MY PROJECT

CHAPTER ONE 1.1 BACKGROUND OF THE STUDY One of the recurrent problems of the three-tier structure of the government in Nigeria is dwindling revenue generation as characterized by yearly budget deficits and insufficient funds for economic growth and development. This economic reasoning emphasized the revenue need of government and indicates that, apart from strengthening the existing sources of revenue, it is also necessary for government to diversify its revenue base in order to meet its constitutional responsibilities. Myles (2000) states that financial capacity of any government depends among other things, on its revenue base, the fiscal resources available to it and the way these resources are generated and utilized. It is therefore, the duty of the government to adequately mobilize potential revenue across the country to prevent economic stagnation. This mobilization involves the adoption of economically and politically acceptable taxes that would ensure easy administration, accounting, verification, auditing and investigation based on the equality, neutrality and other attributes of a good tax. The impressive performance of VAT in virtually all countries where it has been introduced, according to Ajakaiye (2000), clearly influenced the decision to introduce VAT in Nigeria in January 1994. 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). Value Added Tax (VAT) was introduced in Nigeria in 1993 at a flat rate of 5% on all the vatable goods and services. The rate was increased to 10% by the Federal Ministry of Finance with effect from May 2007. However, following a series of meeting between representatives of the Federal Government of Nigeria (FGN) and the Nigeria Labour Congress (NLC) / Trade Union Congress (TUC), the FGN revoked the increase in the VAT rate. The proceeds of the VAT system are to be share in the following proportions: 20% and 80% for the Federal Government and State Government respectively. In the same vein, the state share from VAT proceeds was distributed according to the following; State of Origin 30%, Consumption/Destination 30% and Equality of State 40%. (FIRS 2008). Value Added Taxes have a wider coverage since the cause of adverse variance can be adequately controlled under proper administration (Leach, 2003). The revenue generated from consumption taxes can help to boost the financial base of any economy. This however involves exploiting the potential and adopting the type of consumption tax that will recognize the tax payers as utility minimizing individuals and safeguarding their evading behaviour. The essential consideration 1, choosing a consumption tax option from other tax options includes; assessment of administrative feasibility of each tax and determining its relative revenue potentials, its relative revenue potentials, its degree of voluntary compliance, its relative neutrality, its equity essential for regressively and the efficiency of these criteria, one can easily see under lying reasons why government replaced a Retail Sales Tax (RST) with value Added Tax (VAT) as consumption tax. According to Okpe 2001, the introduction of VAT became necessary because government expenditure was steadily over-shooting revenue, resulting in the wide deficit financing. In addition, records show that between 1960 – 1971, income from indirect taxes in Nigeria constituted the single most important of government revenue. However, with the oil boom of the 1970’s, it contributions declined. It came down from 85% in 1970 to 12% and 13% in 1980 and 1990 respectively. The share of direct taxes rose from 23% in 1970 to 60% in 1980 but came to 45% in 1990. Similarly, the revenue variable from oil and present non-oil source mainly taxes are not sufficient to meet public needs as expenditure continuous to rise because to pressing and economic needs. Therefore, if government must have additional revenue to meet up with growing public expenditures, it can only come from taxes by increasing both individual and company taxes, which under the present circumstance is neither feasible nor advisable. Unfortunately, in Nigeria only a small proportion of the population mostly civil servants pay income tax because of tax evasion and the avoidance by a greater proportion of business class. So increasing it is not likely to increase government revenue significantly. Therefore, a tax increase on a broad based consumption rather than income tax will be suitable as more people will be able to pay. VAT is a consumption tax, which is the broad based. All the essential goods and services were exempted to reduce its burden on the poor and it is relatively easier to pay because it is included in the selling price. The government believes that the propensity to consume is higher than the propensity save and tax is therefore meant to influence the consumption habit of people and it is directed especially to high income earners.   1.2 STATEMENT OF THE RESEARCH PROBLEM In Nigeria, value added tax is one of the instruments the Federal government introduced to generate additional revenue. Yet, the public (Vatable and Organization) had spoken against its introduction. The researcher embarks on an in-depth study of its administration, assessment and implementation with particular reference to the cost of administration vis-a-vise the yield. This is meant to help the policy makers and government appraise substantially and ascertain how effective it is for the revenue generation. The researcher established the general impact of the tax on the overall economy especially as it affects the poor or low-income group. This will enable government to make some adjustments in policy formulations. Also, the researcher will find out how Value Added Tax (VAT) will achieve those things other related forms of taxation could not achieve. It also appears that VAT is faced with some problems after its adoption into the Nigeria tax system; it has become a controversial issue that generates debate among several authors that the purpose of introducing Value Added Tax as one of the methods of taxation in Nigeria economy has not yet known. For the purpose of this, this project work shall examine the implication of value added tax on revenue generation in Nigeria and to provide reasonable solutions and recommendations that will be geared to reveal the benefit of VAT in Nigeria macro economy. 1.3 OBJECTIVES OF THE STUDY The primary objective of this study is to examine impact of the value added tax on revenue generated in Nigeria. However, the specific objectives are: To examine the relationship between Value Added Tax (VAT) and revenue generated in Nigeria. To find out whether VAT contributes significantly to the total revenue generated by the Federal Government for economic development. To seek ways of improving government revenue generation base in order to improve on the economy. 1.4 RESEARCH QUESTIONS The following research questions are formulated to pilot this research work: How significantly does VAT contribute to the total revenue generated by the federal government for economic development? Is there any positive relationship between Value Added Tax and revenue generation in Nigeria? Is there any ways of improving government revenue generation base in order to improve economy. 1.5 RESEARCH HYPOTHESIS The following hypothesis will be tested to guide the research work: There is no significant relationship between revenue generated and value added tax. VAT has not significantly contributed to the revenue generated by the Federal Government for economic development. There any ways of improving government revenue generation base in order to improve economy. 1.5 SCOPE AND LIMITATIONS OF THE STUDY This study will be carried out to study the impact of Value Added Tax on revenue generation in Nigeria for the period of 2001 to 2014. The researcher inquired in the factors related to the success of VAT in Nigeria. The study will also cover the impact and significant relationship between Value Added Tax (VAT) and revenue generated in Nigeria, as well as review other related tax systems and their impact in economic development, received substantially relevant literatures that related to the research. The main limitation of the study is the reliance on information supplied by businessmen and people who are not willing to make full disclose of their businesses to unknown person because they see the researcher as spies and agent of tax board or authority. Some private organization refuse to disclose some information on their record keeping on VAT and especially on returns rendered to the federal government. This made it very difficult to get the required information on VAT operation by the organization in respect to credit system of VAT Also the interview with the sole trader was not easy to obtain because it was very difficult to make them understand that the purpose of the study is not to bring them to book for tax purpose. 1.7 DEFINITION OF OPERATIONAL TERMS i. Value Added Tax: A tax on supply of goods and service, which is eventually borne by the final consumer, but collected at each stage of production and distribution. ii. Vatable Goods and Services: Any goods and service that is subject to VAT. There are 17 goods and 23 services are Vatable. iii. Vatable Persons: Any person/business and organization that is authorized to collect VAT and trades in Vatable goods and services. The organizations collect VAT from customers and remit to VAT office. iv. Taxable Period: This is the period within which VAT is collected and remitted. The taxable period in Nigeria is made before the 21st day of the following the month of collection. v. FIRS   -           Federal Inland Revenue Services. (VAT Directorate) the board in charge with the function of assessment and collection of VAT. vi. VAT on input: this is the VAT on the purchase of goods and service on a notable person. vii. VAT on OUTPUT: this is the VAT charged on the sale of goods and services it is the VAT paid to the F.I.R.S after vat on the purchase of such good or supply has been deducted. viii. Macroeconomics: Is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation. REFERENCES Jones L.M (2003) Optional Taxation in Models of Endogenous Growth, Journal of Political Economy 101 (3), 485-517 Leach, G. (2003). The Negative Impact of Taxation on Economic Growth. London, UK: refoerm, institute of Directors. Myles, G. (2000). Taxation and Economic Growth, Fiscal studies, 21(1), 141-161. Naiyeju, J.K. (2009). Value added tax. Fact of a positive Tax in Nigeria Kupas Public Affairs. Narayan, P. (2003). The Macroeconomic Impact of the IMF Recommended VAT Policy for the Fiji Economic Soyede, I & Kajola, S.O. (2006). Taxation Principles and Practices in Nigeria, Ibadan: Silicon Publishing Company Oyebanji, O.J. (2010). Principles and Practices of Taxation in Nigeria, 4th Ed, Ibadan: Frontlines Publishers. Adereti, S.A, Adesi (2011. Value Added Tax and Economic Growth in Nigeria: Enropean Journal of Humanities and Social Sciences Vol 10 Ajakaiye D.O. (1999). Macroeconomic effect of VAT in Nigeria: A Computable General Equilibrum Analysis. ACRC Research Paper 92 CHAPTER ONE 1.1 BACKGROUND OF THE STUDY One of the recurrent problems of the three-tier structure of the government in Nigeria is dwindling revenue generation as characterized by yearly budget deficits and insufficient funds for economic growth and development. This economic reasoning emphasized the revenue need of government and indicates that, apart from strengthening the existing sources of revenue, it is also necessary for government to diversify its revenue base in order to meet its constitutional responsibilities. Myles (2000) states that financial capacity of any government depends among other things, on its revenue base, the fiscal resources available to it and the way these resources are generated and utilized. It is therefore, the duty of the government to adequately mobilize potential revenue across the country to prevent economic stagnation. This mobilization involves the adoption of economically and politically acceptable taxes that would ensure easy administration, accounting, verification, auditing and investigation based on the equality, neutrality and other attributes of a good tax. The impressive performance of VAT in virtually all countries where it has been introduced, according to Ajakaiye (2000), clearly influenced the decision to introduce VAT in Nigeria in January 1994. 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). Value Added Tax (VAT) was introduced in Nigeria in 1993 at a flat rate of 5% on all the vatable goods and services. The rate was increased to 10% by the Federal Ministry of Finance with effect from May 2007. However, following a series of meeting between representatives of the Federal Government of Nigeria (FGN) and the Nigeria Labour Congress (NLC) / Trade Union Congress (TUC), the FGN revoked the increase in the VAT rate. The proceeds of the VAT system are to be share in the following proportions: 20% and 80% for the Federal Government and State Government respectively. In the same vein, the state share from VAT proceeds was distributed according to the following; State of Origin 30%, Consumption/Destination 30% and Equality of State 40%. (FIRS 2008). Value Added Taxes have a wider coverage since the cause of adverse variance can be adequately controlled under proper administration (Leach, 2003). The revenue generated from consumption taxes can help to boost the financial base of any economy. This however involves exploiting the potential and adopting the type of consumption tax that will recognize the tax payers as utility minimizing individuals and safeguarding their evading behaviour. The essential consideration 1, choosing a consumption tax option from other tax options includes; assessment of administrative feasibility of each tax and determining its relative revenue potentials, its relative revenue potentials, its degree of voluntary compliance, its relative neutrality, its equity essential for regressively and the efficiency of these criteria, one can easily see under lying reasons why government replaced a Retail Sales Tax (RST) with value Added Tax (VAT) as consumption tax. According to Okpe 2001, the introduction of VAT became necessary because government expenditure was steadily over-shooting revenue, resulting in the wide deficit financing. In addition, records show that between 1960 – 1971, income from indirect taxes in Nigeria constituted the single most important of government revenue. However, with the oil boom of the 1970’s, it contributions declined. It came down from 85% in 1970 to 12% and 13% in 1980 and 1990 respectively. The share of direct taxes rose from 23% in 1970 to 60% in 1980 but came to 45% in 1990. Similarly, the revenue variable from oil and present non-oil source mainly taxes are not sufficient to meet public needs as expenditure continuous to rise because to pressing and economic needs. Therefore, if government must have additional revenue to meet up with growing public expenditures, it can only come from taxes by increasing both individual and company taxes, which under the present circumstance is neither feasible nor advisable. Unfortunately, in Nigeria only a small proportion of the population mostly civil servants pay income tax because of tax evasion and the avoidance by a greater proportion of business class. So increasing it is not likely to increase government revenue significantly. Therefore, a tax increase on a broad based consumption rather than income tax will be suitable as more people will be able to pay. VAT is a consumption tax, which is the broad based. All the essential goods and services were exempted to reduce its burden on the poor and it is relatively easier to pay because it is included in the selling price. The government believes that the propensity to consume is higher than the propensity save and tax is therefore meant to influence the consumption habit of people and it is directed especially to high income earners.   1.2 STATEMENT OF THE RESEARCH PROBLEM In Nigeria, value added tax is one of the instruments the Federal government introduced to generate additional revenue. Yet, the public (Vatable and Organization) had spoken against its introduction. The researcher embarks on an in-depth study of its administration, assessment and implementation with particular reference to the cost of administration vis-a-vise the yield. This is meant to help the policy makers and government appraise substantially and ascertain how effective it is for the revenue generation. The researcher established the general impact of the tax on the overall economy especially as it affects the poor or low-income group. This will enable government to make some adjustments in policy formulations. Also, the researcher will find out how Value Added Tax (VAT) will achieve those things other related forms of taxation could not achieve. It also appears that VAT is faced with some problems after its adoption into the Nigeria tax system; it has become a controversial issue that generates debate among several authors that the purpose of introducing Value Added Tax as one of the methods of taxation in Nigeria economy has not yet known. For the purpose of this, this project work shall examine the implication of value added tax on revenue generation in Nigeria and to provide reasonable solutions and recommendations that will be geared to reveal the benefit of VAT in Nigeria macro economy. 1.3 OBJECTIVES OF THE STUDY The primary objective of this study is to examine impact of the value added tax on revenue generated in Nigeria. However, the specific objectives are: i. To examine the relationship between Value Added Tax (VAT) and revenue generated on Nigeria economy. ii. To find out whether VAT contributes significantly to the total revenue generated by the Federal Government for economic development. 1.4 RESEARCH QUESTIONS The following research questions are formulated to pilot this research work: How significantly does VAT contribute to the total revenue generated by the federal government for economic development? Is there any positive relationship between Value Added Tax and revenue generation on Nigeria economy? 1.5 RESEARCH HYPOTHESIS The following hypothesis will be tested to guide the research work: i. There is no significant relationship between revenue generated and value added tax. ii. VAT has not significantly contributed to the revenue generated by the Federal Government for economic development. 1.6 Significance of the Study The study will assist the government in policy formulation as it relates to value added tax. It will also help to broaden the nation’s revenue base thereby making it less dependent on oil export. 1.7 SCOPE AND LIMITATIONS OF THE STUDY This study will be carried out to study the impact of Value Added Tax on revenue generation in Nigeria for the period of 2001 to 2014. The researcher inquired in the factors related to the success of VAT in Nigeria. The study will also cover the impact and significant relationship between Value Added Tax (VAT) and revenue generated in Nigeria, as well as review other related tax systems and their impact in economic development, received substantially relevant literatures that related to the research. The main limitation of the study is the reliance on information supplied by businessmen and people who are not willing to make full disclose of their businesses to unknown person because they see the researcher as spies and agent of tax board or authority. Some private organization refuse to disclose some information on their record keeping on VAT and especially on returns rendered to the federal government. This made it very difficult to get the required information on VAT operation by the organization in respect to credit system of VAT Also the interview with the sole trader was not easy to obtain because it was very difficult to make them understand that the purpose of the study is not to bring them to book for tax purpose. 1.8 DEFINITION OF OPERATIONAL TERMS i. Value Added Tax: A tax on supply of goods and service, which is eventually borne by the final consumer, but collected at each stage of production and distribution. ii. Vatable Goods and Services: Any goods and service that is subject to VAT. There are 17 goods and 23 services are Vatable. iii. Vatable Persons: Any person/business and organization that is authorized to collect VAT and trades in Vatable goods and services. The organizations collect VAT from customers and remit to VAT office. iv. Taxable Period: This is the period within which VAT is collected and remitted. The taxable period in Nigeria is made before the 21st day of the following the month of collection. v. FIRS   -           Federal Inland Revenue Services. (VAT Directorate) the board in charge with the function of assessment and collection of VAT. vi. VAT on input: this is the VAT on the purchase of goods and service on a notable person. vii. VAT on OUTPUT: this is the VAT charged on the sale of goods and services it is the VAT paid to the F.I.R.S after vat on the purchase of such good or supply has been deducted. viii. Macroeconomics: Is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation. REFERENCES Jones L.M (2003) Optional Taxation in Models of Endogenous Growth, Journal of Political Economy 101 (3), 485-517 Leach, G. (2003). The Negative Impact of Taxation on Economic Growth. London: UK: refoerm, institute of Directors. Myles, G. (2000). Taxation and Economic Growth, Fiscal studies, 21(1), 141-161. Naiyeju, J.K. (2009). Value added tax. Fact of a positive Tax in Nigeria Kupas Public Affairs. Narayan, P. (2003) The Macroeconomic Impact of the IMF Recommended VAT Policy for the Fiji Economic Soyede, I & Kajola, S.O. (2006). Taxation Principles and Practices in Nigeria, Ibadan: Silicon Publishing Company Oyebanji, O.J. (2010). Principles and Practices of Taxation in Nigeria, 4th Ed, Ibadan: Frontlines Publishers.