ASSESSING THE CONTRIBUTION OF VAT TO THE REVENUE PROFILE OF NIGERIAN GOVERNMENT

ABSTRACT

Assessment of the contribution of VAT to the revenue profile of Nigeria is the Works contained in this Project. It contained an indepth evaluation of the contribution of VAT to the revenue profile of Nigeria, the extent to which VAT proceeds impact on the revenue profile of the Nigerian government, to determine the extent to which the Federal government  policies affect the contribution of VAT to the revenue profile of Nigerian government, to determine  the  effectiveness  and  efficiency  of  VAT  administrations  in Nigeria, as well as to determine the extent to which proper public education on  the  importance  of  paying  tax  influence  the  contribution  of  VAT  in Nigeria.  Historic  data  from  FBIR,  Enugu  was  used  as  secondary  data. Primary data were collected through questionnaire administration prepared for  the  tax  payers  and  tax  officers.  Personal  interview  were  equally conducted for some staff of FBIR, Enugu and selected tax payers within Enugu metropolis. Correlation analysis and chi-square were used as test techniques to test hypothesis. Infinite population formular was also used to determine the sample size. It was observed, after series of tests that Value Added Tax does not contribute immensely to the revenue profile of Nigeria; the federal government policies does not affect the contribution of VAT to the revenue profile of Nigeria government; VAT administrator are inefficient and ineffective; proper public education on the importance of paying tax does influence the contribution of VAT in Nigeria. Based on these findings, the researcher recommends that the federal government should set new laws and policies, to enhance effectiveness and efficiency in the administration of VAT in Nigeria and also minimize the fraudulent activities of tax official.

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The increasing cost of running government coupled with dwindling revenue has left various state governments in Nigeria with formulating strategies to improve the revenue  base. More so, the near collapse of the National  Economy has created serious financial stress for all tiers of government. Hardest hit are the state governments  all of whom have experienced  unusual  reduction  in their share of the National Revenue from the Federation Account. Despite the numerous sources of revenue available to the various tiers of government as specified in the Nigeria 1999 Constitution, since the 1970s till now, over 80% of the annual revenue of the three tiers of government come from petroleum. However, the serious decline in the price of oil in recent years has led to a decrease in the funds available for distribution to the states. The need for state and local governments to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the part of state and local governments and even the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources.

To meet the inescapable need for increased revenue, the use of external tax consultants was introduced by the federal and state governments in Nigeria to boost  revenue  generation  under  a  programme  known  as  the  Accelerated Revenue  Generation  (ARG)  Programme.  The Federal  government  appointed Consultants/ Monitoring agents on Value Added Tax (VAT).

Value added tax (VAT) has become a major source of revenue in many developing countries. VAT has become an important contributor to total government tax revenues. Shalizi and Squire (1988) find that VAT accounted for about 30% of total tax revenues  in Nigeria  in 1982.  The oil producing countries are not excluded from the list of countries introducing this tax handle. This impressive performance of VAT in virtually all countries where it has been introduced  clearly  influenced  the  decision  to  introduce  VAT  in  Nigeria  in January 1994.

Specifically, the Federal Inland Revenue Service (FIRS) pointed out that VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries world-wide (FIRS, 1993: 4). Evidence so far supports the view that VAT is already a significant source of revenue in Nigeria.

VAT is a multi point levy where the tax paid on local purchases  from the registered dealer can be set off against the tax payable on the sale of goods, other than special goods. A value added tax is a tax on sales to consumers that is collected at different stages of the production process. It has the same base as a retail sales tax (RST) that is collected only on sales to final consumers.

Value added tax is an indirect tax charged on sale of goods. Before the implementation of Value Added Tax, Sales tax was charged on sales. Sales tax was levied at first point of sale,  and the resellers  did not contribute  to the Government. Government was losing huge revenue due to this system. Finally Government introduced VAT on 1st April 2005, with the motto of uniformity in tax structure and to reduce the evasion of tax. VAT works on the principle that when   raw   material   passes   through   various   manufacturing   stages   and manufactured product passes through various distribution stages, tax should be levied on the ‘Value Added’ at each stage and not on the gross sales price. A value added tax or value-added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the “value added” to a product, material or service, from  an  accounting  point  of  view,  by  this  stage  of  its  manufacture  or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.

The “value added” to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales  tax  in  that,  with  the  latter,  the  tax  is  collected  and  remitted  to  the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

The value added taxes in Nigeria were created as replacements or substitutions 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. As per the VAT Decree No.

102  made  on  the  24th  of  August,  1993  in  Abuja  by  the  President  and Commander-in-Chief  of  Nigeria,  General  I.  Babangida  certain  goods  and services have been exempted from the purview of value added taxation. As per the specifications laid down in the above mentioned decree goods such as all exported goods, medical and pharmaceutical products, products meant for kids, basic food items, commercial vehicles and their spare parts, books and other educational   materials,   fertilizer,   farming   machines,   agricultural   products, farming transportation equipments and veterinary medicines and magazines and newspapers.

As per the above mentioned decree a number of services have been declared exempted  from  value  added  taxation  in  Nigeria.  These  services  are  all  the services that are exported, medical services, plays and performances that are run by  educational  institutions  for  educational  purposes  and  services  that  are provided by community banks, mortgage organizations and people’s banks. In Nigeria the companies or business organizations that function on a no profit making basis are required to pay value added taxes.

1.2 STATEMENT OF PROBLEM

In most of the developing countries of the world. It is impossible to assess and collect various taxes especially those on Income. This is mostly as result of the Insincerity of both the tax payers and tax administrators, who rather prefer the money in their pocket to generating same for the government even when at the end of the month, they still expect salaries to be paid by the government.

It has long been evident that VAT in Nigeria has remained the most unsatisfactory,  disappointing  and  problematic  of  all the taxes  in the  system today.

This is as a result of weakness and inconsistency of the tax policies in Nigeria tax system. For instance, the National Tax Policy (NTP) which is yet to be effective  even  though  approved  by the  Federal  Executive  Council (FEC).Nigeria is yet to have any policy thrust for its tax system. The year 2010 was not an exception as there was no notable policy pronouncement to drive the tax  system.  This  has  contributed  to  the  slow  pace  of development  that  the system has witnessed.

The irony remains that not much has been done to set the Nigerian tax system on the right footing. Despite the fact that reforms had been ongoing, there is yet to be a clear direction for the system.

On the side of VAT in Nigeria, they had been a fundamental problem militating against its effectiveness and efficiency. These can be attributed to fraudulent activities of the officials.

Because of diversity and complexity in human nature and activities, no tax laws can capture everything; loopholes will exist and can only be reduced and not completely  eliminated.  Fraudulent  activities  of tax officials  must  be viewed seriously. It leads to loss of revenue for the government, even honest tax payers loose faith in tax system and are tempted to join the league of tax dodger if it becomes too widespread and unchecked. Fraudulent activities of tax officials result to unpleasant repercussion on resource; it affects wealth redistribution and economic  growth;  it creates  artificial biases in macroeconomic  indicators.  it runs courter to the distributional or equity goals of taxation.

In a bit to cob the anomalies, government has put in place a number of measures but sad enough those measures have not achieved the desired result. This can be seen from the proportion of income tax from direct assessment and collection via Pay-As-You-Earn(PAYE).This goes to show that all is not well with system or method of VAT assessment and collection.

1.3 OBJECTIVES OF THE STUDY

The general objective of the study is to assess the contribution of VAT to the revenue profile of Nigerian government.

To  meet  the  main  objective,  the  study  will  focus  on  the  following  sub objectives:

1.  To determine  the extent to which VAT proceeds  impact on the revenue profile of the Nigerian government.

2.  To determine the extent to which the Federal government policies affect the contribution of VAT to the revenue profile of Nigerian government.

3.  To  determine  effectiveness  and  efficiency  of  VAT  administrations  in Nigeria.

4.  To determine the extent to which proper public education on the importance of paying tax influence the contribution of VAT in Nigeria.

1.5    RESEARCH QUESTIONS

The following questions will be addressed in this study;

1.  To what extent has VAT Proceeds impacted on the revenue profile of Nigeria government?

2.  Does the federal government tax policy affect the contribution of VAT in Nigeria positively?

3.  How effective and efficient are the VAT administrators in Nigeria?

4.  Does proper public education on the importance of paying tax influence the contribution of VAT in Nigeria?

1.5     FORMULATION OF HYPOTHESES

Given the objective of the study, the following hypotheses are formulated:

1.  Ho. VAT proceeds impact negatively to the revenue profile of Nigerian government.

H1. VAT proceeds impact positively to the revenue profile of Nigerian government.

2.  Ho. The federal government tax policies do not affect the contribution

VAT to the revenue profile of Nigerian government.

H2. The federal government tax policies affect the contribution of VAT to the revenue profile of Nigerian government.

3   Ho. VAT administrators in Nigeria are not effective and efficient

H3. VAT administrators in Nigeria are effective and efficient.

4    Ho. Proper public educations  on the importance  of paying  tax  do not influence the contribution of VAT in Nigerian.

H4. Proper public education on the importance of paying tax influences the contribution of VAT in Nigerian

1.7     SIGNIFICANCE OF THE STUDY

The findings of this study will ensure that VAT is imposed at all levels of production on the differences between firms’ sales and their purchases from all other firms. Arguably, the primary reason for congressional interest in a VAT is its high potential revenue yield.

This  study reveals  how  other  aspects  of a VAT that often  raise interest  or concern include international comparison of composition of taxes, VAT rates in other countries, equity, neutrality, inflation, balance-of-trade, national saving, administrative costs, compliance, intergovernmental relations, and size of government.

The findings of this study will enable for proper adjustment to factors that may lead to the failure of VAT.

The study will enable for proper understanding of the importance of VAT to revenue generation.

The study will enable me contribute my own views and ideas on assessing the contribution of VAT to the revenue profile of Nigeria government.

The study will be of immense help to other people and students who wish to carry out other research in the field or related field.

1.7 SCOPE OF THE STUDY

The research is limited to assessing the contribution of VAT to the revenue profile  of  Nigerian  government.  In  view  of  this,  the  researcher  intends  to confirm the study to the branch office of the federal Board of Internal Revenue Enugu and Board of Internal Revenue Head office Enugu

1.8 LIMITATIONS OF THE STUDY

In carrying out this research many factors served as constraints:

•  The limitation of the research scope to just assessing the contribution of VAT to the revenue profile of Nigerian government.

•    Inadequate  Time-  Time  factor  constituted  the  major limitation  of this study. It related to the fact that the time for research work was short because it was combined with lectures, studies and examinations.

•    Negative  Attitude of Respondents-  The problem facing the researcher with regards to the respondents relates to the non-cooperation and uncompromising attitude of some respondents in giving out relevant information or facts. They looked upon the researcher as spy, resulting in withholding some of the useful information needed.

•    Disappointment   from   Respondents-   The   difficulty   of   getting   the respondents to complete the questionnaires in time was another problem facing the researcher. This is because most respondents complained of inadequate   time,   since   they   are   paid   nothing   to   complete   the questionnaires. Hence they never kept their appointments.

1.9 DEFINITION OF TERMS

VAT: A value added tax is a tax on sales to consumers that is collected at different stages of the production process. It has the same base as a retail sales tax (RST) that is collected only on sales to final consumers (Twins, 2004:12). Revenue: income from business: money that comes into a business from the sale of goods or services. (Oluba 2008:1)

Government income: the income of a government from all sources, used to pay for a nation’s expenses. (Sani 2005:54)

Finance yield on investment: the total return produced by an investment. (Desai, Foley and Hines 2004)

Government tax-collecting department: the department of a nation’s government that is responsible for collecting taxes. (FBIR, 2001)

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