The Effect Of Value Added Tax On Revenue Generation In Nigeria (2011-2016)

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The Effect Of Value Added Tax On Revenue Generation In Nigeria (2011-2016)


Abstract


This study was carried out to examine the effect of Value Added Tax (VAT) on revenue generation in Nigeria (2011 – 2016). Specifically, the study examined effect of Value Added Tax on Revenue Generation in Nigeria, the benefits of VAT as a source of revenue in Nigeria, and the challenges of VAT as a source of revenue in Nigeria. The study employed the survey descriptive research design. A total of 32 responses were validated from the survey. From the responses obtained and analysed, the findings revealed that VAT is an important source of revenue in Nigeria. The findings also revealed that Inaccurate computation of Value Added Tax figures, Incompliance of infant industries with Value Added Tax Directorate, Illiteracy of some rural areas about Value Added Tax, Lack of information on VAT to new industries and Incomplete information in the tax invoice of a customer are among the challenges of VAT in Nigeria.

The study recommend there should be stringent penalty imposed on any individual or corporate body who indulge in any form of VAT malpractices irrespective of states, if the high correlation between VAT and Overall Tax Revenue in Nigeria should be maintained. More so, government through Federal Inland Revenue Service should create an effective and reliable data base for every vatable persons to minimize (if not eliminate) the incidence of tax evasion. In the same vein, the entire tax system should be overhauled to discourage tax avoidance as VAT payers are ever willing to take advantage of loopholes in the tax system to reduce their tax liabilities


Chapter One


Introduction

1.1 Background of the Study

A value-added tax (VAT), which is also known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is a business that collects and pays to the government VAT on its products or services, it can reclaim the tax paid. It is similar to, and is often compared with, a sales tax.

VAT essentially compensates for the shared service and infrastructure provided in a certain locality by a state and funded by its taxpayers that were used in the provision of that product or service.Not all localities require VAT to be charged, and exports are often exempt. VAT is usually implemented as a destination-based tax, where the tax rate is based on the location of the consumer and applied to the sales price. The terms VAT, GST, and the more general consumption tax are sometimes used interchangeably. VAT raises about a fifth of total tax revenues both worldwide and among the members of the Organisation for Economic Co-operation and Development (OECD). As of 2018, 166 of the 193 countries with full UN membership employ a VAT, including all OECD members except the United States, where many states use a sales tax system instead.

Taxation is an important factor in Economic planning and also an agent for social change. It is perhaps the last to understand and most unappreciated instrument among other government policies by the citizens, yet they expect government to provide some services. This must probably owing to the fact that most people, particularly in developing countries like Nigeria, have very little knowledge of how the machineries of government operate.
Thus, the taxman is seen by an average Nigeria as a monster always ready to prey on its victims, or a plague that must be avoided at all cost. Benjamin Franklin, Philosopher, observed that “in this world nothing is certain but death and taxes.”

The certainty of taxes have been established long in Nigeria. Before the arrival of the Colonial Masters, Nigeria had been paying taxes in kind by giving farm products to their rulers and rendering free services such as clearing the bush, digging pit toilets, well e.t.c., for the benefits of the community as a whole. Income tax was first introduced in Nigeria in 1904 by the Late Lord Lugard, various types of taxes there after come into being through subsequences government.

Despite the fact that there are other sources government could generate revenue to fashion a society everyone can be proud of Taxes are not new in Nigeria but Value Added Tax (VAT) is the most recent form of tax known to Nigerians. The idea of introducing VAT in Nigeria came from the report of the study groups set up by the Federal Government in 1991, review the entire fan system VAT was proposed and a committee was set up by carrying out feasibility studies on its implementation. In January 1993, government agreed to introduce VAT by the middle of the year, it was later shifted to 1st September 1993, by which time the relevance legislature (Decree No 102 of 1993) would have been made and proper ground work done. VAT, which replaces sales tax in Nigeria, is administered by the Federal Inland Revenue Services (F.I.R.S) through VAT directorate in close co-operation with the Nigeria custom services (NCS) and the State Inland Revenue Services (S.I.R.S).


1.2 Statement of the Problem

The rationale behind replacing sales tax with the VAT is in formed by a number of factors and consideration notable:
The base of sales tax in Nigeria operate under Decree No 7 of narrow. It covers only nine categories of goods plus sales and services in Registered hotels, motels and similar establishments. The narrow base of the tax which negated the fundamental principles of consumption tax which by nature is expected to cut across all consumable goods and services, VAT base is border and included most professional services and banking transaction which are profit generating sectors.

Only locally manufacturer good were aimed by the sales tax Decree 1986, although this might not have been the intention of the law. Vat is neutral in this regard. Under VAT, a considerable part of the tax to be realised is form imported goods. This means that under the new VAT, locally manufactured goods will not be placed at a disadvantages relative to imports.

Since VAT is based in general consumption behaviour of the people, the expected high yield from it will boost from the payer of the tax. In the light of the foregoing, a seminar of this among the people to the effect that government derives the bulk revenue required for meeting its obligation to the people through taxation.

The introduction of Value Added Tax into Nigeria tax system was greatly antagonised by its critics, more and more organisations are being a registered person. Every organisation that trades in goods and services for a consideration is obliged to register with the FIRS VAT Directorate. The registration covers all the business activities of the organisation. This study thus investigates the effect of Value Added Tax on Revenue Generation in Nigeria.


1.3 Objective of the Study

The main objective of this study is to examine the effect of Value Added Tax on Revenue Generation in Nigeria. The study also seeks to examine the benefits of VAT as a source of revenue in Nigeria, the challenges of VAT as a source of revenue and to make necessary recommendations to the identified challenges.


1.4 Research Questions

The following research questions guide this study:

  1. What are the benefits of VAT as a source of revenue in Nigeria?
  2. What are the challenges of VAT as a source of revenue in Nigeria?
  3. How can VAT administration be improved in Nigeria?

1.5 Significances of the Study

This research work would will bring to the knowledge of government, FIRS, and individuals the benefit of VAT as a source of revenue and the challenges militating against proper VAT administration in Nigeria. It will also serve as a reference to researchers and students who may carry out research on this topic or related domain.

It would also add to the body of knowledge. This would enhance better understanding of the effect of VAT on revenue generation in Nigeria


1.6 Scope of the Study

This study focuses mainly on the effect of VAT on revenue generation in Nigeria (2011 – 2016). The benefits of VAT as a source of revenue and its challenges are also investigated in this study. the personnel of FIRS, Lagos state form the population of this study.


1.7 Limitation of the Study

Fund, time and availability of materials were the major constraints the researcher encountered while carrying out this research.

1.8 Definition of Terms

Tax:

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law

Value Added Tax:

This is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the end consumer. If the ultimate consumer is a business that collects and pays to the government VAT on its products or services, it can reclaim the tax paid.

Revenue:

Is one of the most important activities any business can engage in. It is defined as a process by which a company plans how to market and sell its products or services, in order to generate income


Chapter Five


Conclusion and Recommendation

5.1 Conclusion

In this study, our focus was to examine the effect of Value Added Tax on revenue generation in Nigeria. The study specifically was aimed at ascertaining the effect of Value Added Tax on Revenue Generation in Nigeria, the benefits of VAT as a source of revenue in Nigeria, and the challenges of VAT as a source of revenue in Nigeria. The study adopted the survey research design and randomly enrolled participants in the study. A total of 32 responses were validated from the enrolled participants where all respondent are active workers in FIRS in Lagos State.

The findings revealed that VAT is an important source of revenue in Nigeria. The findings also revealed that Inaccurate computation of Value Added Tax figures, Incompliance of infant industries with Value Added Tax Directorate, Illiteracy of some rural areas about Value Added Tax, Lack of information on VAT to new industries and Incomplete information in the tax invoice of a customer are among the challenges of VAT in Nigeria.


5.2 Recommendation

Based on the responses obtained, the researcher proffers the following recommendations:

  1. There should be constant review of existing tax laws every four months as that of the United State of America and other advanced economics, so as to keep the act in pace with the economic reality.
  2. There should be stringent penalty imposed on any individual or corporate body who indulge in any form of VAT malpractices irrespective of states, if the high correlation between VAT and Overall Tax Revenue in Nigeria should be maintained.
  3. There should be constant training and re-training of VAT administrators through seminars, conference to keep them abreast with the modern trend in tax administration.
  4. Government through Federal Inland Revenue Service should create an effective and reliable data base for every vatable persons to minimize (if not eliminate) the incidence of tax evasion. In the same vein, the entire tax system should be overhauled to discourage tax avoidance as VAT payers are ever willing to take advantage of loopholes in the tax system to reduce their tax liabilities.
  5. Effective VAT offices should be established in every community in Nigeria so that the numerous petty traders, motor cycle operators, even the hairdressers can be made to pay VAT but with human face so as not to discourage the rural poor out of self employment.
  6. The tax payers will be willing to pay tax when the evidence of the tax paid is visible in the form of infrastructural provision. Tax frauds have been reduced to a minimum level in the people republic of China because of the capital punishment on such offences, therefore any person found guilty of tax fraud should be penalized to ensure greater faithfulness in remitting VAT proceeds for the general good of the populace.

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