For years, businesses in Nigeria have been grappling with an unfair tax system that treated essential operational expenses as luxury overheads. The old Value Added Tax (VAT) Act forced companies to pay 7.5% VAT on purchases, but did not allow them to deduct that VAT from their sales. This created a significant financial burden, leading businesses to pass on the extra costs to consumers by raising prices. However, with Section 155 of the new Nigeria Tax Act, 2025, this burden has been lifted.
The old VAT Act, specifically Section 17, had a narrow and rigid rule for deducting "input VAT" from "output VAT". Businesses were only allowed to recover input VAT on goods purchased or imported directly for resale and raw materials used directly to manufacture new products. All other expenses, including services and capital assets, were not eligible for deduction. This led to a toxic financial problem for businesses, discouraging investment in modern equipment or professional services.
Section 155(4) of the new Nigeria Tax Act revolutionizes input VAT recovery by allowing registered businesses to deduct input VAT incurred on any taxable supply, including services and fixed capital assets, from the output tax payable at the end of the tax period. The core principle is simple and fair: as long as the input VAT was incurred for the purpose of consumption, use, or supply in making taxable business sales, it can be claimed back.
To prevent abuse of this expanded deduction framework, Section 155 outlines six golden rules. These include universal eligibility across services and fixed assets, the direct business consumption test, proportional deduction for mixed supplies, a five-year expiration clock, a strict forward-looking commencement rule, and deduction at the end of the tax period. These rules ensure that businesses can claim input VAT deductions in a fair and transparent manner.
The new law has significant implications for businesses in Nigeria. With the expanded input VAT recovery, companies can now plan their capital spending and manage their monthly cash flows more effectively. This reform is expected to bring relief to cash-strapped businesses and encourage investment in modern equipment and professional services.
According to experts, this statutory shift is one of the most practical, business-friendly reforms in modern Nigerian tax history. It brings Nigeria into line with global best practices and gives businesses genuine room to breathe. The reform is expected to have a positive impact on the economy, making products less expensive and increasing profit margins.
The implementation of Section 155 of the new Nigeria Tax Act is a significant step towards creating a more favorable business environment in Nigeria. Businesses can now look forward to reduced costs and improved cash flows, which will enable them to compete more effectively in the global market. The government has taken a bold step in modernizing the tax system, and it is expected that this reform will have a lasting impact on the economy.
Key points
- The new Nigeria Tax Act brings relief to businesses with Section 155 VAT reform.
- Section 155 allows businesses to deduct input VAT incurred on any taxable supply, including services and fixed capital assets.
- The reform is expected to have a positive impact on the economy, making products less expensive and increasing profit margins.
