What is the difference between Withholding tax and Value Added Tax?

Q: What is the difference between Withholding tax and Value Added Tax and to whom do they apply?

A: Withholding Tax (WHT)

This is a payment on account of income tax. Simply put, it is an advance payment of income tax, with its main the purpose to bring prospective taxpayers into the tax-net. It could also be described as a pro-active system used to track down tax payers and the incomes which may otherwise not be reported by them. Upon payment, a withholding tax receipt is issued in the name of the tax payer as evidence of payment.  Statutory Framework of WHT

The two income tax statutes in Nigeria - the Personal Income Tax Act (PITA) 1993 and the Companies Income Tax Act (CITA) 1993 both provide for the deduction of tax at source by a paying party.

Sections 60, 61 and 62 of CITA specifically provide for the deduction of tax from interest, rent and dividend respectively, due to companies, while sections 68, 69, 70, and 71 of PITA provide for the deduction of tax at source from rent, interest, dividend and directors fees respectively, due to individuals and non-corporate entities.

Section 62 of CITA and Section 72 of PITA also provide that tax be deducted at source from the payments due to taxable persons or companies. Such directives are usually by way of publication in official government gazettes, stating the nature of payments from which to withhold tax and the rate of withholding tax to be applied on such payments.

Applicability of WHT

While it has been stated that withholding tax is a payment on account of income tax, many people do not realise what constitutes income tax. To that effect, the Federal government gazettes on withholding tax contain a more comprehensive list of taxable payments and the applicable rates which includes but not limited to:

- All types of contract and agency arrangements other than outright sale and purchase of goods and property in the ordinary course of business (5%);

- Consultancy and Professional Services (10% for Companies, 5% for non-corporates);

- Management Services(10% for Companies, 5% for non-corporates);

- Commissions(10% for Companies, 5% for non-corporates); and

- Technical Services (10% for Companies, 5% for non-corporates);

It should be noted that reference to “rent” under both PITA and CITA includes payments for the use or hire of any equipment, payments for charter vessels, ship or aircraft and all such other payments for the use of or hire of movable or immovable property.

Value Added Tax (VAT)

VAT is a consumption tax payable on goods and services consumed by any person (government agency, business organisations or individuals). VAT is borne by the final consumer of goods and services because it is included in the price paid.

Statutory Framework

The Value Added Tax Act CAP. V1 L.F.N. 2004 provides the legal basis governing all aspects relating to VAT. The Act provides that tax shall be charged and payable on the supply of all goods and services. Some goods and services are excluded from VAT including, but not limited to-

- Goods: All medical and pharmaceutical products; Basic food items; Books and educational materials;
- All exports and exported services
- Services: Medical services; Services rendered by Community Banks, People’s Bank and Mortgage Institutions;
- Plays and performances conducted by educational institutions as part of learning.

Applicability of VAT

The Act provides that a taxable person shall pay to the supplier the tax on taxable goods and services purchased by or supplied to him; with the definition of a Taxable Person being one who independently carries out in any place an economic activity as a producer, wholesale trader, supplier of goods, supplier of services or person exploiting tangible or intangible property for the purpose of obtaining income there from by way of trade or business.

The tax rate on all goods and services is currently 5%.

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