Liquidity is arguably the biggest issue facing Nigeria’s fledgling electricity industry, and there may be a number of reasons for this—including the effects of value added tax (VAT).
Generating companies generally would be able to recover the input VAT paid to gas suppliers from the output VAT collected on energy sold to distribution companies or to the Nigeria Bulk Electricity Trading Company (NBET). The distribution companies also would be able to recover the input VAT paid to the generating companies (or NBET) from output VAT collected from customers. Consequently, VAT would not be an extra burden for the industry because operators theoretically would be able to transfer that cost to the final consumer. However, this is not always the case.
Distribution companies, because of a poor rate of collection, struggle to recover any VAT paid to generating companies, and this also affects the generating companies’ ability to recover their own input VAT—as the distribution companies are struggling to settle their invoices, thereby worsening the liquidity challenge in the industry.
To address these issues, there have been discussions with the Federal Inland Revenue Service as well as proposals under the VAT (Modification) Order, 2018.
Read a September 2018 report prepared by the KPMG member firm in Nigeria
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