September 27, (THEWILL) – For several years, running a business in Nigeria came with a silent, painful tax punishment hidden deep inside the country’s now-repealed Value Added Tax (VAT) law.
If you bought a piece of machinery to expand your factory floor, paid a massive bill for cloud IT services, or spent millions on corporate electricity and building maintenance to keep your daily operations running, you were hit with a double whammy. You paid 7.5% VAT on those purchases, but when it came time to calculate your monthly tax bill, the government told you a harsh truth: “Sorry, you cannot deduct that VAT from your sales.”
Under the old, repealed Value Added Tax Act, businesses were trapped in an unfair, distorted tax system that treated essential operational expenses as luxury overheads.
Now, with Section 155 of the new Nigeria Tax Act, 2025 (NTA), that old burden has finally been lifted. The government has modernised input VAT recovery, bringing Nigeria into line with global best practices and giving cash-strapped businesses genuine room to breathe.
The Old VAT Trap: What Section 17 Used to Do
To appreciate how big this new statutory shift is, you have to understand the frustration created by Section 17 of the old Value Added Tax Act.
Under the old law, the rule for deducting “input VAT” (the VAT you pay on your business purchases) from “output VAT” (the VAT you collect from your customers) was extremely narrow and rigid. You were strictly allowed to recover input VAT on only two things:
- Goods you purchased or imported directly for resale.
- Raw materials (stock-in-trade) used directly to manufacture new products.
That was it. Everything else was completely blocked.
If you paid VAT on legal fees, marketing agencies, software subscriptions, logistics, or office power bills, that is, what accountants call “overheads and services”, the law forced you to throw that extra cost straight into your profit and loss statement. Worse still, if you bought capital assets like delivery trucks, factory generators, or office buildings, you had to add the non-recoverable VAT directly to the asset’s total cost and write it off over time.
This old rule created a toxic financial and economic problem for businesses. Because businesses could not recover the VAT paid on services and capital equipment, they simply passed those extra costs down to the final consumer by raising their prices. It made products more expensive, squeezed profit margins, and discouraged investment in modern equipment or professional services.
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The Section 155 Revolution: A Full Net for Input VAT
Section 155(4) of the new Nigeria Tax Act completely destroys that outdated, restrictive philosophy.
The new law states clearly that a registered business can now 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.
Read that again: services and fixed assets are now fully eligible for input VAT deduction. The core principle under Section 155 is simple and fair: as long as you incurred the input VAT for the purpose of consumption, use, or supply in making your own taxable business sales, you can claim it back.
The Six Golden Rules Governing the New Input VAT Net
To ensure businesses do not abuse this expanded deduction framework, Section 155 builds a clear, six-point statutory structure around how input tax recovery works in practice:
- Universal Eligibility Across Services and Fixed Assets: The headline reform is that input VAT is no longer limited to physical goods bought for direct resale or raw materials. Input tax on legal consulting, IT infrastructure, marketing spend, factory plants, heavy machinery, and office buildings can now be deducted against output VAT.
- The Direct Business Consumption Test: Input VAT can only be deducted if the expense was incurred strictly for the purpose of consumption, use, or supply in making your taxable business supplies. Personal expenses, staff entertainment, or non-business perks remain strictly ineligible for input tax deduction.
- Proportional Deduction for Mixed Supplies: If your business makes both taxable sales and tax-exempt sales (for example, a commercial bank offering taxable fee-based services alongside tax-exempt interest income), you cannot claim 100% of your input VAT. Under Section 155(4)(a), you are allowed to deduct only the exact percentage of input VAT that relates directly to your taxable sales.
- The Five-Year Expiration Clock: Under Section 155(4)(b), you must claim your input VAT deduction within five years after the end of the tax period in which the expense occurred. If your accounting team forgets to claim an old input VAT receipt on a capital purchase and lets it sit past five years, that tax credit expires forever.
- Strict Forward-Looking Commencement Rule: Section 155(5) makes it crystal clear that this expanded input VAT recovery applies strictly to taxable supplies made as from the commencement of the new Act. You cannot reach back into old financial years governed by the repealed VAT Act to claim historical input VAT on old overheads or capital assets.
- Deduction at the End of the Tax Period: Input VAT is deductible in the exact tax period in which the taxable supply occurred. This means businesses can immediately offset input VAT on big capital investments against output VAT collected in the same month, significantly smoothing out corporate cash flows.
What This Means for Your Business
Bottom Line
This single statutory shift is one of the most practical, business-friendly reforms in modern Nigerian tax history. It changes how businesses should plan their capital spending and manage their monthly cash flows:
Cheaper Capital Upgrades: Buying new machinery, upgrading factory infrastructure, or purchasing company vehicles just became effectively 7.5% cheaper, because that input VAT is no longer trapped on your balance sheet, rather it offsets your monthly tax liabilities directly.
Encouragement for Professional Services: Small and medium enterprises (SMEs) no longer face a tax penalty for hiring professional consultants, IT experts, or marketing agencies, as the VAT on service invoices is now fully recoverable.
Tighter Invoicing and Reconciliation: To enjoy these new deductions, your accounting team must maintain strict digital records. You cannot claim input VAT without valid, verifiable VAT invoices from your suppliers that show the exact tax paid.
The Bottom Line
The repealed VAT Act treated business investment like a luxury to be penalized. Section 155 of the new Nigeria Tax Act treats it as the true engine of economic growth.
By allowing full input tax recovery on services and capital assets, the law removes a massive cost friction from the Nigerian economy. For business owners and finance leaders, the mandate is clear: review your procurement systems, upgrade your VAT accounting processes, and make sure you claim every single Naira of input VAT you are legally entitled to recover.
Note: The views expressed in this article are strictly those of the author and do not necessarily reflect the official position of his employer.
By Tomi Akinwale
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Akinwale is a chartered accountant, tax consultant, and professional advisor.
