Value-added tax (VAT) is a
consumption tax that is imposed on the value added to goods and services at
each stage of production and distribution. In Nigeria, VAT is a major source of
revenue for the government. However, VAT can also have a negative impact on the
profitability of manufacturing firms. This study examines the effect of VAT on
the profitability of manufacturing firms in Nigeria. The study uses data from a
sample of 10 manufacturing firms in Nigeria. The results of the study show that
VAT has a negative impact on the profitability of manufacturing firms in
Nigeria. The study also finds that the impact of VAT is greater on smaller
firms than on larger firms. The study concludes that VAT is a significant
burden on manufacturing firms in Nigeria. The study recommends that the
government should consider reducing the rate of VAT or exempting certain goods
and services from VAT in order to reduce the negative impact of VAT on the
profitability of manufacturing firms. The study also makes the following
The government should provide
more support to manufacturing firms in order to help them offset the negative
impact of VAT. The government should review the VAT system to ensure that it is
fair and efficient. The government should work with manufacturing firms to
develop strategies to reduce the impact of VAT on their profitability.
The study concludes that by
taking these steps, the government can help to mitigate the negative impact of
VAT on the profitability of manufacturing firms in Nigeria.
TABLE OF CONTENTS
Title Page i
Declaration page ii
CHAPTER ONE: INTRODUCTION
1.1 Background to the study 1
1.2 Statement of study 4
1.3 Objectives of the study 6
1.4 Research Questions 6
1.5 Research hypotheses 7
1.6 Significance of the study 8
1.7 Scope of the study 9
1.8 Limitations of the study 9
1.9 Definition of Terms 10
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual framework 12
2.1.1 Definition of Taxation 12
2.1.2 Overview of Value Added Tax (VAT) 14
2.1.3 VAT Administration in Nigeria 16
2.1.4 Objectives of Taxation 20
2.1.5 Canons of Taxation 23
2.1.6 Impact of Value Added Tax in Nigerian Economy 26
2.2 Theoretical Framework 29
2.3 Empirical Review 32
CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 Research design 39
3.2 Sources of data 39
3.2.1 Primary Sources of Data 39
3.2.2 Secondary Sources of Data 39
3.3 Population of the study 40
3.4 Determination of Sample size 40
3.5 Instrument of Data Collection 41
3.6 Sampling techniques 42
3.7 Validity of the instrument 42
3.8 Reliability of the instrument 43
3.9 Method of data analysis 43
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data presentation 46
4.2 Testing of hypotheses 55
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS
5.1 Summary of findings 61
5.2 Conclusion 61
5.3 Recommendations 62
1.1 Background to the Study
There are quite a number of definitions of tax or taxation depending on the qualities it poses. In that vein, taxation is the process or machinery by which communities or group of persons are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society (Adedeji, 2010).
Taxation is the system of imposing levy by the government against the income, profit or wealth of the individual, partnership and corporate organization (Aluko, 2009).
In the present dispensation of Nigerian economy, taxation has always been a means by which communities are provided with common facilities such as access roads, security, amongst others from time immemorial.
In Nigeria, sales tax came into being in 1986. VAT introduction in 1993 heralded the abolition of sales tax.
According to Anyafor, (2006), the rationale behind replacing sales tax with VAT is informed by the following reasons;
1. The base of the sales tax in Nigeria is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments,
2. The sales tax act targeted only locally manufactured goods, VAT is a consumption tax and is based on the general consumption behavior of the people, thus the base is large.
Igbonyi, (2008) citing the Act (then decree) section 7 (2) which states that VAT shall be administered and managed by the Federal Board of Inland Revenue Service (FIRS) but shared by the three tiers of government in Nigeria from 1999 to date as follows;
Federal Government: 15%
State Government: 50%
Local Government: 35%
Value added tax (VAT) according to Isah (2011) is a consumption tax, levied at each stage of the consumption chain and borne by the final consumer of the product or service. The administration of VAT is relatively easy, unselective and difficult to evade. Countries all over the world, look for ways to boost their revenue, this facilitated many nations to introduce value added tax on goods and services. For instance in Africa, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, Nigeria. Evidence suggests that in these countries VAT has become an important contributor to government revenue (Oyebanji, 2010).
Value added tax (VAT) according to Tabansi (2005) is a tax introduced in Nigeria in 1993 and implemented in 1994. It is imposed on goods and services at the rate of 5%. The main aim of this tax is to raise revenue to government and its incidence is borne by the final consumer. VAT is collectible from both imported and locally manufactured goods and services.
Adedeji, (2010) defined VAT as a consumption tax, charged at 5% on all vatable goods and services. He went further to state the attributes of VAT as:
1. VAT is a consumption tax;
2. VAT is a multi-stage tax, and
3. The incidence of VAT is on the final consumer.
Anyafor, (2006) asserted that VAT has tremendously increased the revenue earnings of government as opposed to the normal system before the advent of the (VAT), it has reduced the incidence of tax invasion as many people who hitherto used to avoid VAT has been paying as it is indirect form of tax system. Many goods that people purchase these days has tax tag sometimes unknowingly by them. VAT paid by a business on purchases is known as input tax, which is recovered from VAT charged on company's sales, known as output tax (Anyafor, 2006). 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 taxpayer is entitled to a refund of the excess from FBIR though in practice this is not always possible. A Taxpayer however has the option of recovering excess input from excess output of a subsequent period. Isah, (2011) stated that recoverable input is limited to VAT on goods imported directly for resale and goods that form the stock-in-trade used for the direct production of any new product on which the output VAT is charged.
1.2 Statement of Problem
The attitude of Nigerians towards Value Added Taxation is worrisome as many prefer not to pay tax if given the opportunity. This is due to the fact that most people consider tax as loss in profit. The economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is overdue.
The cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that, if left unchecked, the cost may soon outweigh the benefit or value derived from such operation and that will not be appropriate for the system. The government spends more to realize a miserable pittance.
The rate of corruption on the part of tax officials is alarming as most of them connive and collude with supposed-tax- payer to evade and avoid tax.
Sometimes, the tax officials are not properly trained on the modern ways of tax administration. The inadequate social infrastructures in Nigeria call for attention as to how tax revenue generated is to be expanded and accounted for, especially where those in authority continue to spend these hand-earned resources with reckless abandon.
1.3 Objectives of the Study
The broad objective of this study is to appraise the effect of Value Added Tax (VAT) on profitability of manufacturing firms in Nigeria focusing on a study of selected manufacturing industry.
The specific objectives include the following:
1. To determine the extent to which Value Added Tax (VAT) has contributed to the Gross Domestic Product of Nigeria.
2. To identify how money supply affect VAT payment in Nigeria.
3. To examine the relationship existing between the cost of collecting VAT and the benefits derived from it.
1.4 Research Questions
The following research questions are stated for this study:
1. To what extent has Value Added Tax (VAT) contributed to Gross Domestic Product of Nigeria?
2. How does money supply affect VAT payment in Nigeria?
3. Does a significant relationship exist between the cost of collecting VAT and the benefits derived from it?
1.5 Research Hypotheses
The following hypotheses are formulated for this study:
HO: Value Added Tax (VAT) has not contributed to economic growth of Gross Domestic Product of Nigeria.
HI: Value Added Tax (VAT) has contributed to Gross Domestic Product of Nigeria to a great extent.
HO: Money supply does not have significant effect on VAT payment in Nigeria.
HI: Money supply has significant effect on VAT payment in Nigeria.
HO: A significant relationship does not exist between the cost of collecting VAT and the benefits derived from it.
HI: A significant relationship exists between the cost of collecting VAT and the benefits derived from it.
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 contributions to economic development of Nigeria were mentioned. Its 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. All these will contribute immensely to the knowledge previously had by some of the beneficiaries mentioned above.
1.7 Scope of the Study
This study covers selected manufacturing firms in Enugu State. The firms selected are; Innoson Nigeria Ltd, Emenite Nigeria Ltd and Coca Cola Bottling Company.
1.8 Limitation of the Study
The researcher encountered diverse constraints in the process of carrying out this research study.
1. Difficulty in gathering Research Material:
There was difficulty in gathering the necessary information or materials necessary for the successful completion of this research study. This is due to the fact that most of the respondents were either not on sit or were uncooperative in providing the necessary information as regards to their responses.
2. Time Constraints
Time also posed as a constraint to the successful completion of this research study. The researcher had to combine the time for lectures and work to carrying out this research study. Though it was not easy but she was still able to carry out the research work.
There was not enough finance on the part of the researcher to complete this research study.
Irrespective of these constraints, the researcher was still able to successfully carry out this research study.
1.9 Definition of Terms
Value Added Tax: A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.
Gross Domestic Product: Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
Total Consolidated Revenue: Total consolidated revenue is the aggregate of all revenue generated by a parent company and its majority-owned subsidiaries, after intercompany eliminations. Intercompany eliminations refer to sales included by one company to another majority-owned subsidiary or its parent.
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