VALUE ADDED TAX AS A MEANS OF GENERATING REVENUE FOR THE GOVERNMENT

CHAPTER ONE 

INTRODUCTION

1.1  BACKGROUND OF THE STUDY

Taxation is an important factor in Economic planning and also an agent for social change. It is perhaps the last to understand and the most unappreciated instrument among other government policies by the citizens, yet they expect the government to provide some services. This must probably be owing to the fact that most people, particularly in developing countries like Nigeria, have very little knowledge of how the machinery of government operates. Thus, the taxman is seen by an average Nigeria as a monster always ready to prey on its victims, or a plague that must be avoided at all cost. Benjamin Franklin, the Philosopher, observed that “in this world nothing is certain but death and taxes.” The certainty of taxes has been established long in Nigeria. Before the arrival of the Colonial Masters, Nigeria had been paying taxes in kind by giving farm products to their rulers and rendering free services such as clearing the bush, digging pit toilets, well e.t.c., for the benefits of the community as a whole. Income tax was first introduced in Nigeria in 1904 by the Late Lord Lugard, various types of taxes thereafter come into being through subsequences government. Despite the fact that there are other sources government could generate revenue to fashion a society everyone can be proud of. Taxes are not new in Nigeria but Value Added Tax (VAT) is the most recent form of tax known to Nigerians. The idea of introducing VAT in Nigeria came from the report of the study groups set up the Federal Government in 1991, review the entire fan system VAT was proposed and a committee was set up by carrying out feasibility studies on its implementation. In January 1993, the government agreed to introduce VAT by the middle of the year, it was later shifted to 1st September 1993, by which time the relevance legislature (Decree No 102 of 1993) would have been made and proper groundwork is done. VAT, which replaces sales tax in Nigeria, is administered by the Federal Inland Revenue Services (F.I.R.S) through VAT directorate in close co-operation with the Nigeria custom services (NSS) and the State Inland Revenue Services (S.I.R.S). The rationale behind replacing sales tax with the VAT is informed by a number of factors and consideration notable:
i. The base of sales tax in Nigeria s operates under Decree No 7 of narrow. It covers only nine categories of goods plus sales and services in Registered hotels, motels, and similar establishments. The narrow base of the tax which negated the fundamental principles of consumption tax which by nature is expected to cut across all consumable goods and services, VAT base is a border and included most professional services and banking transactions which are profit-generating sectors.
ii. Only locally manufactured goods were aimed by the sales tax Decree 1986, although this might not have been the intention of the law. Vat is neutral in this regard. Under VAT, a considerable part of the tax to be realized is form imported goods. This means that under the new VAT, locally manufactured goods will not be placed at a disadvantage relative to imports.
iii. Since VAT is based on the general consumption behavior of the people, the expected high yield from it will boost from the payer of the tax. In the light of the foregoing, a seminar of this among the people to the effect that government derives the bulk revenue required for meeting its obligation to the people through taxation.

1.2   STATEMENT OF THE PROBLEM

The introduction of Value Added Tax into Nigeria’s tax system was greatly antagonized by its critics, more and more organizations are being a registered person. Every organization that trades in goods and services for consideration is obliged to register with the FIRS VAT Directorate. The registration covers all the business activities of the organization. The following are some of the problems encountered in the introduction of Value Added Tax:
i. Inaccurate computation of Value Added Tax figures.
ii. Incompliance of infant industries with Value Added Tax Directorate.
iii. Illiteracy of some rural areas about Value Added Tax.
iv. Lack of information on VAT to new industries.
v. Incomplete information in the tax invoice of a customer: With these problems, the VAT directorate found it rather difficult to balance the final account which provides information to other VAT officials. Therefore, there is a need for the introduction of Value Added Tax for the progress of modern business organization.

1.3   OBJECTIVES OF THE STUDY

The broad objectives of this project work are summarised as follows:

i.  To improve the effectiveness of VAT in reducing over-dependence on oil sector by the nation.

ii.  To determine the importance of VAT as a source of revenue to the government in Nigeria.

iii.  To ascertain whether the federal Inland Revenue Services can help the profit tempo in the nearest future.

iv.  To rectify the existing lapses in VAT administration so as to minimize the level of tax evasion.

v.  To determine the efficiency of Federal Inland Revenue Services’ ineffective administration of Value Added Tax in Nigeria.

vi.  To ascertain the extent to which VAT can provide revenue to finance basic infrastructure for industrial development

1.4   SIGNIFICANCES OF THE STUDY

This research work would serve as a reference to interested parties that is; student, researcher and so on. It would also add to the body of knowledge. This would enhance better understanding of the importance of Value Added Tax as a source of revenue to the Government in Nigeria. Other corporate or manufacturing organizations, the government and also the individual would understand more about the following:
i. How VAT has been able to give the desired impact by generating revenue, which is the beginning of the reduction of over-dependence on oil revenue.
ii. How to evaluate the work of the F.I.R.S and necessary suggestions about how to keep up with this great achievement in the Nation Fiscal Policy.

1.5    RESEARCH HYPOTHESIS

Ho: There is no positive correlation between the operation of Vat introduction and its acceptance by the industries.

Hi: There is a positive correlation between the operation of VAT and its acceptance by the industries.

1.6   SCOPE OF THE STUDY

The research for this study has involved the definition of the subject matter. The researcher has endeavored to reveal its urgent report, its work among business organization benefits it entails and it’s surrounding

1.7    LIMITATION OF THE STUDY

The scope of the study is limited by the following:
1. Availability of accurate data due to the inadequacy of most available data being approximated. And for audited as far as privacy imposed for logistics reasons by the case study in her vital document and in the information.
2. Time Factor: The time for the commencement and completion of this project work allows only for a proper but concise account of the subject matter such as contained in the write-ups.

1.8   DEFINITION OF TERMS

1. Value Added Tax: This is defined in the statement of Standard Account Practice (SAP) No 5 issued in the United Kingdom in April 11974 “as a tax on the supply of goods and services which is eventually borne by the final consumer collected at each stage of the production and distribution chain.
2. With Holding Tax: “This is an advance payment of income tax and the purpose is to bring the prospective tax-payer to the tax-net, thereby widening the income tax base.” That is, it is used to track down taxpayers and the incomes, which may otherwise not be reported by them.
3. Vatable Person: This is a person who trades on vatable goods and services for consumption.
4. Vatable Goods and Services: These terms refer to goods and services that will attract VAT at five percent (5%) on their consumption.
5. Output Vat: This is the VAT that is due to Vatable supplies. It is derived multiplying the tax value of the aggregate supply by the tax rate.
6. Input Vat: This is charged on business purchases and expenses according to section 10 2 of Vat Decree 1993. This includes goods and services supplied in Nigeria or imported.
7. Vat Account: This is the summary of the output tax in a normal ledger account form.
8. Zero Rating: This term is used to indicate that the supply of goods and services in a taxable supply but that the tax is charged at a zero or nil rate.
9. Taxable Activity: This includes any activity other than those in the exempted list, conducted as a business, vocation trade and profession.

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