KPMG Seeks Govt Clarification on Exemption of Diesel from VAT

KPMG has urged the federal government to clarify the confusion surrounding the removal of Automobile Gas Oil (AGO) or diesel from Value Added Tax (VAT) Modification Order 2021, recently signed by the Minister of Finance, Budget and National Planning, Dr. Zainab Ahmed.

Making the comments in its November 2021 bulletin on the “Impact of the Order on Taxpayers and Businesses Operating in Affected Sectors,” the global firm stated that the order, which was gazetted in September, was creating some confusion on the status of diesel as it relates to the modified taxes.

It noted that it was important that there is clarity on the tax exempt status of diesel to avoid unnecessary dispute as was provided in the erstwhile VAT Order, 2018, explaining that pending this clarification, it will be interesting to see how the general phrase “petroleum oils’ will be interpreted and applied in practice.

The firm wrote: “The Order defines petroleum products as aviation turbine kerosene, premium motor spirit, household kerosene, and locally produced liquefied petroleum gas (LPG) and crude petroleum oils (i.e. oils obtained from bituminous minerals, crude).

“This suggests that Automobile Gas Oil (AGO), that is diesel, which was hitherto included in the definition of petroleum products, that qualified for VAT exemption in the VAT Act (Schedule Modification) Order, 2018 (“VAT Order, 2018”), may no longer be a VAT exempt petroleum product.

“While the seeming exclusion of AGO from VAT exemption may reinforce the deregulation of AGO marketing in Nigeria, the key question is what do the phrases: ‘crude petroleum oil and petroleum oil’ mean? Can these be extended to cover diesel? “

Interestingly, KPMG argued that there is no specific petroleum product that is referred to as “petroleum oil”, adding that rather, the word is of general application referring to liquid petroleum products.

Again, it maintained that it also appeared that there was a careful attempt to distinguish the specific oil covered from other oils with the use of the modifier ‘petroleum’.

“In other words, petroleum oil will not extend to edible oils, such as vegetable oil, palm oil, and other types of oils, not obtained from crude oil or bituminous minerals.

“Simply put, any oil derived from crude should qualify under the general words ‘petroleum oil’ based on the ejusdem generis principle of statutory interpretation.

“It should be noted that the exempt items are being identified by the Common External Tariff (CET) Codes. Thus, as there is no specific CET code for diesel, this may explain why it is not specifically listed in the Order. The only item that it can fit under is petroleum oils under the general CET code,” the report insinuated.

Furthermore, KPMG stated that the Order was made available to the public in October 2021 though it was issued on 21 September 2021, questioning, therefore, whether companies in the oil and gas industry will be subjected to back duty assessments on VAT that should have been charged on the sale of diesel during the lag between the commencement date and date of issuance of the Order.

“However, as the amended definition of petroleum products in the Order was unavailable to the public during the period, and the term ‘petroleum oils’ can be interpreted to include AGO/ diesel, the affected companies should be able to make a case against back-duty assessment by the FIRS.
“Whilst it is unclear whether the continued exemption of the specified petroleum products from VAT is evidence that the Federal Government of Nigeria (FGN) will continue to participate in the downstream sector, it is noteworthy that excluding these items will make the products more affordable for the populace. However, the consensus is that the continued regulation of prices of petroleum products is not sustainable and will not attract the desired investment into the sector,” it added.

On the exemption of gas supplied within the power sector value chain from VAT, the firm described it as a welcome development as it would have an impact on the illiquidity issue that has plagued the sector over the years.

KPMG argued that it also demonstrates the commitment of the federal government towards reducing the tax burden of operators in the sector and improving the ease of doing business.

“The exemption would have a positive impact on electricity tariffs as the VAT incurred on gas supplied within the sector would have been recovered from the end-users,” it explained.

However, KPMG maintained that there are questions as to whether the reference to generation companies (Gencos) relate only to the successor generating companies of the erstwhile Power Holding Company of Nigeria (PHCN), stressing that to the extent that there is no specific definition of Gencos in the Order, it should be given its plain meaning and interpreted broadly and not narrowly.