Analysis Of The Impact Of Value Added Tax (VAT) On Nigeria Economy (A Study Of Federal Inland Revenue Service)

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Analysis Of The Impact Of Value Added Tax (VAT) On Nigeria Economy (A Study Of Federal Inland Revenue Service)


Abstract


The objective of this research work is to analyze the impact of value added Tax (VAT) using Federal Inland Revenue Service as a study. The objective of this study include the following: to determine whether there is significant relationship between valued added tax and the Federal generated revenue; to determine the impact of value added tax on prices of goods and services. The research methodology involves survey method of sample size of 52 and use of questionnaire with chi-square to test the hypothesis which led to the following findings; that VAT as non-oil revenue increases the government revenue on total revenue with better percentage and this reduces the dependence of government on oil revenue. Based on these findings, we recommended that the statutory provisions and amend all faces or areas of laws that could be subject to multiple interpretations. The staff should be with remunerated with up to date incentives and working benefit to avoid the act of conniving with VAT payers.


Chapter One


Introduction

1.1 Background to the Study

The essence of value Added Tax (VAT) In Nigeria in 1994 was to boost the revenue base of the government, re-activate the economy and as possible- reduce the poverty level by appropriately re­allocating resources from personal and private sections to promote growth and development. The adoption of this form of consumption tax was also necessitated by the decline in the oil revenue due to fluctuations in the price of oil in the international market, which makes the oil revenue insufficient to run the affairs of the government similarly the present non-oil revenue Sources mainly taxes are not enough to meet public needs, as expenditure continue to rise. Custom duties, which used to be an important source of government revenue in the 80’s have dwindled significantly.

However, custom duties provided 75 percent of Federal receipt in 1994 but decrease to 19 percent in 2003. Company income tax, which accrued to 32 percent of federally collected revenue in 1994 fell to 5 percent in Nigerians pay tax 50 increasingly. The bull: of the self-employed traders, farmers and businessmen evade taxes and would only pay flat rate levies when compelled

More so, this gives personal income tax a narrow base that cannot be elongated to yield higher revenue; more so, company income tax cannot also be increased, because of the need to encourage industries.

In 1993 government reduced corporate tax from 40 percent to 35 percent. Till this year, increasing the corporate tax will have a devastating effect on production level and the national output. This there is need for a tax increase and broad based consumption tax rather than an income tax.

Value Added Tax is a consumption tax which is broad based and can start from a low rate, with exemptions for essential goods to reduce its burden on the poor, it was believed that that propensity to consume is higher that the propensity to same. Value Added Tax is therefore meant to influence the consumption habit of the people and it is directed at high-income earners. Value added Tax has provided a visible achievement in terms of its proceeds since its inception in the Nigerian economy with a 5 percent rate on the “Vatable” goods and services. The non -oil revenue has therefore increased tremendously. The proceed from this source (i.e. Value Added tax) in 1994 amounted to N8.2billion. It increased to N21 billion in 1995 and was N29 billion in 1996.

The yield has been witnessing substantial annual Increase. However, the sharing formula adopted for Value Added Tax proceeds in Nigeria has been criticized by economic analysts. They believed it is providing revenue for reckless spending in the three tiers of government. The sharing formula as at 2000 budget is 15%, 50% and 35% to federal, State and Local Government respectively.


1.2 Statement of Problem

Indeed, Value Added Tax (VAT) is in principle of a good fiscal measure that is intended to broaden the revenue base of the government. The revenue is also to be channeled towards improving the social services being provided to the people. So, Value Added Tax as a fiscal policy cannot be faulted. However, it is pertinent to state on clear term the problem that led to this study. They are;

  1. Apart from passing on tax and compliance cost to consumers, business organizations and enterprises have seized the opportunity to increase profit margin on their goods whether ‘Vatable’ or not.
  2. Despite the huge proceeds accruing from Value Added Tax (VAT), a remarkable attribute to the source has not been felt on the economic and social activities in the country.
  3. With the nature of Value Added Tax, as self-assessing consumption tax, it is still witnessing considerate evasion.
  4. The Frequent revenue list of Value Added Tax (VAT) exempted goods and services hinder the performance of the tax. It has adverse effect on the revenue base as well as the entire economy.
  5. There is no significant effect of the amount being generated through Value added Tax (VAT) on the federally generated revenue.

1.3 Objectives of the Study

Specific: This study is specifically generate toward achieving the following.

  1. To determine whether, there 1S significant relationship between Values Added Tax and the federal generated revenue.
  2. To determine the impact of Value Added Tax on prices of goods and services.
  3. To examine the negative impact of Value added Tax on the Nigerian economy since the introduction.
  4. To identify the effect on Value Added Tax on the revenue of the Federal Government.

1.4 Research Questions

This study is prompted by some pertinent questions that must be answer to solve the problem of the study. Some of which are;

  1. What have the effects been of value Added Tax (VAT) on the federal Government revenue?
  2. How can the performance of Value Added Tax be improved?
  3. Is there any significant relationship between Value added tax and revenue generated by the federal government
  4. To what extent can we affirm that the percentage of the Value Added Tax cover in the Total Revenue generated in Nigeria?

1.5 Research Hypothesis

  1. Ho: Value Added Tax has no significant effect on the Government revenue.
    Hi: Value Added Tax has significant effect on the Government revenue.
  2. Ho: Value Added Tax has no significant influence on total revenue generated.
    Hi: Value Added Tax has significant influence on total revenue generated.
  3. Ho: Value Added Tax does not increase economy development.
    Hi: Value Added Tax increases economy development.

1.6 Significance of the Study

This research work will contribute immensely to the work of different people willing to explore the area of value Added Tax (VAT). However, it will help in the following areas;

  1. This study will help Government m assessing the effectiveness of the value Added Tax on the Nigerian economy.
  2. It will also be useful to researcher’s who are willing to explore this area of research work.
  3. Individual will be conscious of the fact that, for every consumption of some certain good, there is a percentage of their income they pay to the Government.

1.7 Scope and Limitations of the Study

This study will focus on Federal Inland revenue services – the operational arm of the Federal Board of Inland Revenue. Data relating to Value Added Tax will be used in the course of analysis. Works on related literature on the field were first reviewed with particular attention to administration in Nigerian.

The study is limited to VAT among other forms of indirect taxes in Nigeria and how VAT will improve the revenue of the Federal Government.


1.8 Historical Background of Federal Board Inland Revenue in Nigeria

The federal Board of Inland revenue is constituted under section 1 of companies income Tax Act (eITA) 1990 to assess and collect tax .- for the Federal Government. The operational arm of the Federal Board of Inland Revenue is called the Federal Inland Revenue Service (FIRS) as an operational arm of the Board in charge of assessing and collecting revenue taxes.

It carries out the decision of the Board. It is organized into Five Zonal Offices and Thirty area tax offices. Each districts office is headed by an assistant Director of Taxes the Zonal offices and their headquarters are Lagos Zonal (Lagos), North West Zone (Kaduna) Western Zone (Ibadan), Eastern Zone (Enugu) and North Zone (Jos).

The Assistant Director of Taxes is responsible for the assessment and collection of Taxes in the Zonal and Area Offices.

Each zonal office is made up of the administration department in charges of staff matters, office maintenance and office routine matters.

The assessment department responsible for raising assessment. The collection department is responsible for collection of all taxes assessed.


1.9 Definition of Terms

Tax is a compulsory levy imposed by the government on individuals and business firms and paid by them to the government.

Vatable Person

Any person that trades in any taxable or vatable goods and services as specified in the decree for a consideration has obligation to register for VAT payment. Such person is called vatable person and they can be Sole Proprietor, Professionals, Partnership ofa limited liability company, Club, Association or charity.

Vatable Good And Services

Vatable goods and services are those goods and services under the provision of decree 102 of 1993. They are good which VAT is added to.

Exempted Good And Services

Exempted goods and services are those goods and services are those goods and services excluded from Value Added Tax (VAT) under the provision of decrease 102 Of 1993.

Zero-Rated Goods

These are goods taxed, but as zero percent (0%) for which firms producing them can credit input tax.

Single Rated Tax

This obtains where an origin based Value Added Tax system adopts one tax rate.

Double Rated Tax

This is where a destination based Value Added Tax system adopts one tax rate, and all experts will be zero rated, while a rate is fixed for taxable goods and services.

Multiple Rate Tax

This is where a destination based Value Added Tax (VAT) system adopts more than one rate, multiple rates are used to distribute tax burden so as to make it fall more on the rich than the poor.

Consumption Tax

Referees to tax on the supply of goods and services which IS eventually borne by the final consumers.

Liability To VAT

Liability to (VAT) Value Added Tax arises when the output is more than the input tax.

Output Tax

This is the tax that is due on vatable supplies. Multiplying the tax value of aggregate supply by the tax rate derives it.


Chapter Five


Summary of Findings Recommendation and Conclusion

5.1 Summary of Findings

In the case of this study, I found out that VAT system in Nigerian has a favourable and future prospects of becoming the main revenue source of the various tiers of Government in Nigeria if the potentials are properly harnessed.

The above objectives would be easily realized if the operational arm of Federal Board of Inland Revenue i.e. Federal Inland Revenue services is given an autonomy status where it can operates independently without necessary encumbrance and bureaucratic bottlenecks.

From the analysis in the previous chapter, it was observed that VAT as non -oil revenue increases the government revenue on total revenue with better percentage (%) and this reduces the dependence of government on oil revenue.

The relationship between VAT and total revenue have a good dominant role in revenue generation to the government.

In the analysis, it was shown that as the VAT increases,so as the total government revenue increases.
However, it is pertinent to mention some of the problem associated with VAT system.

  1. Evasion and Avoidance problem
  2. Inadequate finding of the revenue services
  3. Limited or lack of independence of the revenue service
  4. Corruption on the part of VAT officials
  5. Lack of anti-avoidance or evasion measure

Moreso, it was discovered in the course of this study that, VAT is taking a lead role and that it is very active considering its impact in the finance of non-oil revenue in Nigeria by over 20% of the revenue.

Finally, the chi-square co-efficient shows that there 1S a relationship between the following pairs of items;

  1. VAT revenue and total revenue
  2. VAT income and oil income
  3. Economic development and total income

5.2 Conclusion

VAT, although ‘is a multiple stage tax. It is expected to- have a single effect on consumer’s prices and should not add more than the specified rates to the consumer’s price no matter the number of stages at which the tax is paid.
The administrations of VAT in Nigeria invested in the Federal Board Inland Revenue (FBIR) and have performed hereditably well in their role as VAT administrator, considering hindrances on the path of effective administration competent personnel with such skill and knowledge specially trained for a job is highly necessary.

Conclusively, all participant of a VAT should perform their duty for VAT system to be worthwhile. The government should improve and sustain the programme and at the same time be accountable to the citizens on the achievements of VAT every now and then. The VAT officials should not collide with VAT taxpayers and VAT agents to rub-dup the government and this calls into the incentives of the VAT and other non-oil taxes officials. Government should further enlighten the public so that their co-operation will be obtained. It is our hope that when citizen pay their tax promptly, the government should encourage them by providing the necessary infrastructural facilities.


5.3 Recommendation

The problems discovered, highlighted are analyzed will now be provided with solutions which if applied could improve VAT administration and other revenue generally.

  1. The first step towards facing the challenges is to streamline the statutory provisions and amend all faces or areas of the laws that could be subject to multiple interpretations.
  2. Secondly, the revenue service should be made autonomous and be adequately empowered by law and resources wise to be able to achieve the task of administration.
  3. The staff should be well remunerated with up to date incentives and working benefit to avoid the act of conniving with VAT Payers.
  4. VAT defaulters should be duly punished irrespective of states, ranks, position or influence to serve as a deterrent to others.
  5. The question of registration thresh-hold and rural expansion of the tax system needs to be revisited so as to control the attendance cost of administration and collection.
  6. Government should make adequate provisions for the facilities, which serve as hindrance to collection procedures.
  7. Finally, with the commencement of VAT tribunal and improvement in the structures, the level of voluntary compliance would definitely increase and revenue collection from this source may dictate the lead among other sources of revenue in the Nigerian economy.

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