Effects Of Value Added Tax On Internally Generated Revenue

Project and Seminar Material for Accountancy / Accounting

Abstract

The study examined the impact of value added tax on the internally generated revenue of Lagos State for a 6-year period ranging between 2011 and 2016. The study established that VAT is a consumption tax on economic operations including imports. VAT, being an indirect tax, attracts a flat rate of 5% and is collected on behalf of the government by businesses and organizations who have registered with the Federal Inland Revenue Services (FIRS) for VAT services. The study adopts secondary data, precisely panel data. The data are sourced from the Lagos state internal revenue services. The variables of interest are computed from the financial statements of selected internal revenue services.

The analysis of data was carried out by the descriptive and inferential statistics are employed to analyze the data. In furtherance, the multiple linear regression analysis is adopted to estimate the coefficient of parameter estimates in the models specified.

Data on the variables were obtained from the Lagos State Bureau of Statistics and Lagos State Board of Revenue. IGR was contextualized as the summation of Ministries, Department and Agencies (MDAs) Revenue, Pay-as-you-earn (PAYE), road taxes, direct assessment and other taxes. A model was specified in which IGR is expressed as a function of VAT. The model was estimated by the use of simple linear regression analysis. The results revealed that VAT has significant positive impact on IGR in Lagos State. A billion naira increase in VAT is expected to increase Lagos State’s IGR approximately by N7.39 billion. Furthermore, it was found that about 92.6% variation in IGR is explained by VAT.

The study concludes that value added tax contributed enormously to internal generated revenue of Lagos State government between 2011 and 2016.

To this end, the study suggested amongst others that Lagos State government should enact fiscal laws and legislations and strengthen existing ones in line with macroeconomic objectives of economic growth, full employment, financial independence and price stability; Tax agencies and authorities in Lagos State should establish cordial relationship with relevant professional tax bodies; Lagos State government should pursue policies that will enhance industrial development; Deliberate policies of internal control should be put in place by the Lagos State Board of Inland Revenue.

Chapter One

Introduction

1.1 Background to the Study

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 of Lagos State.

1.3 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 Lagos state, Nigeria?
Has Income Value Added Tax any effect on Income Tax in Lagos State, Nigeria?
Is there any significant relationship between Gross Product and Income Tax in Lagos State, Nigeria?
To what extent does Administration of Value Added Tax correlate with Income Tax in Lagos State, Nigeria?

1.4 Objective of the Study

The main objective is to evaluate the effects of value added tax on internally generated revenue in Lagos state, Nigeria.

Specifically, the study aims to:

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

1.5 Research Hypotheses

The following generated null hypotheses will be examined

Ho1: Consumption Value Added Tax does not have impact on Income Tax in Lagos State, Nigeria.

Ho2: Income Value Added Tax has no significant effect on Income Tax in Lagos State, Nigeria.

Ho3: There are no significant relationship between Gross Product and Income Tax in Lagos State, Nigeria.

Ho4: The Administration of Value Added Tax does not have impact on Income Tax in Lagos State, 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

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.

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.

Chapter Five

Conclusion and Recommendation

The result of the study revealed that value added tax is beneficial to the Nigeria economy. This can be understood from the behaviour of the variables in this research, which shows that value added tax is statistically significant to revenue generation in Nigeria. From the findings, for Nigeria to attain its economic growth and development, she must be able to generate enough revenue in order to meet up with the challenges of her expenditures in term of provision of social amenities and the running costs of the Government. The result of this study indicates that if more goods and services are taxed, the revenue base of the country will increase. We still recommend that the value added tax bases be widened to bring the informal sector into the value added tax net so as to stem possible evasion even by the so faithfully complying under the old rate.

5.4 Recommendations

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

The government should adequately make provision for retrieving the proceeds of VAT from companies and other gents of collection.
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.
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.
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.
Again, enforcement of penalties and addition returns assessment provision could go a long way in enhancing VAT collection.
Fast disposition of tax cases will help administration machinery.
A good tax system most ensure that tax laws which include VAT laws must satisfy the basic principles of taxation.
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.