1.1 Introduction
Value Added Tax (VAT) is a broad based business tax imposed at each stage of production and distribution process typically designed to tax final household consumption (Tait, Robert and Tuan, 2005). It is a type of indirect tax that is imposed on goods and services which plays an important role in the economic development of a country by influencing the rate of revenue accruable and consumption (Jayakumar, 2010). The relevance of tax revenues is a core motive for suggesting that emerging economies such as Nigeria must increasingly mobilise their internal resources to enhance economic growth and reduce fiscal deficits through the implementation of an effective tax policy (Wawire, 2006).
As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Research hypothesis and questions, Limitation of the study and Definition of technical terms.
1.2 Background of Study
The Value Added Tax Decree 102; made on 24th August, 1993 in Abuja by the then Head of state and Commander in Chief of Nigeria, General Ibrahim Babangida gave the legal backing for its administration. There is dearth of literature on the revenue performance of state government level VAT in developing countries like Nigeria. Countries introduced a Value Added Tax (VAT) because they are dissatisfied with their existing tax structure. Governments, all over the world need funds to effectively administer and control their economic activities and one of the sources of revenue is taxation. Taxation can be variously defined. Fundamentally, it is a compulsory levy on income since the decision to pay tax is not that of the tax payers. 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 (Igbonyi, 2008).
The existence of taxation in Nigeria is linked with the era of the colonial master in the early 20th century. The introduction became necessary as a result of the enormous tasks facing the government. Now, under current Nigeria law, taxation is enforced by the tiers of government that is Local, State and Federal government. The tasks have to do with how government can control its economic activities and how government can achieve the desired level of price inflation and deflation and how to control supply of money. In Nigeria, tax system has undergone significant changes in recent times.
VAT became operational in Nigeria on the 1st of January 1994 (Noko 2006). Though Nigeria joined the league of countries operating VAT not too long, she has very unique features in the operation of the policy. It is charged at a flat rate of 5% on some items of goods and services. As a reminder, individuals need to know that VAT is not levied directly on your profits, as the case of some other forms of taxation; this is to say that it isn’t a direct form of taxation. As the name implied, it is a tax on the value added to goods and services. In the production stages of a product, value have been added, therefore VAT is charged on the amount of value to the goods and services provided, and this is the reason VAT is payable on the goods and services consumed by any person. Consumed means used up in this context and any person means whether you are as an individual, business, government.
The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the Federal Military Government. Since then, the Value Added Tax Decree had been amended more than half a dozen times, the latest being the Value Added Tax (Amendment) Act of 2007. Some of the amendments have introduced significant changes which are yet to be reflected in the body of existing literature. The idea of introducing VAT was recommended by Dr Sylvester Ugoh, who led a Study Group on Indirect Taxation in November 1991. The decision to accept the recommendation was made public in the 1992 budget speech (Okpe, 2001).
In addition, according to Obianwuna (2005), the Federal Government set up two study groups in 1991, one was set up by the Federal Ministry of Finance and Economic Development to study and give recommendations on the reform needed indirect taxes in Nigeria. The Federal Ministry of Budget and Planning set up the other group on indirect taxation. As the group recommended the introduction of VAT in Nigeria, this made the Federal Government set up a committee that will carry out a feasibility study on its implication in Nigeria. This committee gave the general guideline for the establishment of VAT in Nigeria and its administration was given to the Federal Inland Revenue Services, which was already charged with the responsibility of administering most other taxes in Nigeria. The Sales Tax was under the jurisdiction of the States and generally poorly administered with the marginal contribution in terms of revenue. After extensive deliberation and consultation, VAT was introduced on 24th August 1993 as a federal tax by the Value Added Tax Decree 102 in Abuja by the President and Commander-in-chief of Nigeria. The Nigerian Federal Government enacted the VAT Amendment Act in 2007; this act empowered the Federal Government to fix the rate of value-added taxes to be imposed in Nigeria. The rate was increased from 5% to 10%. However, discussions regarding the possibility of a 50% reduction in the rate are on.
Therefore, in Maiduguri where the research was carried out, the activities that was conducted is to know the Effect of Value Added Tax on Consumer Behavior.
1.3 Statement of Problem
Investigation revealed that value added tax as a consumption tax has a wider coverage since the cause of adverse variance can be adequately controlled under proper administration (Onaolapo, Aworemi, & Ajala, 2013). 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 taxpayers as utility minimizing individuals and safeguarding their evading behaviour. With the introduction of Value added tax, there is an increase in the revenue base of the federal government of Nigeria, because the problem of tax avoidance and tax evasion is reduced (Okoli, & Afolayan, 2015).
Also, VAT has shifted the burden of tax toward consumption rather than savings hence encourages investment. The increment in investment leads to an increase in the level of national income. VAT in addition to the above contributes to increasing the standard of living of the citizens. This is because the proceeds from VAT are used to provide public goods like roads, bridges, schools and hospitals, which will be of equal benefit to both the rich and the poor. It has also generated employment for many Nigerians.
Poor VAT administration as identified by Olaoye (2009) was one of the problems confronting VAT in Nigeria. Tax authorities perform only the technical functions without performing the needed management functions, considered the complexity of tax administration, there are bound to be the ineffectiveness of tax administration. Basically, the performance of only technical functions leads to the false declaration, refusal to complete tax return forms, fraud, inflation of deductible expenses, smuggling, default, illegal bunkering, etc. The dishonest practices by some tax officials also pose a serious threat to the effective tax administration in Nigeria especially when such practices are capable of having demoralizing effects on honest taxpayers. Hence, this study set out to examine the effect of value-added tax of internally generated revenue of southwestern states in Nigeria.
1.4 Aim and Objectives of Study
The aim of the study is to investigate the Effect of Value Added Tax on Consumer Behavior in Maiduguri. In achieving this aim, the following specific objectives were laid out as follows:
- To identify the impacts of Consumption Value Added Tax on Income Tax in Maiduguri;
- To assess the effect of VAT on consumption behavior of goods and services;
- To determine if there is change in consumption pattern after implementation of Value Added Tax; and
- To measure the significance level of the effect of VAT on consumption pattern of households and to evaluate VAT encouraging saving scheme.
1.5 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- Does Consumption Value Added Tax have any impact on Income Tax in Maiduguri?
- Is there a significant change in the consumption pattern of households in Maiduguri?
- What is the effect of VAT on the consumption behavior of goods and services?
- What is the significant level of effect on the consumption pattern of households?
1.6 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant change in the consumption pattern of households in Maiduguri as a result of VAT implementation.
- H1: There is a significant change in the consumption pattern of households in Maiduguri as a result of VAT implementation.
Hypothesis Two
- H0: The level of effect VAT on consumption pattern of households in Maiduguri is not significant.
- H1: The level of effect VAT on consumption pattern of households in Maiduguri is significant.
1.7 Significance of Study
The study is important in such that it will serve as a reliable source for the understanding of the basics of value added tax in the Nigerian context. Also, it will serve as an academic bank for academic scholars and knowledge-thirsty individuals where the impacts of value added tax can be referenced particularly as it affects the consumption style of household.
This research work will also be an invaluable source of literature for researchers, student, marketing practitioners, accountants, bankers, companies, government agencies and related field who might be interested in knowing much about the concept of “VAT”, its benefaction to economic development in Maiduguri. The origin of value added tax, its application and effects on internally generated revenue in Maiduguri were analyzed which will be an indispensable material to the above mentioned beneficiaries.
1.8 Scope of Study
The scope of this research is focused on the Effect of Value Added Tax on Consumer Behavior in Maiduguri, Borno State.
1.9 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Research material: availability of research material is a major setback to the scope of the study.
- Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.10 Definitions of Terms
Tax: is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organisation in order to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law.
Value Added Tax: this is known in some countries as a goods and services tax, it’s a type of general consumption tax that is collected incrementally, based on the increase in value of product or service at each stage of production or distribution.
