The Effect Of Value Added Tax On Revenue Generation Of Government

Project and Seminar Material for Accountancy / Accounting

Chapter One

Introduction

1.1 Background to the Study

Value Added Tax is a consumption tax, which came to existence on first December, 1993, by decree number 102 of 1993 while its actual implementation commenced on first January, 1994. It is a transition from Lagos state sales tax. The tax was introduced sequel to the report of the 1991 study group on the review of indirect taxes in Nigeria under the chairmanship of Dr. Sylvester U. Ugoh. The study group conducted a feasible study of the new tax, which after consideration was approved by the government.

The introduction of value Added Tax in Nigeria marked the phasing out of the sales tax, which has been in force in Nigeria since 1986. Sales tax can be defined as tax imposed on the flow of goods and services in production. A characteristic of this tax is that it deals with goods and services rather than the personnel circumstances of individual. Sales tax originated in Nigeria in 1982 when the Lagos State Government introduced sales tax on a number of goods and services.

This was successful in terms of revenue generation, because of this many other states introduced it in other to foster growth and development in the society. The role of the government in Nigeria mixed economy include:

Provision of the legal framework and a social environment conductive to the effectiveness of the price system.
Creation and maintenance of social and economic infrastructure.
Redistribution of income
Reallocation of resources
Provision of macro economic objective

In other for the government to accomplish this tax, it requires substantial revenue which will be derived from the value added tax.

The match towards value added tax in Nigeria started with the acceptance of the recommendation of the study group on Nigeria Tax system and Administration in Nov. 1991. Consequently the decision was made public in the 1992 budget speech. This resulted in the setting up of the modified value added tax (MVAT) committee on 1st June 1992 as recommended by the study group. Government on its own wisdom as informed by administered by the FIRS which already is charged with the serious responsibility of administering most other taxes including petroleum profit tax (PPT).

Value Added Tax is a tax imposed on the value that is added to goods and services as they pass through the registered person in the course of their taxable activities up to the final consumer. The net effect is that the final consumers pays vat while the registered person’s role in the process is to collect the tax for the Federal Board of Inland Revenue FBIR. It is important to consider some details, some elements in the definition of VAT, as this will explain the trouble that the VAT Directorate of FBIR must go into in the identification and registration of taxable persons.

However, countries introduced a Value Added Tax (VAT) because they are dissatisfied with their existing tax structure. This dissatisfaction falls broadly into one, or possibly all, of four categories: (1) the existing sales taxes are unsatisfactory; (2) a customs union requires discriminatory border taxes to be abolished; (3) a reduction in other taxation is sought; or (4) the evolution of the tax system has not kept pace with the development of the economy (Tait, 1988). If VAT had a birth certificate, the place and year of birth would read ‘France’, ‘1954’ respectively. The VAT created in France in 1954 was a Value Added type of consumption tax on goods, levied at the production stage. In 1968 however, this tax was merged with the existing turnover tax on services and a local tax on retail sales into a single, comprehensive levy extending through the retail stage.(Owens, 1996) The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the Federal Military Government. Since then, the Value Added Tax Decree had been amended more than half a dozen times, the latest being the Value Added Tax (Amendment) Act of 2007. Some of the amendments have introduced significant changes which are yet to be reflected in the body of existing literature. The idea of introducing VAT was recommended by Dr Sylvester Ugoh, who led a Study Group on Indirect Taxation in November 1991.

The decision to accept the recommendation was made public in the 1992 budget speech. (okpe, 2001) In addition, according to Obianwuna (2005), the Federal Government set up two study groups in 1991, one was set up by the Federal Ministry of Finance and Economic Development to study and give recommendation on the reform needed in direct taxes in Nigeria. The Federal Ministry of Budget and Planning set up the other group on indirect taxation. As the group recommended the introduction of VAT in Nigeria, this made the Federal Government to set up a committee who will carry out a feasibility study on its implication in Nigeria. This committee gave the general guideline for the establishment of VAT in Nigeria and its administration was given to the Federal Inland Revenue Services, which was already charged with the responsibility of administering most other taxes in Nigeria. The Sales Tax was under jurisdiction of the States and generally poorly administered with marginal contribution in terms of revenue. After extensive deliberation and consultation, VAT was introduced on 24th August 1993 as a federal tax by the Value Added Tax Decree 102 in Abuja by the President and Commander-in-chief of Nigeria. The Nigerian Federal Government enacted the VAT Amendment Act in 2007; this act empowered the Federal Government to fix the rate of value added taxes to be imposed in Nigeria. The rate was increased from 5% to 10%. However, discussions regarding the possibility of a 50% reductions in the rate are on. The Value Added Taxes are one of the major sources of financing in a number of economically developing countries across the world; this is also similar in Nigeria as well.

1.2 Statement of the Problem

Value added tax as a consumption tax has a wider coverage since the cause of adverse variance can be adequately controlled under proper administration (Onaolapo, Aworemi, & Ajala, 2013). The revenue generated from consumption taxes can help to boost the financial base of any economy. This however involves exploiting the potential and adopting the type of consumption tax that will recognize the tax payers as utility minimizing individuals and safeguarding their evading behaviour. With the introduction of Value added tax, there is increase in revenue base of federal government of Nigeria, because the problem of tax avoidance and tax evasion are reduced. (Okoli, & Afolayan, 2015). Also VAT has shifted the burden of tax toward consumption rather than savings hence encourages investment. With the increment in investment, this leads to increase in the level of national income. VAT in addition to the above contributes to increase in the standard of living of the citizens. This is because the proceeds from VAT are used to provide public goods like roads, bridges, schools and hospitals, which will be of equal benefit to both the rich and the poor. It has also generated employment for many Nigerians.

Poor VAT administration as identified by Olaoye (2009) was one of the problems confronting VAT in Nigeria. Tax authorities perform only the technical functions without performing the needed management functions, taken the complexity of tax administration into consideration, there are bound to be ineffectiveness of tax administration. Basically, the performance of only technical functions leads to false declaration, refusal to complete tax return forms, fraud, inflation of deductible expenses, smuggling, default, illegal bunkering, etc. The dishonest practices by some tax officials also pose a serious threat to the effective tax administration in Nigeria especially when such practices are capable of having demoralizing effects on honest tax payers. Hence, this study set out to examine the effect of value added tax o internally generated revenue.

1.3 Objective of the Study

This research project focuses on the effect of value Added Tax on revenue generation of government and underlisted points are the objective to carry out this research.

Identify the impacts of Consumption Value Added Tax on Income Tax in Nigeria.
Determine the effects of Income Value Added Tax on Income Tax in Nigeria.
Examine the significant relationship between Gross Product and Income Tax in Nigeria.
Access the impact of the Administration of Value Added Tax on Income Tax in Nigeria.

Value Added Tax being a new nomenclature in the Nigeria tax system, the study aims at analyzing the procedure established for its collection.

1.4 Research Questions

As a follow up to the objectives of this study are the, following research questions

Does Consumption Value Added Tax have any impact on Income Tax in Nigeria?
Has Income Value Added Tax any effect on Income Tax in Nigeria?
Is there any significant relationship between Gross Product and Income Tax in Nigeria?
To what extent does Administration of Value Added Tax correlate with Income Tax inNigeria?

1.5 Research Hypotheses

The following generated null hypotheses will be examined

Hypothesis I

H0: Consumption Value Added Tax does not have impact on Income Tax in Nigeria.
Hi: Consumption Value Added Tax do have impact on Income Tax in Nigeria.

Hypothesis II

H0: Income Value Added Tax has no significant effect on Income Tax in Nigeria.
Hi: Income Value Added Tax has a significant effect on Income Tax inNigeria.

Hypothesis III

H0: There are no significant relationship between Gross Product and Income Tax in Nigeria
Hi: There are a significant relationship between Gross Product and Income Tax in Nigeria

Hypothesis IV

H0: The Administration of Value Added Tax does not have impact on Income Tax in Nigeria.
Hi: The Administration of Value Added Tax do have impact on Income Tax in Nigeria.

1.6 Significance of the Study

This research work will be an invaluable source of literature for researchers, student, marketing practitioners, accountants, bankers, companies, government agencies and related field who might be interested in knowing much about the concept of “VAT”. Its benefaction to economic development in lagos state. The origin of value added tax, its application and effects on internally generated revenue in lagos state were analyzed which will be an indispensable material to the above-mentioned beneficiaries.

1.7 Scope of the Study

This study covers the economy of Lagos State Government but with particular reference to the Lagos State Inland Revenue Services (LIRS) which is the relevant tax authority for the value added tax in Lagos State. The data collection was restricted to the VAT office `in Lagos State, hence the findings of the study was generalized to cover VAT activities of a period of ten years ranging from 2007-2016 both years inclusive, within the state and Lagos State Inland Revenue Services at Ikeja, Lagos.

1.8 Definitions of Terms:

Revenue:

Is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees.

Tax:

Is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organisation in order to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law.

Value Added Tax:

This is known in some countries as a goods and services tax, it’s a type of general consumption tax that is collected incrementally, based on the increase in value of product or service at each stage of production or distribution.

Vatable Goods and Services:

These are all goods manufactured/assembled in or imported into Nigeria, except those specifically exempted under the law. All items not included in this published list are vatable at the standard rate of 5%, except in the case of exports where the rate is 0%.

Vatable Persons:

A Vatable person under the VAT Act is “a person (other than a public authority acting in that capacity) who independently carries out in any place, an economic activity as a producer, wholesaler, trader, supplier of services (including mining, and other related activities) or person exploiting tangible or intangible property for the purpose of obtaining income by way of trade or business”. In other words, a Vatable person is the one who trades in Vatable goods and services for a consideration.

Taxable Period:

This is the period within which vat is collected and remitted. The taxable period in Nigeria is made before the 21st day of the following in the month of collection.

Tax Invoice:

Is the authority to make claims on VAT. It is the invoice or receipt given to the purchaser of the vatable goods and services.

Sales Tax:

Is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow or require the seller to collect funds for the tax from the customer at the point of purchase.

Tax System:

A legal system for assessing and collecting taxes.

Budget:

An estimate of cost, revenue, and resources over a specific period, reflecting a reading of future financial condition and goals. It serves as a plan of action for achieving quantified objectives, standard for measuring performance and device for coping with foreseeable adverse situations.

Economy:

An economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated.

Tax Administration:

A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of Findings

The purpose of this study was to the effects of value added tax on internally generated revenue. The hypotheses were meant to know if the consumption value added tax do have impact on Income Tax in Nigeria. More so, the researcher sought to know if Income Value Added Tax has a significant effect on Income Tax in Nigeria. The research also sought to know if there are a significant relationship between Gross Product and Income Tax in Nigeria. Lastly, the Administration of Value Added Tax do have impact on Income Tax in Nigeria.

The analyses of collected data revealed that there are roles played by the Federal Inland Revenue Service. That is, Value Added Tax on internally generated revenue objectives of the study were to;

Identify the impacts of Consumption Value Added Tax on Income Tax in Nigeria.
Determine the effects of Income Value Added Tax on Income Tax in Nigeria.
Examine the significant relationship between Gross Product and Income Tax in Nigeria.
Access the impact of the Administration of Value Added Tax on Income Tax in Nigeria.

Findings from the study revealed the null hypotheses and the alternative hypotheses, that majority of the respondents were of the opinion that

Consumption value added tax do have impact on Income Tax in Nigeria. thereby the null hypothesis Ho is rejected.
Income Value Added Tax has a significant effect on Income Tax in Nigeriatherefore the researcher did not accept the null hypothesis Ho.
To evaluate significant relationship between Gross Product and Income Tax in Nigeria.The null hypothesis Ho is rejected.
The Administration of Value Added Tax do have impact on Income Tax in Nigeria. The null hypothesis Ho is rejected.

5.2 Conclusion

This study empirically investigated the impact of VAT on internal generated revenue in Nigeria. The data set were first subjected to unit root test, using Augmented Dickey fuller Test and Phillip-Perron Test at level value none of the data were stationary but at first difference all the data set.

Meanwhile, In any system tendencies towards tax evasion and avoidance are inevitable. This fact is that when acknowledged by government of any country, measures should be quickly adopted to curt the negative situation. Severe punitive measures (For Default) and incentives (For compliance) be initiated to see if there could be any meaningful improvement over the past.

Effective revenue generation through value added and other taxes education approaches be incorporated for effective dissemination of tax policies, ruling at the moment. Taxation as a way of generating huge percentage of national income should not be allowed to fail by any of the members of the system since revenue from our natural resources are being threatened by international politics and other numerous trends. If government must fulfill its obligation of providing the citizenry of this great country with basic necessities of life, there is need to improve on the revenue generation through VAT.

5.3 Recommendations

Based on the findings it is therefore recommended

That value added tax should be sustained, hence, all identified administrative loopholes should be covered for VAT revenue to continue to contribute more significantly to economic growth of the country.
There should be accountability and transparency from government officials on the management of other government revenue and also citizens should be able to benefit from it.
The study also recommended that government should intensify efforts to check inflation in the country so that the positive impact of VAT on the economic growth of Nigeria can be realized.
More professional trainings be initiated for effective assessment and collection machineries.
Government recognition should be given to the highest taxpayer of the year (in form of an award). Also, government contracts should be benefited giant taxpayers in each zone.
Finally, it is the wish of the taxpayers to see that the taxes paid are judiciously expended to benefit the citizenry rather than being mismanaged by very few government officials. This in addition to the above will boast the payment machineries of Value Added Tax (VAT).