The Effect of Value Added Tax on the Nigeria Tax System

1.1 Introduction

According to Tait, Robert and Tuan (2005), 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. This kind of indirect tax, which is levied on goods and services, affects consumption and the pace at which income is accruable, which is crucial to a nation's economic growth (Jayakumar, 2010). One of the main arguments in favour of the idea that developing nations like Nigeria should mobilise more of their own resources in order to adopt an efficient tax system that would boost economic growth and lower fiscal deficits as suggested by Wawire (2006), is the importance of tax revenues.

This chapter will address the background information that motivated this study, the challenges that prompted it, its aim, and its objectives as a preface to subsequent sections of the study. Additional factors include the study's significance, scope, limitations, research questions and hypotheses, and the definition of technical terms.

1.2 Background of Study

Taxation is the cornerstone of modern economic expansion. Not only are they the greatest of all profits, but their importance is due to the grave problems caused by the current high tax burden (Greene, 2011). The main objective of taxation is revenue creation. A welfare state has to levy large taxes in order to pay for its obligations. Musgrave (2008) asserts that taxes are a vehicle for achieving social goals including wealth redistribution and the decrease of inequality. Therefore, taxes are necessary in a modern government not just to generate the money needed to cover the growing expenses of social services and administration but also to reduce income and wealth inequality. In order to keep money out of consumption and prevent inflation, taxes are also necessary.

In most countries around the world, the goal is to achieve rapid overall development through optimal tax collection and a broader income base. In order to achieve this goal, many countries of the world, especially developing countries, have selectively introduced new forms of taxation to boost their income opportunities in order to improve socio-economic conditions their citizens and a rapid economic development Countries (Iorun, 2012). One of these forms of taxation is value added tax (VAT), this impressive VAT performance in almost every country in which it was introduced. According to Ajakaiye (2000), he clearly influenced the decision to introduce VAT in Nigeria on 1 September 1993, although the actual transaction did not begin until 1 January 1994. VAT is a relatively simple excise tax to manage and difficult to avoid. adopted by many countries of the world (FIRS circular, 1999). The data available thus far supports the hypothesis that VAT revenue is already a sizable source of income for Nigeria and that it serves as a reasonably reliable indicator of economic development.

VAT is charged on the consumption of goods and services. This includes goods and services imported into the country. It is calculated throughout Nigeria at a fixed rate of five (5%). The 5% Exit Tax is calculated for all goods and a service offered by a registered person and the tax burden is compensated by the end user (Ajakaiye, 2000). The broadening of the VAT base is leading to a sharp increase in federal revenue, indicating that the consumption patterns of the majority of Nigerians are increasing. The increase in consumption habits creates a market and has a positive effect on the economic activities of the country (Unegbu and Irefin, 2011).

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%. The Value Added Taxes are one of the major sources of financing in several economically developing countries across the world; this is also similar in Nigeria as well.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Value Added Tax on the Nigeria Tax System.

1.3 Statement of Problem

Investigation revealed that Nigeria intends to increase the percentage of value added tax on goods and services due to its importance for income, economic growth and development by turning away from direct taxation a consumption based indirect taxation system in line with best practices worldwide, to achieve a stable flow of oil revenues and reduce corporate and income taxes. However, citizens have different ideas (including: too much burden on the end user, inflation and higher prices for fuel pumps). This view of the majority of Nigerian citizens made research on the impact of VAT on the Nigerian tax system relevant. It is therefore necessary to understand, on the basis of empirical facts, the impact of VAT on the Nigerian tax system.

1.4 Aim and Objectives of Study

The aim of the study is to ascertain whether Value Added Tax has impact on tax system of Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To assess the impact of the Administration of Value Added Tax on Income Tax in the area under review;
2. To identify the impacts of consumption value added tax on income tax in the area under study;
3. To determine the effects of Income Value Added Tax on Income Tax in the area under study; and
4. To ascertain the influence of Value Added Tax on tax collection, evasion, and avoidance in the area under study.

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 the area under study?
• Has Income Value Added Tax any effect on Income Tax in the area under study?
• Is there any significant relationship between Gross Product and Income Tax in the area under study??
• To what extent does Administration of Value Added Tax correlate with Income Tax in the study area?
• What are the impacts of consumption value added tax on income tax in the area under review?

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.

• H₀1: Consumption Value Added Tax does not have impact on Income Tax in the area under study.
• H₀2: Income Value Added Tax has no significant effect on Income Tax in the area under study.
• H₀3: There are no significant relationship between tax collection, evasion, and avoidance in the area under study.
• H₀4: The Administration of Value Added Tax does not have impact on Income Tax in the area under study.

1.7 Significance of Study

This study will be of great importance to the government by highlighting the effect of VAT on the tax system of Nigeria.

This study will also help in shaping and providing a better understanding to citizenries on how VAT is charged and its contribution to the economy. Furthermore, it will help other researchers to carry out further research on this subject area.

1.8 Scope of Study

The scope of this research is focused on the Effect of Value Added Tax on the Nigeria Tax System using Revenue Mobilization and Fiscal Allocation Commission, Abuja as a case study.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. 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.
2. Research Material: availability of research material is a major setback to the scope of the study.
3. 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).
4. Initial Cooperation Delay from Respondents: A particular limitation of this work came as a result of the respondent refusal to offer their cooperation at the initial time they were contacted. This contributed in making the success of this research study difficult.

1.10 Definitions of Terms

Tax (Tariff):

It 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.

Economy:

It is an economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated.

The Income Value Added Tax:

With this type of VAT, the tax paid on purchases of capital inputs is amortized (that is credited against the firm’s VAT liability) over the expected lives of such capital inputs.

Sales Tax:

It is a tax paid to a governing body for the sales of certain goods and services. Usually laws allow or require the seller to collect funds for the tax from the customer at the point of purchase.

Tax Administration:

A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue.