ASSESSING THE CONTRIBUTION OF VAT TO THE REVENUE PROFILE OF NIGERIAN GOVERNMENT
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The increasing cost of running government coupled with dwindling revenue has left various state governments in Nigeria with formulating strategies to improve the revenue base. More so, the near collapse of the National Economy has created serious financial stress for all tiers of government. Hardest hit are the state governments all of whom have experienced unusual reduction in their share of the National Revenue from the Federation Account. Despite the numerous sources of revenue available to the various tiers of government as specified in the Nigeria 1999 Constitution, since the 1970s till now, over 80% of the annual revenue of the three tiers of government come from petroleum. However, the serious decline in the price of oil in recent years has led to a decrease in the funds available for distribution to the states. The need for state and local governments to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the part of state and local governments and even the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources.
To meet the inescapable need for increased revenue, the use of external tax consultants was introduced by the federal and state governments in Nigeria to boost revenue generation under a programme known as the Accelerated Revenue Generation (ARG) Programme. The Federal government appointed Consultants/ Monitoring agents on Value Added Tax (VAT).
Value added tax (VAT) has become a major source of revenue in many developing countries. VAT has become an important contributor to total government tax revenues. Shalizi and Squire (1988) find that VAT accounted for about 30% of total tax revenues in Nigeria in 1982. The oil producing countries are not excluded from the list of countries introducing this tax handle. This impressive performance of VAT in virtually all countries where it has been introduced clearly influenced the decision to introduce VAT in Nigeria in January 1994.
Specifically, the Federal Inland Revenue Service (FIRS) pointed out that 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 (FIRS, 1993: 4). Evidence so far supports the view that VAT is already a significant source of revenue in Nigeria.
VAT is a multi point levy where the tax paid on local purchases from the registered dealer can be set off against the tax payable on the sale of goods, other than special goods. A value added tax is a tax on sales to consumers that is collected at different stages of the production process. It has the same base as a retail sales tax (RST) that is collected only on sales to final consumers.
Value added tax is an indirect tax charged on sale of goods. Before the implementation of Value Added Tax, Sales tax was charged on sales. Sales tax was levied at first point of sale, and the resellers did not contribute to the Government. Government was losing huge revenue due to this system. Finally Government introduced VAT on 1st April 2005, with the motto of uniformity in tax structure and to reduce the evasion of tax. VAT works on the principle that when raw material passes through various manufacturing stages and manufactured product passes through various distribution stages, tax should be levied on the ‘Value Added’ at each stage and not on the gross sales price. A value added tax or value-added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the “value added” to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The “value added” to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
The value added taxes in Nigeria were created as replacements or substitutions for the sales taxes that were in operation before. They were imposed on all goods that were manufactured in the country as well as goods that had been made outside the country and were selling there. As per the VAT Decree No. 102 made on the 24th of August, 1993 in Abuja by the President and Commander-in-Chief of Nigeria, General I. Babangida certain goods and services have been exempted from the purview of value added taxation. As per the specifications laid down in the above mentioned decree goods such as all exported goods, medical and pharmaceutical products, products meant for kids, basic food items, commercial vehicles and their spare parts, books and other educational materials, fertilizer, farming machines, agricultural products, farming transportation equipments and veterinary medicines and magazines and newspapers.
As per the above mentioned decree a number of services have been declared exempted from value added taxation in Nigeria. These services are all the services that are exported, medical services, plays and performances that are run by educational institutions for educational purposes and services that are provided by community banks, mortgage organizations and people’s banks. In Nigeria the companies or business organizations that function on a no profit making basis are required to pay value added taxes.
1.2 STATEMENT OF PROBLEM
In most of the developing countries of the world. It is impossible to assess and collect various taxes especially those on Income. This is mostly as result of the
Insincerity of both the tax payers and tax administrators, who rather prefer the money in their pocket to generating same for the government even when at the end of the month, they still expect salaries to be paid by the government.
It has long been evident that VAT in Nigeria has remained the most unsatisfactory, disappointing and problematic of all the taxes in the system today.
This is as a result of weakness and inconsistency of the tax policies in Nigeria tax system. For instance, the National Tax Policy (NTP) which is yet to be effective even though approved by the Federal Executive Council
(FEC).Nigeria is yet to have any policy thrust for its tax system. The year 2010 was not an exception as there was no notable policy pronouncement to drive the tax system. This has contributed to the slow pace of development that the system has witnessed.
The irony remains that not much has been done to set the Nigerian tax system on the right footing. Despite the fact that reforms had been ongoing, there is yet to be a clear direction for the system.
