the Gencos (or NBET) from that collected from customers. Consequently, VAT should not be an extra burden for the industry as all players are able to transfer that cost to the final consumer (transmission/wheeling charges do not qualify for input VAT recovery). However, this is not the case. Poor collection rate is still a significant issue for Discos that may struggle to recover any VAT paid.

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