ABSTRACT
The study is on the Management of Value Added Tax and Economic Development of Benue State in Nigeria. The study sets out to accomplish the following objectives: To examine the effect of VAT planning on the living standard of the people, to evaluate the impact of VAT organizing on infrastructural development. Also to access the effect of VAT directing on youth’s employment generation, to determine the impact of VAT control on workers’ productivity. In this study, the following research questions are formulated: To what extent has VAT planning affected the living standard of the people?, How has VAT organizing impacted on the infrastructural development?, What is the effect of VAT directing on youth’s employment generation?, To what extent has VAT control impacted on workers’ productivity? To realize the objectives of the study, the following hypotheses are formulated: VAT planning has produced significant effect on the living standard of the people, There is a significant impact of VAT organizing on infrastructural development, VAT directing has given rise to youth’s employment generation, VAT control has produced significant impact on workers’ productivity. A survey design was used for the study. The sample consisted of 48 management staff and 198 of supervisory staff of VAT offices in the three senatorial districts of the state. To guide the study, four research questions were raised, while four hypotheses were formulated and tested. A 50-item and 30-item questionnaire for management and supervisory staffs respectively were developed and validated as instruments for data collection. The instruments have reliability coefficients of 0.64 and above 0.50. The data collected were analyzed using mean, standard deviation, t-test and product moment correlation coefficient. The study used simple random sampling techniques to select respondents from the population of 305 in three zones of the state. These respondents were interviewed; instrument for primary data collection and questionnaire structured in five point Likert scale. The secondary data were sourced from other researchers, textbook, journals, newspapers and magazines. The findings revealed that there is a significant positive effect of VAT planning on living standard, there is a significant impact of VAT organizing on the infrastructural development there is also a significant effect of VAT directing on employment generation and there is a substantial impact of VAT control on workers’ productivity. The researcher concluded that there is a high correlation between VAT revenue and economic development. Since the principal aim of government for instituting VAT was to mobilize substantial revenue to promote economic development of the state, the recommendations made therefore are: VAT staff should emphasize on proper record keeping, monitoring and supervision, proper remittance of VAT revenue and removing loopholes in the implementation of VAT.
CHAPTER ONE INTRODUCTION
1.1 Background of the Study
Value Added Tax (VAT) is a form of taxation levied on various commodities consumed by people. The introduction of VAT like every other economic policy generated both positive and negative responses from economic observers. Most of the observers were forecasting that VAT could influence the overall consumption habits of people and increase the cost of production. The implication is that it will ultimately worsen the rate of inflation in the economy. Apart from generating revenue for the government, VAT which shifted taxation from production to consumption, could thereby cause cost-push inflationary effects on taxation and on production (Adeniyi, 1993:134).
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 carry out feasibility studies on its implementation (Philips, 1991: 102).
Value added tax (VAT) has become one of the major sources of revenue in many developing countries in sub-Saharan Africa, for example, VAT has been introduced in Benin Republic, Coted’ivorie, Guinea, Kenya, Madagascar, Niger Republic, Senegal, Togo and Nigeria. Evidence suggests that in these countries, VAT has become an important contributor to total government tax revenues (Ajakaise, 2000). Shalizi and Squire (1988), find out that VAT accounted for about 30% of total tax revenues in Coted’ivoire, Kenya and Senegal in 1982. The oil producing countries are not excluded from the list of countries introducing this tax hurdle. This impressive performance of VAT in virtually all countries where it has been introduced clearly influenced the decision to introduce VAT in Nigeria in 1994 (Ajakanje, 2000: 203).
Value added tax (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 (Federal Inland Revenue Service, 1993; 560). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria.
Anyanwu (1993), stresses that, tax is a deliberate effort by the monetary authorities (the Central Bank) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives.
One of the fiscal instruments employed by the government to influence economic activities in the countries is taxation, put simply: “Taxation is a compulsory payment made by individuals and organization to the relevant Inland Revenue Authorities at the federal, state or local government level”, (Anyato, 1996: 1O8).
Similarly, Udu and Agu (2001), define tax as a “compulsory payment made by each eligible citizen towards the expenditure of the State.” A tax is levied by the government without regard to the specific benefits that individual taxpayers may receive.
Value added tax (VAT) is a tax on estimated market value added to a product or service at each stage of its manufacture or distribution and the additions are ultimately added to the final consumer. End users of products and services bear the tax burden. In Nigeria, the VAT rate is 5%. An attempt to rise to 10% met stiff resistance from Nigerian Labour Congress (NLC). The cost of VAT collection is most often borne in mind by the business organizations and individuals.
Following the historical global perspective of value added tax, Wilhelm was the first person to advocate for value added Tax followed by Maurice Laure who was the first to introduce VAT in France. They argued that Value Added Tax is better than sales taxes, because to them, “sales taxes and tariffs encourage cheating and smuggling”.
The goods and services tax (GST) is a levy on value added that results from each exchange. It is an indirect tax collected over someone other than the person who actually bears the cost of the tax or the tax burden. The first among developing countries to implement VAT was Brazil when the state government abolished the multiple sales tax system in order to ensure financial and economic co-ordination among 26 states in the country. The latest countries that imposed VAT were India and China both in 1990. Nigeria introduced VAT in 1st September, 1993
and was imposed on 1st January, 1994. In the United States, in spite of the
autonomy of the states in tax matters, the state that operates value added tax is
Michigan which was replaced in 1974 and was reintroduced in 1981. All other states still operate the sales tax system.
Today, VAT is used as an important instrument for fiscal and economic policies in most countries of the world. In Europe, France, Belgium, Denmark, Germany, Greece, Ireland, Italy, Portugal, Spain, Sweden, Turkey, United Kingdom and Austria value added tax is operated. Hungary, Poland and Czech are among the emerging East European free market economies that are still considering the introduction of VAT. In Latin America-Argentina, Bolivia, Brazil, Ecuador, Mexico, Peru, Uruguay, Dominica Republic all operate VAT system. In Asia also, China, India, Indonesia, Korea, Taiwan, Pakistan, Philippine, Japan and Thailand all operate VAT system. In the Middle East, Israel and Turkey still use VAT system. In Africa-Benin Republic, Burkina Faso, Kenya, Mali, Niger, Senegal, South Africa, Togo and Nigeria all operate VAT system.
Nigeria operates a federal system of government and this has a serious implication on the tax system as administered in the country. The government’s fiscal power is based on the three- tier structure of federal, state and local government, and each has different tax jurisdictions.
The tax and revenue system is dominated by oil revenue. The federal government takes the lion share of all taxes and other revenues. Odusola (2006), and Philip (1997), stress that as at 1995, the breakdown of total tax and levy collection of the three tiers was 96.4% for federal government, 3.2°o for state and 0.4% for local government.
Over the years, since the oil boom in the early 1970s, revenue from oil has dominated government revenue source. Instead of transforming or diversifying the revenue base, fiscal management has merely changed from one primary product to another. This over dependence on oil makes the economy susceptible to vagaries of the international oil market (Odusola, 2006: 234).
The need to address this problem of near mono economy led to tax policy reforms. The reforms as well as the yearly amendments given in annual budget were geared towards addressing the failures of effective tax system. The need for tax reforms in the country has been justified on some of these reasons:
There is a compelling need to diversify the revenue base for the country in order to safeguard against volatility of government revenue.
Nigeria operates a cash expenditure budget system where proposals for expenditure are always anchored on revenue projections.
The tax system concentrated on petroleum taxes and less on indirect taxes because of the dominance of the informal sector. Even the formal sector has limits because there are unions that act as pressure groups to deter any appreciable tax increments.
There has been, and a continue recue on government annual fiscal tax revenue base. The group recommended the establishment of value added tax (VAT). Value Added Tax (VAT) became a land mark source of revenue as a part of tax reform agenda. It was introduced by Decree 102 of 1993. The implementation started in January 1994. The rate was fixed at 5% for eligible goods and services. Theoretically, VAT was imposed generally on all goods and services but with some exemptions.
At present, the total revenue collected under VAT is shared in the ratio of
15.50:35 among the federal, state and local governments (Odusola, 2006: 672). Federal Inland Revenue Service (FIRS) is vested with the responsibility of collecting VAT on behalf of all three tiers of governments.
To ensure value added tax and achieve some level of effectiveness, certain amendments were made to the existing tax structure. The amendments were:
Reduction of personal income tax burden through increased tax allowances and reduced tax rate;
Monetization and taxation of foreign benefit;
Deduction of Research and Development (R&D) expenditure from the gross earning of companies;
Extension of tax free status to companies in rural areas and granting of incentives based on the infrastructure availabilities in the areas;
Reduction of company tax rate from 40% to 35% and subsequently to 35%, and
Payment of petroleum profits tax in US Dollar.
1.2 Statement of the Problem
There have been some significant weaknesses in the implementation of Value added tax, namely: The lack of co-ordination in both the direct and indirect tax administration. The difficulty in implementing workable self-assessment systems, under which Taxpayers declare and pay taxes on the basis of their own calculations, subject to the possibility of later audit by the tax authorities. The need for effective audit programs based on risk analysis selection methods and the need to give prompt refunds of excess credits to certain taxpayers particularly, exporters (because exports are zero rated, exporters will have no output tax liability but will be entitle to a refund of the tax paid on their purchases).
Apart from these weaknesses mentioned above, other problems encountered were as follows: Tax evasion and avoidance- most of the manufacturers, distributors, importers and suppliers of goods and services refused to register for VAT. It implies that, they are trying to avoid paying VAT. This made it difficult for the VAT collectors to locate them when they are out for the collection of VAT. Again, for some of them that registered, they failed to disclose all the sources of their income to the government. It is not all vatable goods that a person can keep record of supplies made and received during a period. This would affect returns of detailed transactions made for the period, and the calculation of the net VAT due cannot be determined easily. Non- remittance of tax revenue to government is another problem.
Prior to the introduction of VAT in Benue State, the State over depended on federal allocation; and with the dwindling price of oil and subsequent fall in revenue from federation account, the State witnessed series of strike actions by workers due to non-payment of salaries and implementation of new minimum wage. The State therefore, needs to diversify its revenue base which has necessitated the introduction of VAT aimed at generating revenue to re-kindle the economy of the State. This study therefore is on the management of value added tax and the economic development of Benue State.
1.3 Objectives of the Study
The main objective is on the effect of management of VAT on economic development of Benue State of Nigeria. The specific objectives are:
i. To examine the effect of VAT planning on the living standard of the people of the State.
ii. To evaluate the impact of VAT organizing on infrastructural development in the state.
iii. To access the effect of VAT directing on youths employment generation in the state.
iv. To determine the impact of VAT control on workers’ productivity in the
State.
1.4 Research Questions
In this study, the following research questions are formulated:
i To what extent has VAT planning affected the living standard of the people of the State?
ii. How has VAT organizing impacted on the infrastructural development in the State?
iii. What is the effect of VAT directing on youth’s employment generation in the State?
iv. To what extent has VAT control impacted on workers’ productivity in the
State?
1.5 Hypotheses
To help in the realization of the objectives of the study, the following hypotheses are formulated:
(i) H1: VAT planning has produced significant effect on the living standard of the people of State.
(ii) H2: There is a significant impact of VAT organizing on infrastructural development of the State.
(iii) H3: VAT directing has given rise to youth’s employment generation in the state.
(iv) H4 VAT control has produced significant impact on workers’ productivity in the state.
1.6 Significance of the Study
This study will be of immense benefit to the following:
i. Government: Since value added tax is a source of generating revenue, the government can use the study to improve on the administration and collection procedures of VAT by implementing the recommendations of this study. Policy makers will use it as a guide to enhance higher production in Value Added Tax (VAT) operations, and revenue that accrues therein will be necessary for the future for effective and efficient economic planning.
ii. Public: The public, which bears the tax burden, will find this study beneficial. The information contained in this study will expose and enlighten them on the importance of proper tax system like VAT and the after effect of non-payment. It will also help firms/industries to understand the dynamic nature of value added tax as it relates to the entire economy of the state.
iii. Future researchers: It will provide a reference point for future research especially those researchers that are interested in tax matters and for educational purposes. Finally, the study will also enable any interested persons, groups to have in- depth knowledge of the factors that are detrimental to the smooth running of the optimal revenue generation to the government.
1.7 Scope of the Study.
Theoretical Coverage: The study covered the following theories: Socio-political theory, expediency theory, Benefit received theory and Faculty theory are examined. Other theories are cost of service theory, ability to pay theory.
Geographical coverage: The study was restricted to value added tax in Benue State, Nigeria. The main focus of the study is on the management of the effect of value added tax (VAT) on the economic development of the state. The study therefore, picked one local government each from the three senatorial zones in the state as VAT Zonal Headquarters. These local governments are as follows: Zone A: Kasina Ala Local Government, Zone B: Gboko Local Government, and Zone C: Oju Local Government. This study covered a period of ten (10) years from 2003 to 2012.
1.8 Limitations of the Study
It is necessary to conclude with a concession to the study’s limitation. Such concessions is
a Attitude of Respondents: There was unwillingness of some VAT officials to disclose important information and to honor request for interviews.
1.9 Operational Definitions of Terms
Direct taxes: These are taxes that are levied directly on people.
Economic development: Economic development is the process of growth in total and per capital income. The main objective of economic development is to raise the living standard and general well-being of the people in the economy (FIRS, 1993: 153).
Exemption: These are goods that are not to be taxed by law.
Exported goods: These are goods manufactured in Nigeria and sold to other countries.
Horizontal Equity: This refers to a situation where people with the same capacity to pay tax are expected to pay the same amount of money as tax. That is equality before the law (FIRS 1993: 342).
Imported Services: These are services received from outside Nigeria (Odusola,
2006: 567).
Indirect Taxes: This refers to situation where the end users of a product or service bear the tax burden (FIRS 1993: 345).
Input Tax: This is a tax on business purchases expensed.
Input VAT: The input VAT is what is charged on business purchases and expensed.
Output Tax: This is a tax on Supplies (Sales).
Output VAT: This is the VAT that is due on vatable supplies (sales), multiplying the tax value of the aggregate supply divided by the tax rate.
Place of supply: These are supplies of goods or purchases that are brought in from other countries.
Sales Tax: The sales tax is a single tax levied at one of the stages of sales outlets to a consumer.
Supplies: Supplies means any transaction whether it is the sales of goods or the performance of a service for a consideration that is for money or money’s worth.
Tax Evasion: This is a deliberate attempt by some members of the public to avoid paying correct amount of tax using some loopholes in the tax system (Philips, 1997: 236).
Taxation: This means a compulsory transfer of money from individuals, institutions or group to the government (FIRS, 1993: 234).
Value Added Tax (VAT): Okpe (1999), defines VAT as a multistage tax imposed on the value added to goods and services as they proceed through various stages of production and distribution and to services as they are rendered
which is eventually borne by the final consumer but collected at each stage of production and distribution chain. VAT is a tax on value added.
Vatable Person: FIRS (1999) information circular No 9901 states that vatable person is one who trades in vatable goods and services for a consideration.
Vatables Goods/Services: FIRS (1999) information circular No 9901 states that all goods and services with the exception of exempted items are taxable under the VAT Decree.
Vertical Equity: People with different capacity to pay tax should be treated differently.
VAT Planning: Entails setting of goals and the creation of a blueprint to achieve them.
VAT Organizing: Is the allocation of resources to achieve goals
VAT Directing : This is a process which initiates action and it is from here the actual work starts.
VAT Control : This is a methodical process through which management monitor activities to ensure that they are in alignment with objectives.
This material content is developed to serve as a GUIDE for students to conduct academic research
MANAGEMENT OF VALUE ADDED TAX AND ECONOMIC DEVELOPMENT OF BENUE STATE NIGERIA
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