THE PROSPECTS, PROBLEMS AND CONTRIBUTIONS OF VALUE ADDED TAX (VAT) TO NIGERIA ECONOMY Case Study of Federal Board of Inland Revenue VAT Office

CHAPTER ONE

INTRODUCTION

1. 1. BACKGROUND OF THE STUDY

The implementation of Value Added Tax (VAT) in Nigeria started on 1st January, 1994. VAT is a tax on consumption. it is suffered when a person ingest goods and services. The enabling Act is the value added tax act 102 of 1993 (VATA 1993).

Before the final introduction of the VAT in January 1994, the idea of introduction 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 tax set up to carry out feasibility studies on its implementation. And since introduction, VAT has yielded great revenue to the purse of the government.

Tax is a fundamental source and a pillar of revenue generation in every nation of the world especially in the western world (Azubike, 2009). A tax system represents one of the most effective means of mobilizing a nation’s internal resources and it lends itself to creating an environment conducive to the promotion of economic growth for the three-tiered tax structure between the federal, state and local governments, each of which has different tax jurisdictions (Odusola, 2013; Nzotta, 2007). The need for taxation among others therefore, is to provide material source of revenue for government in discharging its ever growing obligations and commitments to its citizenry. An efficient tax system ensures the mobilization of the untapped abundant internal resources and it also stimulates an environment conducive to the promotion of growth of a nation. It was first introduced by France in 1954, and has now been embraced by well over seventy countries. These include the entire Organization for Economic Co-operation and Development (OECD) countries, Japan, Canada, the state of Michigan in the USA and many African Countries (Olatunji, 2009). Some major oil producing countries are not left out from the list of countries that have introduced this tax system. According to Tait (2011) and Adereti, et al. (2011), VAT has been in effect in Ecuador and Mexico since at least it accounted for 12.35% and 19.71% of total government revenues in these countries respectively. Indonesia introduced VAT and by 1988; the ratio of VAT revenue to GDP had increased to 4.5% (Adereti, et al., 2011; Bogetic and Hassan, 2011). In Sub Saharan Africa, VAT has been introduced in Benin Republic, Cote d’Ivoire, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, and Nigeria (Onwucheka and Aruwa, 2014; Adereti, et al., 2011). The main reasons for the rapid spread of this form of taxation were, first, the early adoption of it in the European Union and, second, the key role played in spreading the world to developing and transitional economies by the International Monetary Fund in particular and by international agencies and advisors more generally (Bird, 2014).VAT is generally a tax on the supply of goods and services which are ultimately borne by the final consumer but are collected at each stage of production and distribution chain. With VAT, government reasoned, it will be virtually impossible to evade tax. Hence, it was introduced in Nigeria through Decree 102 of 2011 and this marks the phasing out of the Sales Tax Decree No. 7 of 2012. The Decree that established VAT took effect from 1st December, 2011, but by administrative arrangement, invoicing for tax purpose did not commence until 1st January, 1994(Chigbu and Ali, 2014).This means that Nigeria introduced VAT in 2011; however its full implementation began on 1st January, 1994 (Onwucheka and Aruwa, 2014).Therefore, tax is a compulsory levy imposed on a subject or upon his property by the government to provide security, social amenities and create conditions for the economic well-being of the society (Appah&Oyandonghan, 2011). The need to meet government increasing expenditure and means to generate more revenue gave birth to Value Added Tax (VAT) in 2011 by the Federal Government of Nigeria. According to Unegbu and Irefin (2011), Value Added Tax which is simply known as goods and services tax (GST) was imposed on virtually all goods and services whether produced or rendered in Nigeria so as to support government in raising funds for the implementation of recurrent and capital expenditure and boost economic growth. Aguolu (2016) claims that VAT is a sound concept that has helped to reduce the burden on tax payers, reduce the incidence of tax evasion, and guarantees the collection of revenue to enhance economic growth. However, there has been debate and arguments since the introduction of Value Added Tax on the likely challenges and prospects on the Nigeria economic growth. According to Azubuike (2009), our basic problem, perhaps is the enforcement machinery of our tax laws which Value Added Tax is inclusive is so innocuous that anybody can go against it without qualms. Azubuike (2009) further contends that those charged with VAT administration are ill-equipped, so ill-trained, highly corrupt and so neglected that they become disillusioned, frustrated and therefore hardly give their best services. On the other hand, Bryant (2010) notes the following limitations in VAT administration in Nigeria; that VAT incurs increased accounting costs for collection which are often reimbursed by the taxing authority; VAT is being charged indiscriminately in most cases in Nigeria on the populace for services not enjoyed with good reference to former NEPA which latter transformed to Power Holdings Company of Nigeria (PHCN) and finally privatized bearing different names in various states of the federation; the non-remittance of VAT proceeds by VAT agents to the tax authority, and poor accountability of the usage of the VAT proceeds by the three tiers of government. Oladipupo and Izedonmi (2008) contend that poor understanding of the various tax laws by taxpayers could be responsible for the high magnitude of their non-compliance to VAT and as such public attitude towards VAT matters has often be negative, thus, resulting in low revenue generation to boost economic development. The above challenges result in ineffectiveness administration of the VAT and its attendant effect on economic development in Nigeria.Value added tax system is introduced to substitute tax on consumption and other taxes, especially company taxes. By using the VAT, it is expected that this substitution will have positive impact on economic development. It is therefore imperative to examine what happens when developing nations such as Nigeria implements this tax. Do they achieve faster or slower growth? It is in view of this that this study seeks to establish the impact of value added tax on Nigeria’s economic development.

1. 1. STATEMENT OF PROBLEM

VAT has become important source of revenue to the Nigerian Government (both Federal and state level). The Federal government of Nigeria intends increasing percentage of VAT imposed on goods and services because of its relevance to income base and economic growth and development through a shift from direct tax regime to indirect tax regime anchored on consumption, in accordance with best global practice, to achieve stable non-oil revenue flow and to lower companies income and personal income tax.  But the citizens’ perceptions are different (such as: too much burden on the final consumers, inflation, and a rise in fuel pump price to mention). This popular opinion of majority of Nigerian citizens has made it pertinent to carry out a research to examine the impact of VAT on the economic development of Nigeria. Thus, there is need to understand the impact of VAT on the economic development of Nigeria.

1.3 AIMS OF THE STUDY

The major aim of the study is to examine the impact of value added tax on economic development in Nigeria.  Other specific objectives of the study include;

1. To examine evolution of value added tax in Nigeria.
2. To examine the value added tax and revenue generation in Nigeria.
3. To examine the impact of value added tax on economic development in Nigeria.
4. To examine the economic effects of taxation in Nigeria.
5. To examine the relationship between value added tax and economic development in Nigeria.

1.4 RESEARCH QUESTIONS

 1. What is the evolution of value added tax in Nigeria?

2. What is value added tax and revenue generation in Nigeria?

3. What is the impact of value added tax on economic development in Nigeria?

4. What are the economic effects of taxation in Nigeria?

5. What is the relationship between value added tax and economic development in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There are is no significant impact of value added tax on economic development in Nigeria.

H1: There is a significant impact of value added tax on economic development in Nigeria.

Hypothesis 2

H0: There is no significant relationship between changes in VAT revenue and economic development in Nigeria.

H1: There is a significant relationship between changes in VAT revenue and economic development in Nigeria.

1.5SIGNIFICANCE OF THE STUDY

This study will be of great importance to the government by highlighting the effect of VAT on the economic development of Nigeria. This study will also help in shaping and providing a better understanding to citizenries on how VAT is charged and its contribution to the economy. More so, it will help other researchers to carry out further research on this subject area. The study would also be of immense benefit to students, researchers and scholars who are interested in developing further studies on the subject matter

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the impact of value added tax on economic development in Nigeria.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8DEFINITION OF TERMS

Tax: Is a compulsory payment made by individuals and firms to the government of a country from which essential services are provided to the people (Onwucheka and Aruwa, 2014). Anyanwu (2009) defined tax as a compulsory levy by the government on individuals, firms, goods and services in order to raise revenue for its responsibilities and to promote social equity through the redistribution of income effect of taxation.

VAT: Value added tax is an indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service.

Development: “a specified state of growth or advancement; a new and advanced product or idea; an event constituting a new stage in a changing situation.” (Oxforddicationaries.com). All are definitions of development but when we talk of international development more meaning is implied. This briefing explores definitions and perspectives of development and explains how it is different from aid.