The Impact Of Value Added Tax On The Productivity Of Manufacturing Organisations In The Nigerian Economy

Project and Seminar Material for Economics

The Impact Of Value Added Tax On The Productivity Of Manufacturing Organisations In The Nigerian Economy


Abstract


This is a study on the Impact Of Value Added Tax On The Productivity Of Manufacturing Organisations In The Nigerian Economy. The study adopted the survey research design and randomly enrolled participants in the study. A total of 40 responses were validated from the enrolled participants where all respondent are active workers in the Federal Inland Revenue Service, Enugu. The findings shows that Value Added Tax (VAT) has contributed to Gross Domestic Product of Nigeria to a great extent. it found that Money supply has significant effect on VAT payment in Nigeria. The study showed that there is significant relationship exists between the cost of collecting VAT and the benefits derived from it


Chapter One


1.0 Introduction

1.1 Background of the Study

The federal government in 1991 set up a study group to look into and give recommendation of the administration and reform of indirect taxation. This was as a result of the inadequate revenue yield from non-oil taxes in Nigeria and the overdependence of the government on oil revenue. This group was to review the indirect taxation system in Nigeria, study the feasibility of the introduction of Value Added Tax and make recommendation.
According to Ajakaiye (2000) the recommendation accepted by the government included the following:

  1. Detailed action programme for the preparatory work on VAT
  2. When introduced, VAT should pay special attention to the government’s fiscal relationship because it will replace sales tax which is a stage tax.
  3. Have a single rate.
  4. Cover manufacturing industry importers in form of goods.
  5. Cover professional services excluding doctors and pharmacists.

Sales tax was the basic consumption tax by many countries. At the dawn of the 20th century, many countries embrace VAT as a replacement sales tax. The substitute of VAT for sales tax paid off tremendously though at varying degrees to various countries. The adoption of VAT was so pervasive that the adoption of it by European Economic Community (EEC) was made obligatory under the treaty of Rome signed in 1957. In spite of the wide acceptance, some countries like Japan, Australia and Canada have been reluctant of introducing the VAT.

The Standard Statement of Accounting Practice (SSAP) NO 5 (1993) defined VAT as a tax on the supply of goods and services which is eventually borne by the final consumer but collected at each stage of production and distribution.
Professor Aluko (1993) in his paper ‘Classical Value Added Tax (CVAT)’ defined VAT as a tax on the increase in the value of goods and services in the process of production and distribution.

Ayodele (2007) argued that VAT has become a major source of revenue for most developing countries like Nigeria. In view of this, there is penchant to increase the tax rate to get higher revenue.

First Tax Guide (2005) stated that the revenue from VAT was shared 20-80 percent between the state and federal government. Currently, it is shared 15:50:35 among the federal, state and local government. The state collection was to be earmarked as 30% for state of origin, 30% for consumption/destination and 40% for equality of the state. VAT is levied at a single tax rate of 5% which makes it easier to administer. When paid by business on purchase, it becomes an input tax which is recoverable from VAT charge on company’s sales known as output tax.

In Nigeria, all goods and service are vatable with limited aid specific exemptions. All imports are vatable with imported raw materials or finished goods and VAT on imports are calculated on total revenue value at the total cost, insurance and freight. Exports are zero rated, implying that exporters do not impose VAT on exports, but they can claim credit for VAT paid on their inputs.

According to Ajaikaiye (2002) Nigerian VAT has a very wide base with relatively few exemptions, moreover VAT does not replace any of the usual indirect or income taxes. Sales tax revenue accrues exclusively to the state government, but shared by all levels of government. Thus, it can be assumed that VAT revenue is shared by all the levels of government. Though VAT revenue is not sterilized, it is injected into the economy through government final consumption expenditures.


1.2 Statement ot the Problem

Resistance to VAT in Nigeria at the early stage was very intensive and prolonged, in the sense that some manufacturing organizations do not want the tax, they felt that its implementation should not be given to any revenue agency. In the thrust of this it was argued that the VAT implementation would almost certainly be based on bureaucratic red-tapism (Ogundele, 1996).

Naiyeju (1996) identified a spectrum of fear inherent in the introduction of VAT in Nigerian economy;

Anticipated high administration cost, especially the cost of monitoring the VAT implementation bearing in mind the Nigerian factor.

  1. The established culture of tax evasion by some manufacturing organizations.
  2. Effects on prices of commodities.
  3. Fear of inability to administer VAT efficiently.
  4. Compliance cost.

1.3 Objectives of the Study

The following are the objectives of the study;

  1. To examine how VAT has influence the productivity of manufacturing organizations in the Nigerian economy.
  2. To analyze the effects of VAT revenue in the GDP of the Nigerian economy.
  3. To determine how the productivity of manufacturing organizations in Nigeria has enhance the GDP of the Nigerian economy.
  4. To enumerate goods and services covered by VAT and those exempted from VAT.

1.4 Research Questions

  1. How has VAT influence the productivity of manufacturing organizations in the Nigerian economy ?
  2. Is there any significant relationship between VAT revenue and the GDP of the Nigerian economy?
  3. Does the productivity of manufacturing organizations in Nigerian enhance the GDP of the Nigerian economy?

1.5 Research Hypotheses

The following hypotheses are formulated for this study:

Hypothesis One
  • HO: Value Added Tax (VAT) has not contributed to economic growth of Gross Domestic Product of Nigeria.
  • HI: Value Added Tax (VAT) has contributed to Gross Domestic Product of Nigeria to a great extent.
Hypothesis Two
  • HO: Money supply does not have significant effect on VAT payment in Nigeria.
  • HI: Money supply has significant effect on VAT payment in Nigeria.
Hypothesis Three
  • HO: A significant relationship does not exist between the cost of collecting VAT and the benefits derived from it.
  • HI: A significant relationship exists between the cost of collecting VAT and the benefits derived from it.

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 interest in knowing much about the concept of VAT.

Its general contributions to economic development of Nigeria were mentioned. Its advantages and disadvantages, types of taxes, the origin of VAT, its application, impact and administration were thoroughly analyzed which will be an indispensable material to the above mentioned beneficiaries. It will also help the government in her policy formulation to suggest alternative strategies that can aid effective administration and monitoring of the VAT process and procedures. All these will contribute immensely to the knowledge previously had by some of the beneficiaries mentioned above.


1.7 Scope of the Study

This study covers selected manufacturing firms in Enugu State. The firms selected are; Innoson Nigeria Ltd, Emenite Nigeria Ltd and Coca Cola Bottling Company.


1.8 Limitation of the Study

The researcher encountered diverse constraints in the process of carrying out this research study.

1. Difficulty in gathering Research Material:

There was difficulty in gathering the necessary information or materials necessary for the successful completion of this research study. This is due to the fact that most of the respondents were either not on sit or were uncooperative in providing the necessary information as regards to their responses.

2. Time Constraints

Time also posed as a constraint to the successful completion of this research study. The researcher had to combine the time for lectures and work to carrying out this research study. Though it was not easy but she was still able to carry out the research work.

3. Finance:

There was not enough finance on the part of the researcher to complete this research study.
Irrespective of these constraints, the researcher was still able to successfully carry out this research study.


1.9 Definition of Terms

Value Added Tax:

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

Gross Domestic Product:

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

Total Consolidated Revenue:

Total consolidated revenue is the aggregate of all revenue generated by a parent company and its majority-owned subsidiaries, after intercompany eliminations. Intercompany eliminations refer to sales included by one company to another majority-owned subsidiary or its parent.


Chapter Five


Summary of Findings, Conclusion and Recommendations

5.1 Summary of Findings

The summary of findings made for this study includes the following:

  1. Value Added Tax (VAT) has contributed to Gross Domestic Product of Nigeria to a great extent.
  2. Money supply has significant effect on VAT payment in Nigeria.
  3. A significant relationship exists between the cost of collecting VAT and the benefits derived from it.
  4. Corrupt tax officials have affected the rate of VAT collection in Nigeria to a great extent.

5.2 Conclusion

From the findings of this study, it has been discovered that Valued Added Tax (VAT) is the bedrock of wealth creation in Nigeria as well as economic development as it contribute significantly to the nation’s Gross Domestic Product (GDP). Therefore, government must give adequate attention to taxation in general and VAT in particular under a stable and conducive sociopolitical and economic atmosphere. The effect of VAT on the Overall Tax Revenue in Nigeria is very significant, as the former contributes a very high portion in the latter.

If the administration of VAT is strengthened and the compliance rate is high, government will generate more revenue through VAT and the dividend of democracy can be effectively delivered in the light of good governance. Finally, effective VAT would off-set other challenges of the nation such as inadequate and dilapidated infrastructure, complicated and antiquated tax laws, bureaucratic complexities and week administration of the other forms of tax.


5.3 Recommendations

The following recommendations are made to achieve the objective of wealth creation through VAT;

  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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