Value Added Tax As A Tool For Revenue Generation (A Cases Study Of Selected Individuals In Edo State)

Value Added Tax As A Tool For Revenue Generation (A Cases Study Of Selected Individuals In Edo State)
Abstract
In this research, the researcher examines how value added tax affects revenue generation in Nigeria. The researcher observed that the imposition of VAT has both positive and negative impacts for revenue generation in Nigeria. VAT has had a positive impact on the economy of Nigeria because it has assumed a high profile since its introduction to replace the sales tax thereby enabling the governments to provide incentive on infrastructures for its coming. For example, over N7.791 billion was realized from VAT on impacts in 1994. More so, about 589 local government in Nigeria in 1994 shares VAT revenue of N61 million and N22 billion was also realized from VAT in 1996. However, VAT is not without this weakness. Wilt the imposition of VAT on raw material impacts amount to an additional burden on the consumers of produced goods and services. The objectives of VAT are to broaden the tax base wills the equal burden on imported and domestically produced goods and services. VAT will also harmonize our tax system and general redistribution of wealth and income expected. In understanding the study, the researcher discussed VAT under the following headings. Concept and objective of VAT in Nigeria, implication of VAT for revenue generation in Nigeria, types of VAT and how they are administered, vatable goods and services and their rates and methods of calculating VAT in Nigeria. The researcher used questionnaire in the form of like type rating scale for primary data collection. Finally, the findings of the study is that VAT has more of positive implication for revenue generation in Nigeria than its negative impacts in the service that VAT has assumed a high profile since its introduction to replace the scale tax this is proved with the results of the questionnaire.
Chapter One
Introduction
1.1 Background of Study
Some years back, the agricultural sector was playing an important role in the Nigeria economy both in generating revenue and in the physical impact. This was before oil started its own impact on the economy. The impact created by the oil sector begging to be more relevant within a short period of time. Other sectors of the economy become secondary in terms of their relevancies. The sectors were neglected in the favour of oil.
Oil thus becomes the leading factor and the leading product in term of revenue generating and foreign exchange contribution. The condition of the economy became vulnerable to the condition of the word oil market form 1970 till date. The fluctuation of price in the world of oil market in the Nigeria economy is a significant factor to the revenue to be generated. This is by diversifying the revenue generated based on the higher economy.
In addition to the above mention situation, the Nigeria state was increasingly acquires ring national responsibilities along with the traditional role of the government. The financial requirement of the government has been increased over the years in facilitating the accomplishment of government functions. Worthy of mention is this connection in the effective way of revenue generation and collection by the government against responsible for the task. The idea of introducing Value Added Tax (VAT) was therefore considered and the federal government finally approved its introduction. Value added tax is therefore expected to increase and be effective, contribute towards enhancing the revenue generation based on the government. The system is expected to minis of eliminate the corrupt practices associated with revenue assessment and collection.
The important of revenue in any country and of course Nigeria cannot be overemphasized. Revenue has been the bedrock of government performance. The history of revenue in Nigeria dated to the pre-colonial era when tax and levies were paid to the fathers or lord as the case may be to Oba’s, Kings, Emirs. The tax or levies were to be paid in cash or in kind during the pre-colonial era. It was used to support the sustenance of the colonial administration. It has even been used to mobilize farmers into cash crop production mainly for the colonial export through the use of the cash taxes. Even after independency, tax has played in important role in generating revenue for the government. It was used for the running of the affairs of the post independence government in Nigeria.
Furthermore, it has also been used to achieve other policies such as the protection of the infant industries, income re-distribution, checking and controlling the consumption of some certain goods, etc. it is therefore very much likely that it will continue to play a very important role in Nigeria economy.
Following the difficulties, Irregularities, complains associated with the assessment and collection of the said tax, operation committee was set up by the Federal government in 1991 to review the entire tax system in operation. The committee recommended the idea of introducing Value Added Tax (VAT) in the country and another committee was set up to undertake the feasibility study and make recommendation on its implementation after which the government finally approved the introduction of value added tax in Nigeria tax system with effect from 1st September 1993 and was incorporated in the 1994 budget. Therefore, this study seeks to examine Value Added Tax as a means of revenue generation for economy development.
1.2 Statement of Problem
There have been efforts by the Federal government to increase the revenue base of the economy for better development, and approval growth of the Nation economy. Therefore, this research is carried out to establish the position of Value Added Tax on the overall Nigeria tax system. The ineffective impact of generating revenue for the government and controlling irregularities wildly believed to be associated with the said tax.
1.3 Research Questions
The following questions were asked during the research of this project. They are:
- How successful has the introduction of value added tax (VAT) been in Nigeria.
- What are the relationship between value added tax(VAT) and other forms of taxation.
- What are the problems associated with the admission of value added tax(VAT)?
- And how can we make it very effective to the needs of Nigerian?
- What are the advantages of value added tax (VAT) in generating revenue in Edo state?
1.4 Objective of the Study
The objective of this study includes:
- To examine the introduction of the value added tax (VAT) as a system of taxation in Nigeria.
- To investigate the relationship between Value Added Tax and generation of revenue through other forms of taxations.
- To find out the problem associated with the administration of VAT since its introduction and also to give recommendation on how o make VAT very effective and responsible to the need of the Nigerians.
- The study also intends to find out the advantages of Value Added Tax (VAT) in term of generating revenue in Edo state.
It is also set to find out beyond technical level practical problems associated with it and to make recommendation at the end of the study.
1.5 Significance of the Study
The significance of the study is that government is in need of money to execute its increasing projects. Having introduced VAT to replace the sole taxation, to escape the difficulties in the old system. The study will be of benefit by enhancing the effective implementation and achievement of the objective, as such; VAT should be regarded as worth and should be encouraged and supported.
The benefactors of the study of Value Added Tax (VAT) are:
- The government
- The citizens
- The investors (foreign and local)
This study is very important, as the value added tax is a new or a modified system, which has a lot of significance. The public needs to be educated on its operation. The study will bring the outstanding between the government, the populaces (the tax payer) and the tax authorities together
Proper knowledge of the Values Added Tax would bring increase return to the government as a result of the compliance by the payer and proper record keeping by the officials.
1.6 Scope of the Study
The scope of the study is to cover the introduction, the implementation, problem and prospect of VAT and its relationship with revenue generation in Edo state. The line frame will cover from its introduction in 1993 till date. In addition to this all data and information to be used will be from area office of the Edo State Board of Internal Revenue.
1.7 Definition of Terms
The terms used in this study on the of Value Added Tax are define as follows;
Value Added Tax:
This is the tax impose on the value of goods and services in the country either imported or exported which the surlier or the sellers of the goods add to it.
Economy:
This means control and management of money, goods and services in a country.
Goods:
The term goods cover all tangible and intangible assets and commodities that are traded for considerations.
Supply of goods:
This includes delivery and transfer of goods arising from contractual or legal action or transaction though agents.
F.I.R.S:
Federal Inland Revenue service, it the operation of Federal Board of Inland Revenue.
F.B.I.R:
The means Federal Board of Inland Revenue.
Legislation:
This deal with the aspect of making laws in the system of tax.
VAT on input:
This is the VAT on the purchase of goods and service on a notable person.
Output VAT:
This is the VAT charged on the sale of goods and services it is the VAT paid to the F.I.R.S after vat on the purchase of such good or supply has been deducted.
Vatable person:
This means any person co-operates or incorporates who trade in Vatable goods and service for a consideration.
1.8 Limitations of the Study
The study is concentrated on the advantage of Value Added Tax (VAT) in terms of revenue generation and its operation in Edo state Board of Internal Revenue office. Value added tax (VAT) as a new introduced system of tax. The study was faced with a problem of its own which limited the research system. Some of the limitation is as follows;
- Non-availability of books and journals etc. due to lack of relevant textbook, journals and magazine, the other relevant articles or publication on the subject matter through which one could easily collect his materials for the literature review in this research work.
- The effect of scarcity of data: The issue of scarcity of data arose were some private organization refuse to disclose some information on their record keeping on Vat and especially on returns rendered to the government.
- Time: Due to shortage of time, the study was carried out in Edo State only. Time did not allow for wilder research in other state of the federation. It was not easy to collect most of the questionnaire distributed due to the fact that the people who the questionnaire were given never got it ready at the appropriate time. They gave appointment for it to be collected. Some even said that they missed the questionnaire.
Chapter Five
Summary of Findings, Conclusion and Recommendation
5.1 Summary of Finding
“This write up is aimed at finding out the implications of value added tax on revenue generation in Nigeria”
This study revealed the objectives of value added tax in Nigeria.
These are:
- To broader the tax base with an equal burden on imported and domestically produced goods and services.
- To diminish the incidence of taxation towards expenditure rather than income.
- To promote flexibility in public sector revenue and to allow for the development of maintenance expenditure.
- To encourage general distribution of wealth and income.
- To achieve harmonization of our tax system.
- To encourage savings and investment.
Politically, the case of election is considered a great advantage and therefore political convenient.
VAT was to adopt a monetary system, which will prevent a loss of economic sovereignty.
A well structured VAT would not discriminate between tangible goods and services.
The study also revealed the implication of value added tax on revenue generation in Nigeria.
These include:
- VAT is a consumer based tax which has assumed a profile since its introduction in 1994 is replacing the sale tax”. If generated N13, 677 billion in the first half of 1994 which is about 24% above the pro rate revenue of N11 billion projected for the period. Figures obtained from Federal Inland Revenue services (FIRS) showed that out of the total collection, over N7.791 billion was realized from Vat on imports. N5.886 billion was realized from VAT on non import. Monthly collection showed the highest yield of N2.914 billion was recorded in May, while the lowest below the estimated monthly yield was realized in February. The government of Nigeria recorded a development that encouraged the federal government to reduce personal income tax rates and increase the VAT in 1995. By the end of 1995, the new tax scheme shots up its contribution to the revenue pool of the government to the tune of N20.26 billion.
- VAT as stated in 1996 budget speeches overshot the 1995 estimates by yielding over N21 billion.
In 1994 the nations’ 589 local government shared revenue of N61 million, while federal capital territory (FCT) received N317 million revenue in 1995. Recently, the government of Nigeria has earned about N7.01 billion from VAT in the first three (3) months of this year. The study further revealed the benefits of VAT and arguments against VAT in Nigeria. The benefits of value added tax in Nigeria includes:- - VAT will generate more revenue for government than the sale tax thereby reducing our independence on oil. The more revenue generated, the greater opportunity for the government to provide incentive or infrastructure for the country.
- Since VAT encourage efficiency, a firm will pay input tax on production that is, the higher the cost of production, the higher the tax it will retrieve to reduce cost of production thus reducing Vat payable.
- The presence of VAT eliminates tax evasion.
- VAT can be a source of finance as agents collect VAT and keep for some time before remitting it to the government.
- VAT improves income tax administration because of the data matching procedure adopting by some tax systems.
- VAT can be used as a tool of fiscal policy.
- VAT addresses the issue of regressively in taxation, the more you buy, the more you pay so, the richer bends to buy more and pay more.
- VAT encourages voluntary compliance since it is based on self assessment system.
Arguments against VAT includes:-
- The argument against VAT is the uniform rate of 5% on both luxuries and necessities translates to regressive tax principle which consumption is pay to.
- With the imposition of VAT, prices of items increased in most cases are as high as 50%.
- For instance, a tablet of joy soap that is sold for N20.00 now sells for N30.00. It can lead to increase in price inflation.
- The burden of record keepers can be very high on VAT agents in terms of materials and the time spent.
- VAT on manufactured goods and imports are based on costs, insurance and freight. It is therefore inequitable, inflationary and doing violence to the general practices the world over. These are elements of cost not value added.
- The imposition of VAT on raw materials imports amounts to an additional burden on the cost of production.
- VAT is a fraudulent means of exploiting the masses.
- VAT on insurance was a double taxation. For instance, if an insured purchased a car he must have paid VAT on it and compelling hider to pay.
- VAT on premium was tantamount to double taxation.
This study further revealed the different types of VAT and how they are administered in Nigeria.
They are:
- The consummation VAT which shifts tax burden from capital expenditure to the consumer in full and immediately.
- The income VAT – The VAT paid on purchases of capital inputs in amortized over the expected live of the capital inputs.
- The gross products VAT which does not allow for deduction of Vat on input of capital purchases age. The firm’s liability.
- The study further revealed the bodies that administered VAT in Nigeria. They are the Federal Board of Inland Revenue (FBIR); Federal Inland Revenue Services (FIRS), the technical committee and VAT directorate.
- This study further revealed vatable goods and services in Nigeria and their rates.
Each of the goods and service are charged at the rate of 5%. Some of them are:-
- All goods manufactured and assembled in Nigeria.
- All imported goods into Nigeria.
- All second hand goods.
- Household furniture and equipment
- Petroleum products
- Jewelries
- Textiles clothing, rugs.
- Beer, wine liquor, spirits, soft drink, bottle water and so on.
- Some of the vatable services are:
- Services rendered by financial institution with the exception of mortgage bank,
- Accountancy services
- Market research
- Recruitment, strapping and training
- Advertising
- Legal services
- Computer services
- Security services
- Services supplies by architects
- Services of brokers and so on.
Finally, the study revealed the three major methods of calculating value added tax in Nigeria.
These include:
- The addition method – here, a firm calculates VAT by adding all payments for untaxed inputs (rent for land, interest for capital, wages for labour and profits for entrepreneur) then multiply by VAT rate to get VAT payable to the government.
- The subtraction method which subtracts the inputs tax from the output tax.
- The credit method – here, a firm would multiply its sale by the tax rate to calculate VAT collected on sales.
5.2 Conclusion
Bases on the analysis of data and findings made, the following conclusion were made generally. VAT was introduced in Nigeria with the aim to broaden the tax base with an equal burden on imported and domestic goods and services, to diminish the incidence of taxation towards express rather than income, to achieve harmonization of our tax system, to encourage savings and investments, to encourage general distribution of wealth and income.
The implication of VAT on the revenue generation of Nigeria was a positive one in that; VAT generated N13,677 billion in the first half of 1994 which is about 24% above the pro rate revenue of N1 billion projected for the period. Again, over N7,791 billion was realized from VAT on imports and N5,886 billion was realized on non imports. More so, VAT as stated in 1996 budget speeches overshot the 1995 estimates by yielding over N21 billion. Also, the five hundred and eighty nine (589) local governments in Nigeria in 1995 shared VAT revenue of N61 million while federal capital of Nigeria has earned about N7.01 billion from VAT in the first three months of this year.
However, some arguments against the introduction of VAT by some prominent Nigerians and interest group was that, the uniform rate of 5% in both luxuries and necessities translate to regressive tax principle. Again, that VAT can lead to price inflation, and with the imposition of VAT, the prices of most goods increased to 50% that the imposition of VAT on raw material imports amount to an additional burden on the cost of production, that VAT is fraudulent means of exploiting the masses, and that VAT on insurance was double taxation.
The three main types of VAT are; the consumption VAT, the income VAT and the gross product VAT. The bodies responsible for administering VAT in Nigeria includes; the Federal Board of Inland Revenue (FBIR), whose duties are to see to the management of tax, the second body is the Federal Inland Revenue services, the VAT directorate and the technical committee.
The three methods of computing VAT in Nigeria is; the addition method, the subtraction method and the credit method
5.3 Recommendations
Based on the findings and conclusion of the study, the following useful recommendations were made for its successful implementation.
The administration requirements of VAT are known to be complex in Nigeria. Therefore, there is no need for more human resources to be provided by FIRS so that the system can be effective. Implementations always make our problem in this country. Hence, there is the need for the FIRS to invest in qualified personnel who will be given the opportunity of continuous relevant professional training in order to reap the benefits anticipated from the VAT system. The board should, therefore, evolve an effective and efficient system of monitoring the activities of officials. Besides, it must rid itself of unscrupulous elements. For instance, the introduction of computer administrative centers for each of the states solely for VAT purposes will enhance the successful administration of VAT.
The flat rate of five percent (5%) is retrogressive for it does not provide customers with an option or alternative to maximize their wants. There is no substitutes with less VAT in other countries like the united kingdom where the rate is graduated into zero, eight and twenty five percent consumer satisfaction is granted, since he has substitutes in order to encourage increased activity in the productive sector of the economy, raw materials and other inputs used for manufacturing should attracts a low rate. Luxuries and other products which do not qualify as essential goods and services should attract a higher rate of VAT than necessities.
There has not been adequate publicity to create awareness about VAT. The board should embark on an intensified enlightenment campaign to educate the mass to understand and appreciate the new tax. Seminars and workshops means for the elites is not enough for a successful implementation of VAT.
The administration of Vat should as the system take off, give thoughts to ways in which the burden of taxpayers could be made easier especially in respect of imports which for resale and which are warehouse disposer as a trader may have to keep his goods in the warehouse for a considerable length of time before they are disposed of, it should be possible to have payment of VAT on warehoused goods deferred until the goods are either sold or used. Necessary details of this can be worked out.
The already existing high and effective income tax system in operation in Nigeria which has not been stepped down before the introduction of VAT, makes it burdensome, especially to salary and wage earners. A reduction of these income taxes would reduce the burden and make the people appreciate and co-operate with the FIRS officials in implementing VAT.
The Federal Inland Revenue Service (FIRS) should provide the state inland revenue service (SIRS) with the necessary support for effective collection. The state government, on their part, should be mandated to use the revenue collected from VAT to increase the provision of social services this will encourage taxpayers to bean their tax liabilities without complaint.
If the government should insist on continuing with VAT, then they should intensify enlightenments campaign to actual sensitize both the consumers and business community on the advantages they stand to get from VAT.
The government should intensify and expand the adult education program directing more attention to the illiterate majority among our different retail outlets.
There should be expansion from VAT on all industrial machines and machine parts imported into the country to enhance industrial and technological growths of the economy. This is necessary because the correct idea of treating VAT elements on imported machines and parts, as cost is not only stagnating the growth of industries in the country but is diminishing it.
The administration of vat should be made 15 be a separate institution from the federal Inland Revenue services (FIRS) to such an extent that will enable the new body to cope with the enormous challenges posed by the complexities and technicalities associates with efficient and effective administration of VAT.
The legislature instrument establishing VAT should be revealed to make its comprehensive acceptable realistic and to ensure farmers to both tax payers, the economy and the government in order that it can stand the test of time.
VAT should be implemented in phases considering the level of our economic and technological developments. This is to avoid disruptions in economic planning.
5.4 Suggestion for Further Research
The following are useful suggestions for a research student interested in further studies.
- Value added tax in Nigeria: arguments for and against.
- VAT is a suitable alternative to sales tax in a developing economy.
- Common problems encountered by VAT payers and administrators.
- Benefits of value added tax to the Nigerian economy.


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