The Analysis Of Effectiveness Of Value Added Tax (VAT) In Federal Government Revenue Generation Taxation As A Major Source Of Revenue In Nigeria

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The Analysis Of Effectiveness Of Value Added Tax (VAT) In Federal Government Revenue Generation Taxation As A Major Source Of Revenue In Nigeria


Abstract


The federal government being a non‑profit oriented organization generates its revenue through various sources. These1hources include: Taxes, Loan and grants, Investment, Rates and Rents, Court Fees, Royalties, and, Sales of confiscated properties.

Tax being the paramount of government revenue source is sub divided into: Personal Income Tax, Companies Income Tax, Petroleum Profit Tax. Capital Transfer Tax, Value Added Tax, Education Tax and Capital Gains Tax.

In this project work, we shall be looking into the Value Added Tax (VAT), which is the most effective of all other Taxes, due to the process and procedures involved in its collection.

In chapter one of this project work, we shall be, discussing briefly the historical development of the VALUE ADDED TAX (VAT) the structure also the scope of VALUE ADDED TAX (VAT).

In chapter two we shall be looking into people’s opinions and ideas on’ Taxes generally, precisely on the VALUE ADDED TAX (VAT).

However, In chapter three, the method used in this study will be explained in terms of population sample. Size and sampling technique Research instrument and method of data analysis collection of data analysis and statistical tools.

Attention will be focused on breakdown of the data collected as well as the analysis of the data and the testing of the hypothesis in chapter four, the final chapter of this project. will be the summation of the findings, the conclusions reached as well as providing practicable recommendations that can help in checking and restraining the savage cycle that has made VALUE ADDED TAX (VAT), ineffective in terms of revenue generation.


Chapter One


1.0 Introduction

VALUE ADDED TAX (M) as it is called is one of the means through which the government generate fund and could be said to be the most effective of all other taxes due to the process and procedure of its collection. Generating funds generally through the public tax be faced with a lot of administrative bottlenecks, this is why we are looking at VAT and to compare it with other taxes and see how effective they are and to use VAT as a means or yardstick of measuring the effectives of generated fund but before then a brief history of this value added tax and the rational for introducing the tax into Nigerian economy will be examined.


1.1 Brief History of Value Added Tax (VAT)

Taxation has been in time memorial but the year 1991 was a major trademark in the tax administration of Nigeria, in that year the Professor Edozien led study group on the review of Nigeria tax system first identified, the need to transform the old scales tax that was then administered by the state government. Within the same time, another study group on indirect taxation led by Dr Sylvester U. Ugoh was given the task of studying the feasibility of introducing value added tax after making series of consultation, studies and researches both within and outside the country, the Ugoh study recommended in November 1991 that after two years of preparatory work.

As a follow up, by 1991 the Isewere led modified value added tax (MVAT) committee was set up to undertake preliminary work for the introduction of the new tax. The committee was later to work in close collaboration with the federal Inland Revenue ser4ces, in 1993 for them to take over the administration of the new tax, which was scheduled to come on stream as value added tax by 1st September 1993.When the federal government agreed to introduce the new tax, decree No. 102 of 1993 was promulgated to back it up. Although the scheme did not actually commence until 1st January 1994 due to administrative bottleneck which were initially encountered by federal Inland Revenue services so value added tax was therefore introduced as a replacement of the sales tax.

There are currently five administrative bodies set up in Nigeria since 1992 to look into the related issues of tax. These administrative machinery are important for the proper management of tax in Nigeria most especially value added tax.

Value added tax is borne by the final consumer but collected at each stage of the production and distribution chain. It has a wider coverage than the sale tax and cover both imported and locally manufactured goods except where a particular goods or services had been described as exempted under the decree. So many companies tend to confuse value added tax (VAT) exemption with tax exemption but under the decree individuals companies or organizations are not generally considered for VAT exemption as only goods or services may be so qualified.

In the 1930’s professor Card Shoup together with an economist named professor Seligman wrote for Cuba a tax reform report but was never implemented, though the professor Shoup had proposed to Japan the introduction of value added tax in 1948. In the report of Japanese taxation, Professor Shoup stood his ground on the need for the first time in fiscal history for the introduction of value added tax fioni the report to Shoup mission USA. Michingen state was said to have experienced the implementation of what looked like a modified VAT in 1953 but the policy was neglected for about four years. Shoup first proposed VAT in Japan, while the French government began a series of tax‑reforms in 1954. These reforms included the imposition of VAT “Taxes Sur la Valuer a on the consumption of goods. Few years later Nicholas Kaldor who later advised the chairman government on tax reforms prescribed the implementation of the expenditure tax in India (1967). Although the expenditure tax project in India was twice implemented and twice rejected. It contributed to the fiscal ferment that the idea of taxing purchases or consumption then enjoyed use French value added tax could not but succeed the tax soon became popular and continued to gain a prominent place in the fiscal armory of many countries, in Europe, Latin, America, Asia and Africa.

Since the 1960’s and 1980’s many countries in the world have moved over to (VAT). In the Europe (VAT) overshadow other system of indirect taxation in Africa due to the fiscal influence of France. The Francophone countries were the first to adopt the tax. VAT is a consumption tax. It is only paid if there is consumption of either VATABLE goods or services. The above statement has a very important implication on the efficiency on the part of the administration of the tax and ease of completion, R on the part of the administrator and even the taxpayer respectively.

VAT is a mufti‑stage tax and the incidence is on the final consumer of goods and services. It is a mufti‑stage tax since it is a value added tax. The tax must a paid at every stage in which value is added. At the end of the day the final consumption, price of the goods will be addition of all values added a. the various stages of handling the goods. VAT incidence is on the final consumer ‑ being a consumption tax.


1.2 Purpose of the Study

  1. To look in the distribution formular since inception of VAT and the achievement so far from the part of the federal government, the duty payer and citizens.
  2. To know how the revenue generated is expanded throughout the federal, government to the state government and also to the local government.
  3. To find out how the revenue is generated.
  4. The research on the problem facing the taxpayer and the government and to render solutions to their problems.

1.3 Problems of the Study

Reaching a decision of using VAT. The government was faced with the problem of its collection and the administration of the tax.


1.4 Hypothesis of the Study

  1. There is relationship between organizations that administer custom and excise duty with VAT.
  2. There is a relationship between VAT and the personnel involved in the collection.
  3. VAT enhances government revenue.
  4. There no relationship between income flax and VAT.
  5. VAT has an Impact on the economy.

1.5 Significance of the Study

  1. To identify the process and procedures in VAT collection and suggest solutions to problems encountered.
  2. To make people now the essence of VAT in the economy.
  3. To know all the protocol and the legal system involved in VAT.
  4. To know if VAT has an impact on the people and the economy.
  5. To get the populace informed on how VAT can improve the standard of living.
  6. To create awareness on the achievement.

1.6 Scope of the Study

The scope of the study will be covering at least three years after the introduction and implementation of value added tax in September 1993 and the story is expected to cover Lagos geographically.


1.7 Limitation of the Study

Conceptually, this study does not cover extensively all the states in Nigeria but majorly Lagos State so as a result, findings here cannot be applied to other parts of the countries of the world and furthermore, the study is not covering the whole years since VAT has been in operation but only about three years since the inception and lastly it deals with vatable goods and services.


1.8 Structure of the Project

The study examines critically the analysis of the effectiveness of Value Added Tax (VAT) in federal government revenue generation. The project is structured in a way that the chapter one contains the historical development of VAT, the structure and also the scope of VAT.

Chapter two deals with the literature review, which is divided into works of various authorities on the subject and state of development in the 6eld as well as the theoretical foundation of the study. The chapter three explains the methodology used in the research work.

In chapter four the data collected shall be analyzed. also the discussion and summary of all findings while the final chapter of the project will be the summation of the findings, the conclusion reached as well as providing practicable recommendation that can help.


1.9 Definition of Terms

1. VAT:

Is defined as a tax on supply of goods and services, which is eventually borne by the final consumer but collected at each stage of the production and distribution chain.

2. Withholding Tax:

Is an advance payment of income tax and purpose is to bring the prospective tax payer to the tax net, thereby widening the income tax base.

3. Gross Product Vat:

It is when the input of capital purchase is allowed against the firm output tax.

4. Consumption Vat:

It is when the capital purchase are treated like the purchase of revenue items.

5. Vat Exempt:

This is defined as product or services on which the buyer or supplier does not have to charge VAT.

6. Tax Evasion:

Is an attempt not to pay tax at all. TAX WTE: If is the amount of tax that has to be paid. TAX BASE: It’s the object at which tax is charged.


Chapter Five


Summary of Findings, Conclusions and Recommendation

5.1 General Conclusion

This chapter centers on research findings and the conclusions that were drawn base on the findings. It also made recommendation on the topic of discourse. “The analysis of effectiveness of value added tax (vat) in federal government revenue generation”.


5.2 Summary of Findings

The government of Nigeria in it’s quest to increase revenue mobilization decided to change the tax structure in order to ensure efficiency, effectiveness in the administration of tax, and reduce over dependency in oil as the only major source of revenue. The sales tax were replaced by VAT in December, 1993 with the introduction of Decree 102 of 1993 which marks the phasing out for the sales tax decree 07 of 1986, on the grounds that the previous system encouraged tax evasion, had a narrow base of revenue generation and deferred the payment of tax. In view of the e assertion, there is the need for the researcher to look into the implication of VAT in Revenue generation of Nigeria and whether the introduction of VAT has any positive or negative implication on the economy. The study revealed the following.

  1. VAT has economic impact on consumption patterns of Nigeria.
  2. VAT has positive impact on government revenue generation in Nigeria.
  3. Payment of VAT has improved the prospects of business, organization and industries in Nigeria.
  4. The introduction of VAT has been confronted with a lot of challenges.
  5. The decision by the government to replace the former sales tax with Value Added Tax has been a worthwhile one.
  6. Though VAT has been known to be defective areas it has been able to serve, the purpose for which. It was introduced to a considerable length.
  7. It has been pointed out in the analysis that, though there has been a tremendous increase in government revenue with the introduction of VAT which help improve government commitment to community development, the VAT staffs well motivated according to the findings to increase efficiency and effectiveness in tax collection hence their ability to go extra miles, however the accounting system put in place by the government to audit the accounts prepared by corporate institutions that collect taxes on behalf of government are very weak, hence there are false declarations of sales figure that prevent full disclosure of VAT revenue.

5.3 Conclusion

Having critically examined the research questions, tested the hypotheses, and the research findings, the following conclusion was made based on the information gathered.

  1. VAT has actually improved the economic development of the country with much implication on the revenue generation of Nigeria. This can be seem from the projected revenue in the year of it’s commencement 1994 out of 11 billion naira that was projected, VAT generated N13,677 billion in the first half of 1994, which is about 24% above the estimated income, for the period. Again, over N7.791 billion was realized from VAT on imports and N5,886 billion on non-import. VAT as stated in 1996 budget speeches overshot the 1995 estimates by yielding over N21 billion. Also the five hundred and eightynine (589) local governments in Nigeria in 1995 got VAT revenue of N61 million while Federal Capital territory earned about 7.01 billion from VAT in the first three months of 2005.
  2. Payment of VAT has improved the prospects of business, organizations and industries in Nigeria to an extent, which we are all witness today for instance, there has been an improvement in power supply recently and stability in the prices of petroleum and allied products.
  3. These has been a lot of motivation to VAT staffs to increase their efficiency, this could be seen from their special salary structure different from other government ministry or parastatals like them. That is the federal Inland Revenue service (FIRS).
  4. Finally, Despite the Positive side of the introduction of VAT, there are still the views of the opposition which to an extent portrays the policy in a negative form or perspectives.

5.4 Recommendations

On the basis of the findings that have been established and the conclusion drawn from the study, following recommendation are necessary.

  1. The government should adequately make provision for retrieving the proceeds of VAT from companies and other gents of collection.
  2. From the above, it is expected that in a given tax system such as VAT an effective tax administration would yield maximum revenue with a minimum cost. This however depends on the quality of the machines for tax administration which include manpower devoted to tax collection and assessment, the equipment and VAT Decree. When the people come to understand VAT better and it’s benefit, the economic compliance would be greater and therefore compliance cost would be smaller on the other hand, when the voluntary compliance is great, the VAT administration would be easier and giving the tax structures, the greater revenue yield.
  3. Seminars and workshops so far organized on this issue are narrow in its scope and design. There should be functional VAT offices n every council area to coordinate a vigorous campaign to educate people and seek their cooperation. This will no doubt erode the negative attitude that some of the consumer’s have developed towards, VAT.
  4. VAT has a good chance of working in Nigeria. If it receives the cooperation of tax collectors, if however, people continue to evade tax colluding with tax collectors as witnessed on sales tax, no meaningful achievement would be made.
  5. Again, enforcement of penalties and addition returns assessment provision could go a long way in enhancing VAT collection.
  6. Fast disposition of tax cases will help administration machinery.
  7. A good tax system most ensure that tax laws which include VAT laws must satisfy the basic principles of taxation.
  8. The list of VAT exemption items should be clearly defined in simple language. This should be properly articulated to ensure those goods that are vatable d those goods that must be exempted.

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