CHAPTER ONE

1.0     INTRODUCTION

1.1      Background to the Study

The introduction of Value Added Tax (VAT) in Nigeria was greeted with widespread criticisms by people of Nigeria.  This arose from the fear of grand design by the government to further milk the already poor masses of Nigeria.  There was usually the suspicion that Nigerians would end up contributing money into private pockets.

After it had taken off, there was a little problem of implementation.  People appeared not to know what goods and services should attract the VAT and those on which VAT should not be paid.

However, after those initial problems VAT seems to have found its stand if anything after its implementation about 10 years ago the programme appears not to be the ‘monster’ that many Nigerians thought it was meanwhile, it has turn out to be another major revenue source for government after oil.

The need to enhance the efficiency and revenue yield of the Nigeria tax system informed the setting up in 1991 of two study groups to review the tax system.  The Committee on Indirect Taxation now recommended the introduction of Value Added Tax (VAT).  VAT will be paid on imports also.

The main body responsible for VAT is the Federal Inland Revenue Service (FIRS) it was already in charged with the responsibility of collecting most taxes in Nigeria on behalf of the federal government.

Some goods were however exempted from vAT decree which include some of the following:

Ø    Medical and pharmaceutical products

Ø    Basic good items and infant foods

Ø    Books, magazines and other educational materials

Ø    Commercial products and spare parts

Ø    Agricultural equipments.

Ø    Veterinary medicine equipments Ø         Farming and transport equipments

Ø    Sundry diplomatic goods etc.

With these exemption however, the VAT revenue base is still rich and growing.

The year 1991 was a major landmark in the tax administration of Nigeria.  In that year the Professor Edozun-led study group on the review of the Nigerian tax system first identified the need to transform the out-dated sales tax that was then administered by the State governments.

Within the same year (1991), a parallel study group on indirect taxation led by Dr. Sylvester U. Ugoh was given the responsibility to study the feasibility of introducing VAT in Nigeria as an improvement on the existing sale tax.

The Ugoh study group came up with a firm recommendation in November 1991 that VAT should be introduced in Nigeria after two years of preparatory groundwork.  As a follow-up, by 1992 the Ijewere-led Modified Value Added Tax (MVAT) Committee was set up to undertake preliminary work for the introduction of new tax.  The committee was later to work in close collaboration with Federal Inland Revenue Service (FIRS) in 1993 for the latter to take over administration of the new tax which was scheduled to come on stream as VAT by September 1993.

Accfording to Ogundele (1991:16) taxation has always been a means by which communities provide themselves with common facilities such as access road, health facilities water security etc. from time immemorial.

In the North taxes were in forms of ‘JANGALI’ (tax levied on livestock), ‘KUDIN KASA’ (development levy).   Modern and well regulated taxation in Nigeria stated in 1940 with the introduction of Direct Taxation

Ordinance No. 29 (Cap 54 of that year) it replaced the Native Direct Taxation Ordinance No. 41 of 1927 whose provision it incorporated.

In the Eastern part of the country there was no form of tax on citizens because of equilateral system of government colonial masters appoints paramount chiefs for easy administration of taxes in the areas.

The need to mobilize resources (revenue intensive) is as ancient as when human beings learnt to organize themselves into communities in order to achieve some goals such as security welfare etc. in these process all the three tiers of government (federal, State and local) attempts to mobilize adequate revenue for the purpose of governance and as such begins to innovate various levies to generate much revenue. 

Value Added Tax (VAT) needs to be over as it provides revenue to the federal government and other tiers of governments.  It is against this background that the importance of this study can not be over emphasized.

1.2     Statement of the Problem

With about ten years into the introduction of Value Added Tax (VAT) in Nigeria and the successful implementation and collection which has so far yielded revenue in billions of naira, it is presumed that certain factors could have enhanced the collection of VAT and its administration in Nigeria.

Given that the country is a complex society it is necessary to understand the factors that have been responsible for the growth of VAT revenue.  How has VAT been able to replace sales tax successfully?  What was responsible for the failure of sales tax in achieving its desired result?  What areas, if any, will need to be strengthened to ensure enhanced programme and improved collection to make the system efficient  and

effective.

In this regard the following questions are being raised:

i)             What is the level of collection of VAT and to what extent has VAT been able to effect the general revenue and economic development of the country?

ii)            To what extent was VAT able to effect the economic

development as it relates to the economy of the country? iii) To what extent has the huge revenue resources committed to the collection of VAT been able to bring about a general increase in VAT collection and economic development?

iv) How effective are the strategies used in the general collection and administration of VAT vis-à-vis economic development of the country?

This study will attempt to address these questions on VAT and economic development.

1.3     Objectives of the Study

The main objective of this study is to examine what impact VAT has on the economy taking into consideration, the VAT payers, those responsible for the administration of VAT and the extent to which VAT has replaced sales tax.

Besides the aforementioned, other objectives of this research include:

1)           To find out the desirability of Value Added Tax, this objective relates to obtaining a measure of understanding the extent to which ‘VAT’ is socially needed for revenue purpose.

2)           To determine what rating system could be considered

appropriate for the Nigerian politico-economic system.

3)           To determine how to enhance the collection of VAT in Nigeria.

4)           To contribute to the existing literature on Value Added Tax

(VAT) management and economic development of Nigeria.

5)           To advise and proffer solution to some problem encountered in administration tax in Nigeria.

1.4     Hypothesis

Ho: Value Added Tax (VAT) has no significant impact on the economic development of Nigeria.

Hi: Value Added Tax (VAT) has significant impact on the economic development of Nigeria.

1.5     Significance of the Study

 It is hoped that the findings of this study would be beneficial and of great importance to the Federal Inland Revenue Service which is saddled with the statutory responsibility of collecting VAT.  It will also benefit the federal government whose resources are channeled towards the collection of VAT and also the general public, who consumes VATABLE goods and

services.

 In general, this study will broaden the knowledge people have on VAT and the level of how responsive are the general public in the settlement of VAT and areas which may lead to improvement in the general collection and remittance of VAT.

                 This study will also go a long way to fill the missing links in the

analysis of VAT vis-à-vis sales tax in the existing tax literature.

1.6     Scope of the Study         

             The Nigeria tax system is known to be prone to continual changes

which in itself necessitate changes in the administration of the tax.

 This study considers the factors that aid the collection of VAT and its contribution to the economic development of Nigeria.  The analysis of investigation will focus on Federal Inland Revenue Service.

Development Mobilization, Allocation and Fiscal Commission as well as the office of the Economic Adviser in the Presidency.

The study will pay particular attention on the VAT as well as economic development of the country.

1.7     Definition of Terms 

i)             Value Added Tax

This is a multi-stage consumption tax collected on sales at all stage of sales and distribution in the operation VAT each seller issues an invoice going the amount of VAT paid which become a credit for further set off it item is used as input in the chain of production or distribution.

ii)            Input Tax

The input is what is changed on business purchase and expenses. 

These include goods and services supplied in Nigeria or imported.

iii)          Output Tax is the tax that is due on VATABLE supplied.  It is derived by multiplying the tax of the aggregate supply derived by the tax rate.

iv)          Consumption VAT

This type of VAT is where capital purchase are treated the same way as the purchase of any input.  This treatment of capital input is equivalent to expensing.

v)            The Income VAT

Under the income VAT the tax paid on purchase of capital input as amortized, that is credited against the firm VAT liability as inputs.

vi)          The Gross Product VAT

 Under the gross product purchases are allowed against the firm output tax in other words the taxable firm is treated as a final consumer of all its capital input.

vi) Economy is defined as a process whereby the real per capita income overtime coupled with changes in structure attitude development in administrative system qualitative distribution of income conducive to normal integration.

vi)          Economic Development

Economic development is concerned with the ability to raise and maintain the productive capability of a country.  A country can achieve economic development of the following factors are available:

-              Political stability

-              Investments -          Abundance of capital

-              Human resources.

vii)         Federal Inland Revenue Service is the body that is responsible for collection of taxes on behalf of the federal government; the taxes include:

1)           Value Added Tax

2)           Income tax for companies i.e. limited liability companies

3)           Personal income tax for armed forces and police as well as

residents of Federal Capital Territory

4)           Petroleum profits tax etc.

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