Problems And Prospects Of Administration Of Value Added Tax In Nigeria
The purpose of this study is to examine the problems and prospects of administration of value added tax in Nigeria as it relates to how it can improve government revenue and throws more light in its contribution to the economic growth and development of Nigeria. In addition to the oral interview and questionnaires distributed, was a review of study of literature relating to the impact, administration and collection of VAT in Nigeria. Simple percentages, bar chart, pie chart, and chi-square were used for data analysis on which purposive sampling technique was adopted. The findings shows that: VAT has economic impact in consumption pattern in Nigeria; VAT has positive impact on the economy of Nigeria, and the payment of VAT has improved the prospects of businesses; organizations and industries in Nigeria and the study strongly recommends that: there should be functional VAT offices in every council area to coordinate a vigorous campaign to educate people and seek their cooperation; the above will no doubt erode the negative attitude that some of the taxpayers have developed towards VAT; and government should make adequate provision, for retrieving the VAT proceeds from companies and other collection agents.
Table of Content
- 1.1 Background to the Study
- 1.2 Statement of the Problem
- 1.3 Objectives of the Study
- 1.4 Research Question
- 1.5 Research Hypothesis
- 1.6 Significance of the Study
- 1.7 Scope of Study
- 1.8 Limitation of the Study
- 1.9 Definition of Terms
- 1.10 Organisation of the Study
2.0 Literature Review
- 2.1 Conceptual Framework
- 2.2 Concept of Taxation
- 2.3 Attributes of a Good Tax System
- 2.4 Impact, Incidence and Taxable Capacity
- 2.5 Types Of Tax System
- 2.6 Value Added Tax in Nigeria
- 2.7 Conceptual Analysis of Value Added Tax (VAT)
- 2.8 Aims of Vat in Nigeria
- 2.9 The Impact of Value Added Tax in Nigeria
- 2.10 Administration of Vat in Nigeria
- 2.11 Prospects of Vat in Nigeria
- 2.12 Problems of Vat in Nigeria
3.0 Research Methodology
- 3.1 Research Design
- 3.2 Population
- 3.3 Sample and Sampling Technique
- 3.4 Instrument for Data Collection
- 3.5 Validity of the Instrument
- 3.6 Reliability of the Instrument
- 3.7 Method of Data Collection
- 3.8 Data Analysis
4.0 Results and Discussion
- 4.1 Result
- 4.2 Discussion
5.0 Summary, Conclusion and Recommendation
- 5.1 Summary
- 5.2 Conclusion
- 5.3 Recommendation
1.1 Background to the Study
Value Added Tax (VAT) in Nigeria is a Federal Government tax, which is administered using the existing machinery of the Federal Inland Revenue Services (FIRS).
VAT has a directorate within the frame work of the Federal Inland Revenue Services (FIRS) with the head office in Abuja. It has a network of zonal and local offices throughout the federation. The Directorate of the tax is headed by a director who is assisted by two deputy directors. The Zonal Coordinator of the Federal Inland Revenue Services (FIRS) at Lagos, Ibadan, Enugu, Kaduna and Jos also coordinates the activities of local VAT offices within their areas and are responsible to the VAT Directors in Abuja for all Value Added Tax (VAT) related matters.
VAT as a form of tax was introduced in Nigeria with effect from 1st January 1994 based on the report of the study group set up in 1991 by government to review the system of indirect tax in Nigeria.
Before the introduction of VAT in Nigerian economy, the Federal Government has been working relentlessly on how to revamp the Nigeria economy. To this effect, a lot of economic measures have been introduced. Among the economic measures introduced included the Second-Tier
Foreign Exchange Market (SFEM), Structural Adjustment Programme (SAP), and Foreign Exchange Market (FEM) etc.
All these efforts at revamping the economy were to no avail as the economy seems to be an ailing child that has defied all economic therapy or fiscal measures. Prompted by its avowed position to revamp the Nigerian economy at whatever cost, the Federal Military Government under the leadership of General SaniAbacha introduced a fiscal policy, the Value Added Tax (VAT) in January 1994.
VAT is a consumption tax at each stage of the consumption chain and is borne by final consumer. It requires a taxable person upon registering with the Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% on all vatable goods and services.
Where the supply is not subject to VAT, the VAT liability will either be Zero-rated or exempted. Zero-rated goods and supplies are all export goods and supplies. Supplies that are zero-rated are still taxable but no actual tax is payable to the government. The important difference between Zero- rated and exempt items is that any input VAT relating to Zero-rated supplies is recoverable, whereas that relating to exempt supplies are not recoverable.
The registration of Value Added Tax (VAT) is to cover all the business activities of the vatable persons. Therefore all domestic manufactures, wholesalers, distributors, importers and suppliers of goods and services in Nigeria are expected to register for VAT within six months after the commencement of the decree or six months from the commencement of business, which ever is earlier.
A vatable person is one who trade in vatable goods and services for a consideration. Every vatable person has the obligation to register for Value Added Tax (VAT) payment.
Professionals like lawyers, accountants, Engineers etc who provide professional services to their clients are require to register. There is therefore no thresh-hold for registration.
VAT paid by a business on purchases is known as input tax, which is recovered from VAT charges on company sales known as output tax. If output exceeds input in any particular month, the excess is remitted to the Federal Board of Inland Revenue (FBIR) but where input exceeds output, the tax payer is entitled to a refund of excess from Federal Board of Inland Revenue (FBIR) though in practice this is not always possible.
A tax payer however has the option of recovering excess input from excess output of a subsequent period.
It should be stated at this point that recoverable input is limited to Value Added Tax (VAT) on goods imported directly for resale and goods that form the stock-in trade sued for the direct production of any new product on which the output VAT is charged.
VAT in Nigeria were created as replacement or substitution for the sales taxes that were in operation before. They were imposed on all goods that were manufactured in the country as well as goods that had been made outside the country and were selling there.
The impressive performance of VAT within the first government fiscal policies such as:
- Scrapping of some form of excise duty;
- The reduction of the marginal rate of personal income tax to 25% and lowest tax bracket from 10 to 5;
- The reduction of company income tax rate to 30 and;
- The reduction of the rate of capital tax from 20% to 10%.
Following these, Value Added Tax (VAT) seems to be the best among other types of taxes. It is against this background that we are going to analyze VAT and its impact on the nation’s economy.
1.2 Statement of the Problem
The significant impact of VAT or the role played by Value added Tax in the development of the nation cannot be overemphasized. Revenue is raised by the government through taxation for the development of the nation’s project.
VAT was introduced as a revenue mobilization strategy to cover up the deficiencies experienced with the former sales tax because of its progressive nature. Government ability to adequately and effectively retrieve the proceeds from companies and other agents of collection remains a problem. It does not appear as if there is adequate machinery for effectively monitoring of the remittance of the tax withheld to the relevant tax authorities, this means that the federal inland revenue , the body charged with the administration and implementation of Vat lacks the logistic support , this invariably will give room for tax evasion and avoidance. Secondly, the dishonest practice by some tax officials also posed a serious threat to effective tax administration in Nigeria, especially when such practices are capable of having demoralizing effects on the honest tax payers. Consumers will still want to low how much they are paying as Vat as most of these taxes are not duly reflected on their invoice. it is generally believed that vat is another way of reflecting economic hardship on the consumer to the advantages of the manufacturers and companies. It could be seen as an excuse to raise prices of goods and services arbitrary. For instance, landlords are now charging VAT on house rents, some hotels are charging VAT on their services without remitting same to the appropriate authorities. These are contrary to the regulation governing the vat system.
The uncommon nature of this tax system, has resulted in unaware of its existence by majority with resultant effects of low credibility by the government, this has made people to scorn the payment. Lack of trained personnel and logistic support from the government and FIRS has contributed immensely to poor vat administration and implementation which invariably has resulted in reduction in revenue generation from VAT. This study therefore seeks to examine the problems and prospects of administration of value added tax in Nigeria.
1.3 Objectives of the Study
The aim of this study is to examine the problems and prospects of administration of value added tax in Nigeria.
Specifically, the objectives of the study include to;
- To determine the economic impact of Value – Added Tax on the consumption patterns of Nigeria.
- To assess the impact of Value Added Tax on the Nigeria economy.
- To examine the prospects of Value Added Tax on businesses, firms, organizations and industries in Nigeria
- To identity the problems confronting the implementation and administration of Value Added Tax in Nigeria.
1.4 Research Question
The following research questions are formulated to guide this research:
- What is the economic impact of Value – Added Tax on the consumption patterns of Nigeria?
- What is the impact of Value Added Tax on the Nigeria economy?
- What are the prospects of Value Added Tax on businesses, firms, organizations and industries in Nigeria?
- What are the problems confronting the implementation and administration of Value Added Tax in Nigeria?
1.5 Research Hypothesis
- HO1 There are no challenges confronting the implementation and administration of Value Added Tax in Nigeria
- HO2 Payment of Value Added Tax has not improved the prospects of business, organizations and industries 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 interest in knowing much about the concept of “VAT.
Its general contribution to economic development of Nigeria were mentioned. It’s 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.
The value of the study cannot be overstressed in that it came at the time when it is evident that tax-payers are not happy at paying their taxes, like some say they are not getting required response from the government. Therefore, the study will help to investigate these feelings of desperate taxpayers. This is borne out from the fact that, if their feeling about taxation is positive, their response to tax will be on the increase whereas if their feelings are negative, the expectation is low response to the tax, which will give rise to low revenue.
The importance of the study can also be viewed in the area of final consumers. This is because they are the people who actually bear the burden of the tax. And since government’s interest is to better the lives of the citizenry, the need to investigate such area cannot be overemphasized.
The importance of the study can also be appreciated in the area of tax modification. That is to say, if the existing taxation should be amended to suit the socio-economic condition in the country or should more avenues be created to increase revenue through taxation.
The list of viable goods and services will also be mentioned in subsequent chapter together with the countries that had practiced this system of taxation with the date of adoption. All these will contribute immensely to the knowledge previously had by some of the beneficiaries mentioned above.
1.7 Scope of Study
This study covers the economy as a whole (The Federal, State and Local Government) but with particular reference to the Federal Board of Inland Revenue (FIBRS) which is the relevant tax authority for the Value Added Tax in Nigeria. The data collection was restricted to the VAT office, business registered and non-registered, consumers and wholesalers within Enugu metropolis, hence the findings of the study was generalized to cover VAT activities within the metropolis and Enugu VAT office. The study focuses on the problems and prospects of administration of value added tax in Nigeria.
1.8 Limitation of the Study
The researcher encountered a lot of hindrance and problems in the course of carrying out this research work. Among the major problems is the difficulties in getting and gathering information and others which include the following:
Due to the nature of office and business within the scope, the researcher spends a lot of money on visiting, traveling from one location to another, from one office to the other and even had to repeat a visit more than three times to seek for information, all these involves money considering the financial constraint of the researcher and limited resources available to her.
Many registered and non-registered business owners were reluctant to give out or provide information about the research, since they believe that tax payment is something very confidential and therefore could not open up to the researcher.
Some of the respondents visited were unable to present complete and comprehensive records of their business while some were not keeping proper records of their business activities and as such could not give adequate and correct information on the effect of vat on their businesses rippling on the economy of Nigeria.
Time constraint has been another vital limitation and obstacle towards effective realization of the main objectives of this study. The researcher had to combine the little time left with academic work and preparation.
1.9 Definition of Terms
Value Added Tax:
A value-added tax, known in some countries as a goods and services tax, 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.
VAT is administered by the domestic tax administration in most countries reflecting the uncontroversial decision of the authorities to administer the VAT in the same domestic tax department as the previous sales or turnover taxes.
Refers to the challenges and issues affecting the administration of VAT
Refers to the potential benefits accrued to the administration of VAT
1.10 Organisation of the Study
This study is organized into five chapters. Chapter one included the background of the study, research problem, research objectives and questions as well as limitation of the study. Chapter two contains the literature review. Chapter three includes the methodology and study area. Chapter Four contains the results and discussion of key findings of the study. Chapter Five finally looks at the summary, conclusions, and recommendations based on the findings.
5.0 Summary, Conclusion and Recommendation
The government of Nigeria in its quest to increase revenue mobilization decided to change the tax structure in order to ensure efficiency, effectiveness in the administration of tax, and reduce over dependency in oil as the only major source of revenue. The sales tax were replaced by VAT in December, 1993 with the introduction of Decree 102 of 1993 which marks the phasing out for the sales tax decree 107 of 1986, on the grounds that the previous system encouraged tax evasion, had a narrow base of revenue generation and deferred the payment of tax. In view of the above assertion, there is the need for the researcher to examine the problems and prospects of administration of value added tax in Nigeria.
The study revealed the following.
- VAT has economic impact on consumption patterns of Nigeria.
- VAT has positive impact in Nigeria economy.
- Payment of VAT has improved the prospects of business, organization and industries in Nigeria.
- The introduction of VAT has’ been confronted with a lot of challenges.
- The decision by the government to replace the former sales tax with Value Added Tax has been a worthwhile one.
- Though VAT has been known to be defective in some areas it has been able to serve the purpose for which. It was introduced to a considerable length.
It has been pointed out in the analysis that, though there has been a tremendous increase in government revenue with the introduction of VAT which help improve government commitment to community development, the ‘VAT staffs well motivated according to the findings to increase efficiency and effectiveness in tax collection hence their ability to go extra miles, however the accounting system put in place by the government to audit the accounts prepared by corporate institutions that collect taxes on behalf of government are very weak, hence there are false declarations of sales figure that prevent full disclosure of VAT revenue.
Having critically examined the research questions, tested the hypotheses, and the research findings, the following conclusion was made based on the information gathered.
- VAT has actually improved the economic development of the country with much implication on the revenue generation of Nigeria. This can be seem from the projected revenue in the year of it’s commencement 1994. out of 11 billion naira that was projected, VAT generated N13,677 billion in the first half of 1994, which is about 24% above the estimated income, for the period. Again, over N7.791 billion was realized from VAT on imports and N5,886 billion on non-import. VAT as stated in 1996 budget. speeches overshot the 1995 estimates by yielding over N2 1 billion. Also the five hundred and eighty nine (589) local governments in Nigeria in 1995 got VAT revenue of N6 1 million while Federal Capital territory earned about 7.01 billion from VAT in the first three months of 2005.
- Payment of VAT has improved the prospects of business organizations and industries in Nigeria to an extent, which we are all witness today for instance, there has been an improvement in power supply recently and stability in the prices of petroleum and allied products.
- These has been a lot of motivation to VAT staffs to increase their efficiency, this could be seen from their special salary structure different from other government ministry or parastatals like them. That is the federal Inland Revenue service (FIRS).
- Finally, Despite the Positive side of the introduction of VAT, there are still the views of the opposition which to an extent portrays the policy in a negative form or perspectives.
Based on the findings of this study, the following are recommended;
- The government should adequately make provision for retrieving the proceeds of VAT from companies and other agents 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. These should be functional VAT offices in 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 and those goods that must be exempted.
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