Zero-rated vs exempt VAT

Zero-rated and exempt look identical on an invoice. Both show no VAT. Both make your customer pay nothing extra.

The difference is not on the invoice. It is on your costs.

Zero-rated: you charge 0%, and you can reclaim the input VAT on your costs.

Exempt: you charge nothing, and you cannot reclaim the input VAT on your costs.

That is the whole distinction, and it decides whether the 7.5% you paid your suppliers comes back to you or stays gone.

Why it costs real money

Say you spend ₦10,000,000 on inputs and pay ₦750,000 of VAT on top.

If your sales are zero-rated, you charge your customers ₦0 of VAT and reclaim the ₦750,000 from the revenue. Your input cost is ₦10,000,000.

If your sales are exempt, you charge your customers ₦0 of VAT and reclaim nothing. Your input cost is ₦10,750,000.

Same invoice to the customer. ₦750,000 difference to you, on every ₦10m of inputs. Exempt is not a lighter version of zero-rated — it is the opposite outcome for your cash.

The VAT calculator will show you the classification consequence on your own figures.

The trap in one sentence

Exempt is worse than being taxable. A standard-rated business charges 7.5% and reclaims its input VAT. A zero-rated business charges 0% and reclaims its input VAT. An exempt business charges 0% and reclaims nothing — it is the only one of the three that eats the VAT on its costs. If you make exempt supplies, that VAT is a cost of doing business, not a recoverable tax.

What is zero-rated

From the Nigeria Tax Act 2025 schedules:

• Basic food items
• Medical and pharmaceutical products
• Educational books and materials
• Fertilisers, locally produced agricultural chemicals and veterinary medicine
• Farming machinery and farming transportation equipment
• Baby products
• Locally manufactured sanitary towels, pads and tampons
• Electricity generated by GenCos and supplied to the national grid or DisCos
• Exported goods, excluding oil and gas
• Exported services
• Exported incorporeal property
• Water (basic supply)

What is exempt

• Oil and gas exports
• Crude petroleum oils
• Petroleum products — PMS, AGO, LPG, CNG, kerosene
• Land and buildings, and any interest in land
• Money and securities
• Government licences
• Rent or lease of residential premises
• Shared passenger road-transport services
• Purchase, hire or lease of tractors, ploughs and agricultural equipment for agricultural purposes
• Goods and services for diplomatic missions
• Goods and services for humanitarian projects
• Military hardware, arms and ammunition supplied to the armed forces
• Life insurance and life assurance
• Assistive devices for persons with disabilities
• Electric vehicles and their parts
• Tuition for nursery, primary, secondary and tertiary education

The full lists with their caveats are on the VAT rate page, read straight from our configuration.

Three places people get it wrong

Exports. Exported goods are zero-rated — but oil and gas exports are exempt. Same word, "export"; opposite input-VAT treatment. An oil and gas exporter cannot reclaim its input VAT. A manufacturer exporting anything else can.

Water. Water as a basic supply is zero-rated. Water sold by a restaurant, hotel or caterer is standard-rated at 7.5%. The same bottle changes classification depending on who sells it.

Food. Basic food items are zero-rated. Prepared meals sold by restaurants, hotels and caterers are standard-rated. "It's food" is not the test.

If you make both kinds of supply

Most businesses do. Then your input VAT splits three ways:

• Input VAT directly attributable to taxable supplies — including zero-rated ones — is recoverable in full.
• Input VAT directly attributable to exempt supplies is not recoverable at all.
• Residual input VAT — rent, audit fees, the electricity bill, everything that serves the whole business — is apportioned, usually by the ratio of taxable turnover to total turnover.

Zero-rated turnover counts as taxable turnover for this fraction. This is the practical payoff of the distinction: a zero-rated sale protects your recovery ratio, while an exempt sale dilutes it. Two businesses with identical revenue and identical costs can recover very different amounts of input VAT depending only on which list their sales fall on.

The VAT return preparer does the apportionment and shows the working.

What got better in 2026

Before 2026, input VAT was only recoverable on goods that physically went into what you sold. Services, overheads, fixed assets and capital expenditure were not recoverable, whatever you sold.

From 2026 recovery broadens to all of them. If your accounting still blocks input VAT on your rent, your software subscriptions or your machinery, it is applying a rule that no longer exists, and you are leaving money with the revenue. This is the single most valuable change in the VAT reform for most businesses — and unlike a rate cut, nobody announces it to you.

The rate itself did not change. It is still 7.5%.

The one-line test

Ask: "can I reclaim the VAT on my costs?"

Yes → zero-rated. No → exempt. If you cannot answer it for a given supply, you cannot file a correct return.

Check your classification against the VAT rate reference, and read the disclaimer — the schedules were amended late in passage and secondary sources disagree on several items, which is exactly why we show you which list each item is on and where it came from.