Input VAT Recoverability Under Nigeria's New Tax Regime

Nigeria's tax landscape has undergone significant transformation with the introduction of the new tax regime. This shift began with the commencement of the Nigerian Tax Administration Act (NTAA) in June 2025, followed by the commencement of the Nigerian Tax Act (NTA), the Nigerian Revenue Service (Establishment) Act, and the Joint Revenue Board of Nigeria (Establishment) Act on 1 January 2026.

Beyond the consolidation of various tax laws into the NTA and NTAA, the new regime addresses longstanding inconsistencies and ambiguities found in the repealed legislations. Several provisions have been updated to better align with global best practices, reduce the frequency of tax disputes, and provide clearer interpretation of the law. These revisions are also aimed at promoting ease of doing business, enhancing transparency, and ensuring that Nigeria's tax framework reflects the true intentions of policymakers while supporting an evolving economic environment.

One significant area of revision in the new tax legislation is the treatment of input VAT. The rules governing input VAT recoverability continue to pose challenges for businesses operating within the country. This article evaluates both the previous and current frameworks, outlining the key changes introduced and their implications for taxpayers.

The Old Regime: Input VAT Recovery

Under the old regime, input VAT could generally be recovered either by offsetting it against output VAT or by applying for a refund. However, the scope of recoverable input VAT was narrow. Businesses were allowed to recover input VAT only on goods, as VAT incurred on services and capital items was explicitly disallowed as a deduction from output VAT.

Section 17 of the VAT Act states that "input tax to be allowed as a deduction from output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock-in-trade used for the direct production of any new product on which the output tax is charged." This provision not only prohibits businesses from claiming input VAT on services but also restricts recovery on certain categories of goods. In essence, input VAT was claimable only where the goods were purchased for resale or formed part of the materials used to produce a new product on which output VAT was charged. During tax audits, some taxpayers were often required to clearly distinguish between purchases directly attributable to revenue-generating activities and those that were not related to the revenue of the accounting period.

A major point of contention in interpreting Section 17 of the VAT Act was the definition of stock‑in‑trade. This controversy was highlighted in CHI Limited v. Federal Inland Revenue Service¹, where the FIRS adopted a narrow interpretation, restricting stock‑in‑trade to only raw materials directly used in producing the company's final products. The FIRS further argued that items such as gas, spare parts, and consumables—being overhead costs expensed through the income statement—did not qualify as stock‑in‑trade. Consequently, the associated input VAT on these items was disallowed in accordance with Section 17(2) of the VAT Act.

The New Regime: Key Changes to Input VAT Recovery

The introduction of the new tax regime has brought significant reforms to the rules governing input VAT recovery, aligning Nigeria's framework more closely with established practices in the United Kingdom and other jurisdictions that permit input VAT claims on the supply of goods and services. Section 155(4) of the NTA, states: "Input tax incurred by a registered person on any taxable supply, including services and fixed assets made to such person, may be deducted from the tax payable by the person on its taxable supplies at the end of the tax period in which the supply occurred...".

This provision marks a substantial departure from the previous regime. Under the old rules, input VAT on services and fixed assets was generally not recoverable against output VAT. The new approach therefore offers businesses a more efficient mechanism for claiming VAT paid to vendors on both services and fixed asset acquisitions. By allowing direct deduction of these input VAT from output VAT, the regime simplifies VAT administration for taxpayers and enhances cash-flow management. Businesses no longer need to rely on the slower and less optimal method of expensing such VAT through the income statement, enabling quicker and more complete recovery of VAT costs.

Notwithstanding the expansion of the scope of recoverable input VAT, there seem to be some restrictions based on the concluding part of Section 155(4) which is underlined for emphasis below:

"Input tax incurred by a registered person on any taxable supply, including services and fixed assets made to such person, may be deducted from the tax payable by the person on its taxable supplies at the end of the tax period in which the supply occurred, but only to the extent that the input tax was incurred for the purpose of consumption, use or supply in the course of making taxable supplies".

There are varying schools of thought regarding the interpretation of the underlined portion above. The first school of thought maintains that input VAT should be restricted to tax incurred on taxable supplies—specifically, supplies directly used in generating taxable income. In contrast, the second school of thought argues for a more expansive approach, positing that VAT recovery should extend to all supplies.

Interestingly, the wording of the referenced provision appears to lend support to both perspectives. The deliberate use of the term "consumption" in addition to "supply in the course of making taxable supplies" suggests a deliberate separation of the requirement of consumption, from the requirement of use or supply in the course of making taxable supplies. As a result, some argue that this wording provides sufficient basis to claim input VAT on all supplies, regardless of whether they were incurred for the purpose of making taxable supplies.

On the other hand, others have argued that the use of the comma, after "consumption", and before "use or supply in the course of making taxable supplies" renders both phrases conjunctive. Consequently, any consumption, in order to qualify for input VAT recovery, must strictly relate to, or be for the purpose of making taxable supplies.

There are four major rules of statutory interpretation as established in the case Joseph Nwaobike V Federal Republic of Nigeria² : the literal, the golden rule, the mischief rule and the purposive rule. The literal rule is applied when the words of the statute are very clear, plain and unambiguous without equivocation. The words are to be given their ordinary grammatical meaning, and no more. The golden rule, which is applied to complement the literal rule stipulates that the words of a statute should be given the meaning according to the intention of the legislature and its intention could be known from the literal or grammatical interpretation of the language used. The mischief rule seeks to discover what the law was before the Act and what defects were addressed by the legislation under review. It then looks at the gap or mischief the law wanted to cure and proceeds to fill the gap. The purposive rule of interpretation considers extraneous factors such as the language of the provision, the context in which the language is used and the purpose of the legislation or statutory scheme in which the language is found to discover the intention of the legislature.

For the purpose of this article, we will apply the mischief rule and the purposive interpretation to highlight the two conflicting views on the subject. Applying the mischief rule to the provisions of section 155(4) of the NTA, the gap intended to be fixed is the discrimination in input VAT recoverability. Prior to the NTA, input VAT on services (professional fees, consulting, telecommunications, etc.), fixed assets (machinery, equipment, vehicles, buildings) and general business expenses could not be recovered. The provisions of section 155(4) addressed this gap by expanding the scope of input VAT recoverability to cover services, capital assets, consumption, and overhead expenses incurred for the purpose of making taxable supplies. Consequently, input VAT on any supply including consumables, and general expenses are recoverable.

Nonetheless, is it reasonable to assume that the intention of the legislature is to impose a carte blanche for taxpayers to go an unimpeded spree of VAT recoverability?

Applying the purposive interpretation to the above section, the context of the section is supply of VATable goods and services and conditions for recovery of input VAT incurred in the course of making those supplies. Moreover, the proviso to section 154 prescribes as follows:

"Provided that —

(a) where any input tax is incurred in making both taxable and non-taxable supplies, only the proportion relating to making taxable supplies may be deducted".

The reasonable deduction from this is that the intention of the legislature is to restrict the scope of VAT recoverability to input tax incurred on taxable supplies, i.e. supplies used strictly for generating taxable income. Relatedly, the opening and closing phrases in section 155(4) uses the words 'taxable supply' and 'in the course of making taxable supplies'.

Conclusion:

The reform of Nigeria's VAT framework under the new tax regime represents a significant step toward modernizing the country's indirect tax system. By expanding the scope of input VAT recovery to include services, fixed assets, and general business expenses, the legislation resolves many of the inequities and operational bottlenecks inherent in the repealed VAT Act. For businesses, this shift offers improved cash‑flow efficiency, greater alignment with international VAT practices, and a more coherent system for matching input tax with taxable outputs. These improvements, if consistently applied, have the potential to reduce compliance burdens and limit the frequency of avoidable tax disputes.

Footnotes

1 Appeal No. TAT/LZ/VAT/006/2021)

2 (2021) JELR 111716 (SC)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.