AN EVALUATION OF ROLE OF VALUE ADDED TAX AS SOURCE OF INCOME IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Taxation is the primary source of income to the government. It is a compulsory levy on economic agents of an economy by the government (Gbosi, 2006). Though tax has been defined differently by various authors but the primary aim of any tax system is to raise funds in the public sector for use in promoting government programmes. In some instances, however, a tax may exit primarily, or at least very importantly, for regulatory purposes. Traditionally, taxes are classified into direct and indirect taxes. Direct taxes are those type of taxes in which its liability is determined with direct reference to the tax paying ability of the taxpayer like, “personal income tax, company income tax, petroleum profit tax, capital transfer tax, capital gains tax, inheritance tax, wealth tax”, etc;
while in the case of indirect taxes such an ability to pay is assessed indirectly (Bhatia, 2004). Examples of indirect taxes in Nigeria include entertainment tax, and the subject of this study, the Value Added Tax (VAT).
Value Added Tax (VAT) is an indirect tax levied on goods and/or services as a percentage of their value added. The consumer pays VAT on purchases in addition to the normal prices; the seller then pays the government the value of the VAT collected on sales less VAT they have paid on purchases inputs (Ahabi & Ijewere, 1998). VAT is levied in many countries. It was introduced in the United Kingdom in 1973. It is a kind of tax on the supply of goods and services, and it is borne by the final consumer but collected at each stage of the production and distribution chain. Originated from the treaty of Rome signed by the European Union countries in the late 1960’s. VAT is today practiced in more than sixty other countries cutting across Europe, Latin America, Asia, and Africa
including Nigeria. Most of these countries just like Nigeria switched from sales tax to VAT as a major form of collecting revenue (tax) on consumption. Interestingly, it was first introduced in Nigeria on the 1st of January 1994 under Decree 102 of 1993 within the days of General Sani Abacha as the Military Head of State. VAT is a replacement of the then existing sales tax which had been in operation under the Federal Government Legislated Decree No 7 of 1986; but in operation on the basis of residence (Anyafo, 1998).
Since VAT is based on the general consumption behavior of the people, the expected high yield from it will boost the fortunes of the government with minimum resistance from the payers of the tax. This has invariably serve has a source of huge income for the government of Nigeria. As a result of the importance attached to VAT by the government since inception, it will therefore be necessary if a clear study is carried out in order to evaluate the role of VAT as a source of income in Nigeria so as to avoid a sweeping conclusion, hence the aims of this study which are to empirically evaluate the role of value added tax as a source of income in Nigeria.
