Tax Payers Perception On Value Added Tax System In Nigeria

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Tax Payers Perception On Value Added Tax System In Nigeria


The instability of the Nigerian economy partly due to fluctuations in international oil prices led to suggestions and decisions that had been made which led to the introduction of value Added Tax (VAT) in 1993.

This thesis work entitled “Tax Payers perception on Value added tax system in Nigeria” aimed at assessing whether or not the introduction of VAT has been a success.

Research methods adopted included historical and descriptive methods. Data were obtained through the use of questionnaires, interviews, and documents. Data were analyzed through the use of simple percentages and qualitative analysis at the end of which useful information was obtained.

Findings made include the fact that revenue generated are of increase yearly. It was also discovered that the astronomical yearly increase of VAT collection does not really mean performance as the collection would have been higher if the VAT officials were properly remunerated and effective collection strategies and administrative machinery put in place.

Recommendations made include the need for better conditions of service, judicious use of the VAT proceeds by the benefiting governments, supply or provision of required operational tools, incentives to the VAT payers and the collecting agents and good and conducive operating environment.

Chapter One


1.1 Background of the Study

Taxation has long been practice in Nigeria. Initially, only men were expected to pay taxes but now all people working and anybody found in the capacity of paying tax are obligated to pay tax.

Tax in a mandatory levy on income charged for the purpose of carrying out government activities losses incurred by government in recent times through tax evasion are increasing rapidly despite the pathetic financial and economic state of the country. There are daily report on newspaper and magazines that government losses billions of naira yearly due to tax evasion and the fraudulent practices of the tax officials. This has attributed to many factors. Most people attribute this to the fact that the country’s tax system in highly income base and since income is taxed only at one point or stage, a lot of evasion results.

In Nigeria, many different goods are consumed. For this reason, tax experts see consumption as the actual habit and as such, the need to shift tax base from income tax to consumption tax. This necessitated the introduction of sales tax in Nigeria through degree N0. 7 of 1986.

However, it was discovered that sales tax is narrow because it does not cover a lot of goods and services. This prompted the introduction of Value Added Tax (VAT) in Nigeria.

The idea of introducing VAT in Nigeria came from the report of the study group set up by the Federal Government in 1991 to review the entire tax system, VAT was proposed and a committee was set up to carryout feasibility studies on its implementation. In January 1993, government agreed to introduce VAT through instrumentality of the VAT Degree 102 of 1993. This was meant to be effective from January 1 1994. It came on stream as a replacement to its antecedent, the sales tax, which was characterized by a lot of lapses inadequacies and restrictive coverage. VAT is a consumption tax imported on all manufactured goods, industrial raw material and other imported into or product in Nigeria a single rate of five percent. Potentially, its draguelcover virtually everybody, since one thing or the other except in the cases of specific items that are exempted.

Several benefits which the government expected to derive from value added tax (VAT) were enumerated. During several others they are

  1. Increase in revenue generation
  2. Facilitation of administrative enforcement
  3. Reduction in revenue losses through tax evasion
  4. Enhancement of documentation of transaction
  5. Encouragement of rapid industrial growth by allowing credit for input taxes for capital goods.
  6. Maintenance of neutrality in tax payment since it is broad based and has a single rate.

The government has conveyed these benefits to the public and has also organized workshops and seminars to educate the producers, suppliers, consumers, tax officials and the general public on VAT system in Nigeria. However, the perception of taxpayers is necessary at this stage and this is what this research is to find out.

1.2 Statement of the Problem

The Federal Government has made prantic efforts to convince the public of the need for VAT system in Nigeria. It has informed the public of the benefits which have been derived from VAT, for example, a reduction of tax evasion, increase in government revenue and so on. This implies that the government sees VAT as a good tax system. But the tax payer may not have the same view as the government, they may they will most definitely be reluctant to pay.

The problem or the question therefore, is what is the perception of the taxpayers or the public on tax systems? Do they see it as being important as the government does? It is in view of the above questions that the researcher has decided to find out and evaluate the perception of the public or tax payers on the valued added tax in Nigeria.

1.3 Objectives of the Study

This study is aimed at evaluating Tax Payers perception on Value added tax system in Nigeria. Thus, the specific objectives are:

  1. To review, assess and evaluate the Administrative strategies adopted for the collection of VAT proceeds in Nigeria with a view to making recommendations or suggestions for
    improvement if there are lapses.
  2. To assess and evaluate the performance of VAT in Nigeria as it relates to the staff welfare package and VAT payers’ incentives and other associated benefits.
  3. To assess the potentialities and cost effectiveness of collection of VAT in Nigeria.

1.4 Statement of Research Hypothesis

In order to achieve the objectives of this research study, we intend to test the following hypotheses so as to obtain validity of our findings:

  1. Ineffective Administration is responsible for the lost of VAT revenue.
  2. Low motivation of tax officials and tax payers hinders effective administration of VAT.
  3. The potential collectible from VAT exceeds the actual revenue collected as VAT proceeds.

1.5 Significance of the Study

Every research work has to be significant. It must either create some form of new knowledge, or add to an already existing body of knowledge. To this end, this study will serve as information to the government to known the perception of the tax payers on VAT. It will also reveal areas in the VAT system that require correction in order to achieve a more effective and efficient tax system

1.6 Definition of Terms

a. VAT:

This is a consumption Tax which is charged 5% on goods and services, which are not exampled by the VAT degree of 1993.

b. Vatable Goods:

These are goods and services, which VAT is paid

c. Supplies:

This refers to any transaction whether it is the sale of goods or the performance of a service for a consideration.

d. Vatable person:

One who trades in vatable goods or services for a consideration.

e. Output VAT:

This is VAT that is due on vatable supplies. It is derived by multiplying the tax value of the aggregate supply by the tax rate.

f. Input VAT:

This is charge on business purchases and expenses

g. Federal Inland Revenue Service (FIRS):

This is the authorized body for the collection of taxes.

1.7 Test of Data

Since this study involves the significance between two means, which are summary measures of continuous variables, the Z test, which is a parametric test, will be used.

The formular is:

X – U
Z = r

where X is the means, U is the assume d mean or assumed value, r is the standard deviation, n is the sample size. The study has three different samples; the producers, consumers and VAT officials. This means of each sample will be compared with assumed mean to find out is the different respondents in each category have the same view or not.

1.8 Limitation of the Study

Nobody can claim to have knowledge of and access to everything, nor can anybody claim he can get whatever he wants at anytime he wants it. This study is therefore, cannot be exclusive from these limitation which are stated below:

  1. Finance required for an extensive work are not available and I had to concentrate on specific area.
  2. The possibility of inaccuracies in respondent cannot be ruled out.
  3. There will be no access to some information due to restriction in the organization concerned.
  4. Time factor was another factor.

According to Baridam (1980:18) people who make up organisations may behave differently if they become aware of the researcher’s hypothesis all them, these people being hum an beings are always sensitive to their environment “such awareness according to Belling (1980:486) may create self fulfilling prophecies whereby participants change their behaviour to increase the chances of support the hypothesis”.

However, in spite of these problems, relevant information wasgot from the respective bodies.

  1. Baridam D.M. (19900 Research methods in Administration Sciences.
  2. Behling.O. (1980) The case for the natural science model for research in organisation behaviour and organization theory.
  3. Ochei C.A. (1994) A study of the impact taxation on the growth and developments of company in Nigeria.
  4. Federal Inland (1999) Information circular on revenue service VAT (N0. 9901)
  5. VETOWELL Consultants (995) Development Course for VAT Inspectors.

1.9 Organisation of the Study

For the information presented in a research work to be clearly understood and appreciated, a systematic and chronological presentation of the work is of greater importance. In keeping with this, this research has been organized and presented in five chapters;

  1. Chapter One: This is the introduction chapter and it informs the reader on what the entire study is about. According to Ochei C.A. (1994:5) the chapter specifies the problems that prompted the study, the assumptions of the study and the operational definition of terms.
  2. Chapter Two: This contains the review of all related literature, or previously existing materials or the subject. This chapter establishes clearly the nature of the already existing body of knowledge, thoughts, ideas, concepts on the subject thereby highlighting the new knowledge to be generated by the research.
  3. Chapter Three: Information on the method employed in the collection of data and their analysis can be found in this chapter. Also in this chapter, justification is provided for the adoption of the methods and analytical techniques employed.
  4. Chapter Four: This involves the presentation and analyses of data findings from the testing of hypothesis are also presented here.
  5. Chapter Five: This is the final chapter and it contains the summary of the entire work done, the conclusions down, and the recommendations made by the researcher based on the findings of the research work.
  6. Appendices: It is usual practice that in the final pages of research work, reproductions of some document such as questionnaire relevant tables, statute, letters and so on attached for a better appreciation of the research work by the reader. This can also serve as a means of verification work done.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

While Government particularly those in poor countries may want to make life easier for their citizens by providing more and better health services, educational and communication facilities. It typically fails to meaningfully expand its services because demand grows faster than available resources. The government will usually develop plans for moving away from the state of poverty to a desired state of health; such plans which may seem beautiful and well thought out on paper are often very disappointing in their implementation. The money to spend and invest is simply not enough, this is made worst when it can easily estimate how much money will be available, though it can rightly be assumed that there would be less than original projected or expected. The ground is constantly shifting under the budget officers’ feet and hence priorities in spending must be changed to adapt to the new revenue conditions with its additional problems.

The need to raise revenue from the country will always prompt government to examine the issue of taxation, the ability of government to raise revenue internally is determined by the relatively limited number of channels through which economic develops, government revenue would rise because there would be more opportunities to effectively levy taxes. Less developed economies have fewer taxable bases. It is against this general background that this study was conducted.

The introductory chapter deals with issues relating to the problems warranting the study; the need for government to shift from oil revenue to non oil sectors for revenues and to generate revenues internally to meet the challenges of ever increasing public demands for social services. This led the Nigeria government to accept the recommendation of the Sylvester Ugoh committee to introduce VAT to the regime. VAT replaced the sales tax, which had been in existence and plagued with multiple problems. VAT was introduced formally to the Nigerian public in 1994 and there was hope on revenue that would accrue to government from this tax. VAT started quite well in spite of the initial resistance by the Nigerian public; however, not very long thereafter reports started filtering out that fraud had been uncovered here and there in several tax offices, state governments were reported to have misapplied VAT allocation. It is these negative reports that influenced the decision to embark on this research, to examine what could be responsible for the problems in the administration of tax. This study sought to determine the actual amounts of VAT collected over the years compared to estimated amounts to determine the factors responsible for the disparity and most of all to examine the machinery responsible for the administration of VAT in Nigeria with a view to identifying problems and suggesting remedies.

The concept of VAT and the machinery put in place for its administration in Nigeria were examined. Also examined were the laws establishing the tax and the administrative structure for its implementation. From the set evident that tax administration, as a component in the field of public finance has not been given adequate attention, scholars were preoccupied with how much revenue was generated through the taxing process.

Hypotheses were made which formed the basis of this study. Operational definitions to key concept related to the field were provided. As a new tax problem created by inadequate knowledge of how VAT works and inadequate preparation on the part of government tended to make the tax unpopular initially and this also made obtaining information on tax very difficult. The period covered by this study is from inception in 1994 to 2003.

In chapter two relevant literature was reviewed to acquaint readers with the fields; the theoretical framework for analysis. Due to the uniqueness in Nigeria, government publications on the tax were relied on. So also were commentaries, magazines, and articles presented at seminars and workshops.

The importance of administration to the success of any tax policy was emphasized by various scholars such as Akanle, for him, “while a good law is important to a good tax system, the place of administration can not be underestimated, as it is the indispensable element to the attainment of the overall good of the tax system” (Akale 1991). The theoretical basis for analysis is founded in the general theory of taxation which is in the works of classical economic theories such as Adam Smith’s principles of efficiency, administration convenience and equity, which theorist and this project use for analysis.

Chapter three of this study was concerned with the methods used for gathering of information for the research. The time in which a problem under investigation is suited determines the basic research method to be used. Survey research studies large and small groups by selecting and studying proportion or samples chosen from the proportion to discover the relative incidence, distribution and other underlying variables. The concept of sampling was fundamental to the conduct of this study and the interpretation of results there from. Survey research wants to understand the characteristics that make up the whole population, but due to limitation of time, resources, and so forth, a sample of that population could be made. Stratified random sampling technique was used in selecting the sample population. The sample population used for the study fell within two strata; the VATable persons and tax officials, and from these major groups another sample was selected. Questionnaire administration was carried out on the two groups of respondents to obtain factual and opinionated data. The persons interviewed and questionnaires were the major information gathering techniques used to obtain relevant data that would validate or invalidate secondary data. A total of 200 questionnaires were produced for two groups – 100 of the questionnaires were administered to VATable persons and 100 tax official. Each questionnaire contained 16 questions designed to answer questions raised by the hypothesis. The questions were emanating from the FIRS, unfortunately, those too are difficult to obtain.

Chapter four contains the test of hypothesis – the three major assumptions stated in chapter one, which informed these researches were tested. The data obtained from the questionnaires were used for testing. Each hypothesis had relevant questions amongst the 16, which were designed to solicit answers posed by the assumptions. Because two sets of questionnaires were designed for two sets of respondents, for each hypothesis, the test was first conducted with data from the VATable persons after which they were subjected to further test with data from the tax officials.
The data obtained from the respondents were computed and drawn in frequency tables to determine the mean and percentages, which were used to test the hypothesis for each that was tested, evidence from study suggested that we accept all the hypothetical taken.

5.2 Findings / Conclusion

The effectiveness or otherwise of any tax policy is a reflection of the fiscal system of the domestic economy which in turn reflects the level of development of the socio – political environment of that society. Therefore, the examination of the effectiveness of VAT administration such as this has to be understood within the social, political, and economic culture of our society. Taking such a view has brought out the various problems that have bedeviled the administration of VAT in Nigeria.

  1. The lesson to be drawn from this study is that we should not judge a phenomenon on its face value but that we should always try to understand its underlying properties. The phenomena may not be what it appeared to be after a closer examination. The question had been asked in chapter one of this study if the positive reviews given the VAT system in Nigeria by some newspapers means that the tax is performing optimally. Inspite of the high amounts collected from the tax indicated in chapter four, a lot still needs to be done particularly with regard to the process of its administration, which in the long run increases the amounts collected.
  2. In the course of this study, we discovered that, VAT proceeds have been on increase as indicated by facts and figures available at the Headquarters of the FIRS. This is so because VAT collection has been exceeding its yearly target since inception so far.
  3. Another finding is that the contribution of VAT to non-oil revenue has been positive. This is so because VAT is contributing not less than 20% out of the items that make up the total non-oil revenue. Besides, only VAT has progressive records from its inception
    till date.
  4. Another finding is that the contribution of VAT would have been higher if all the categories of VATable goods and services should have been covered. For example, the percentage of the VAT paying organisations that actually complied during the period covered by this research is too small (just about 20%).
  5. Another conclusion drawn is the illiteracy which prevails amongst the operations in the informal sector, makes books keeping practice almost no existent; and on this VAT depends on its operations. One way out of this is to concentrate the VAT efforts on the more formal sectors of the economy. vi. We can conclude from the study that there exists a tax lag. There is the official tax lag permitted the VATable persons, that is, the difference in time when VAT liability is incurred and the maximum time allowed for making remittance of the net VAT due to the tax authority 30 days. However, this allowance that is made as a form of incentive to taxpayers is being exploited. Commercial banks that were commissioned to collect VAT from organizations and to remit to CBN do not remit same as required and at when due.

5.3 Recommendations

Often when considering tax reforms there is always a tendency to focus attention on the need for a new and more progressive tax structure, ignoring the administrative inadequacies of the existing system. Any policy that makes implementation for granted is bound to have some problems, because it is implementation that separates policy from outcomes; no policy can be better than implementation, poor implementation leads to poor policy outcomes. Most observers agree as indicated by findings of this survey that, without any substantial change in policy, tax revenues could still be increased significantly simply by strengthening implementation. The goal of reforming tax administration is strengthening the ability to mobilize resources, however, the problems facing the tax authority are enormous-resources such as budgets, information technologies, expertise personnel facilities – are so limited and the instruments of administration are so weak, unless positive steps are taken to bridge the gap, procedures would not have noticeable impact on the total revenue that is collected. Therefore for any reform to be meaningful to the implementation of VAT, it must be brought to bare on all aspects of the taxing process; tax administration is made up of a number of processes which is integrated to work simultaneously, each process impacting on the other to make the system operate effectively, as concentrating on some aspects of the administration without considering the effects on the other aspects would result in a lopsided tax administration which would fail to meet the objectives set for it.

The following recommendations are made to improve VAT administration.

  1. One practical suggestion to be made here from the findings of this research is that the instruments of administration should be strengthened, so that taxpayers would comply voluntarily and thereby, little or not action is necessary to make them pay. This process works on the basis of two principles: Certainty and deterrence. The desired objective here is not to influence each taxpayer directly to comply, but to trigger in each to the conclusion that compliance is preferable behaviour to evasion. It is for this reason that it is recommended that a VAT Tribunal established and constituted for speedy adjudication of VAT cases. The mere fact of the existence of such as tribunal would make complying taxpayers to remain so and those delinquents to comply.
  2. Information or lack of it would make or may take tax administration, records, invoices, ledgers and so forth as the
    back borne of administering VAT, and therefore, solid data base would enhance the administration. Therefore we recommend FIRS computerized the entire operations of the VAT directorate. This will smoothing fiscal coordination and also enhance staff efficiency in computing tax liabilities or cross referencing of information from one taxpayer’s returns to the others. It will improve data base information matching, VAT auditing and the general provision of taxpayers services. It will generally enhance access to information.
  3. Because of the difficulties encountered with informal businesses and the prevalent illiteracy level of big businesses, men who as a result are ignorant of the requirements of the tax, public enlightment units should be constituted and adequately funded so that it can educate the illiterates, ignorance and generally those who do not see the need for the tax. Information circulars and pamphlets can be published/printed in local languages, staff of this units must have basic understanding of the local language.
  4. The need to recruit more personnel with requisite qualifications and skills; provide continuous training for existing staff to meet the challenges encountered in the performance of their duties should be taken seriously.
  5. Due to the complexity and anticipated spread of the tax, much funding is required especially if all LGAs were to be fully covered by operational LVOs. The issue of funding is particularly significant because data from this study have indicated that office infrastructure are inadequate; basic furniture such as chairs and tables have to be shared amongst three to four staff in VAT offices. There are poor communication facilities; there are shortages of office stationary, lack of serviceable vehicles. These problems must be addressed seriously. The
    administrative process must be made effective if the desired level of revenue generation is to be achieved.
  6. Data from the study also indicate that government does not make judicious use of VAT revenue for developmental projects, government is seen as interpreting VAT revenue as a windfall that should be recklessly shared and spent. This study is therefore recommending that a system of accounting should be introduced whereby three tiers of government can periodically account to the Nigeria people specific developmental projects they have utilized VAT proceeds for. This is in line with the operations of the PTF where the effects were visible and are still being felt by the citizens of Nigeria-in areas of road network, drugs to our hospitals, renovation and refurbishing our schools at primary, secondary, and university levels and the provision of other amenities.
  7. Finally, and on the general note, unless and until the cost of VAT administration/collection is at its best (cost effective), what is collectible is collected and the VAT revenue is judiciously utilized by the stakeholders through provision of infrastructural amenities for enhancement of socio-economic development for the benefits of its payers and the citizenry, the target making or how much has been collected should not be yardstick for measuring performance. In other words, the astronomical yearly increase of VAT proceeds collected should not be taken as a performance unless other factors are taken into consideration and proven to be so.

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