COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
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CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Value Added Tax (VAT) is a form of taxation levied on various commodities consumed by people. The introduction of VAT like every other economic policy generated both positive and negative responses from economic observers. Most of the observers were forecasting that VAT could influence the overall consumption habits of people and increase the cost of production. The implication is that it will ultimately worsen the rate of inflation in the economy. Apart from generating revenue for the government, VAT which shifted taxation from production to consumption, could thereby cause cost-push inflationary effects on taxation and on production (Adeniyi, 1993:134).
The idea of introducing VAT in Nigeria came from the report of the study group set up by the federal government in 1991 to review the entire tax system. VAT was proposed and a committee was set up to carry out feasibility studies on its implementation (Philips, 1991: 102).
Value added tax (VAT) has become one of the major sources of revenue in many developing countries in sub-Saharan Africa, for example, VAT has been introduced in Benin Republic, Coted’ivorie, Guinea, Kenya, Madagascar, Niger Republic, Senegal, Togo and Nigeria. Evidence suggests that in these countries,
VAT has become an important contributor to total government tax revenues (Ajakaise, 2000). Shalizi and Squire (1988), find out that VAT accounted for about 30% of total tax revenues in Coted’ivoire, Kenya and Senegal in 1982. The oil producing countries are not excluded from the list of countries introducing this tax hurdle. This impressive performance of VAT in virtually all countries where it has been introduced clearly influenced the decision to introduce VAT in Nigeria in 1994 (Ajakanje, 2000: 203).
Value added tax (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 (Federal Inland Revenue Service, 1993; 560). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria.
Anyanwu (1993), stresses that, tax is a deliberate effort by the monetary authorities (the Central Bank) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives.
One of the fiscal instruments employed by the government to influence economic activities in the countries is taxation, put simply: “Taxation is a compulsory payment made by individuals and organization to the relevant Inland Revenue Authorities at the federal, state or local government level”, (Anyato, 1996: 1O8).
Similarly, Udu and Agu (2001), define tax as a “compulsory payment made by each eligible citizen towards the expenditure of the State.” A tax is levied by the government without regard to the specific benefits that individual taxpayers may receive.
Value added tax (VAT) is a tax on estimated market value added to a product or service at each stage of its manufacture or distribution and the additions are ultimately added to the final consumer. End users of products and services bear the tax burden. In Nigeria, the VAT rate is 5%. An attempt to rise to 10% met stiff resistance from Nigerian Labour Congress (NLC). The cost of VAT collection is most often borne in mind by the business organizations and individuals.
Following the historical global perspective of value added tax, Wilhelm was the first person to advocate for value added Tax followed by Maurice Laure who was the first to introduce VAT in France. They argued that Value Added Tax is better than sales taxes, because to them, “sales taxes and tariffs encourage cheating and smuggling”.
The goods and services tax (GST) is a levy on value added that results from each exchange. It is an indirect tax collected over someone other than the person who actually bears the cost of the tax or the tax burden. The first among developing countries to implement VAT was Brazil when the state government abolished the multiple sales tax system in order to ensure financial and economic co-ordination among 26 states in the country. The latest countries that imposed VAT were India and China both in 1990. Nigeria introduced VAT in 1st September, 1993 and was imposed on 1st January, 1994. In the United States, in spite of the autonomy of the states in tax matters, the state that operates value added tax is Michigan which was replaced in 1974 and was reintroduced in 1981. All other states still operate the sales tax system.
Today, VAT is used as an important instrument for fiscal and economic policies in most countries of the world. In Europe, France, Belgium, Denmark, Germany, Greece, Ireland, Italy, Portugal, Spain, Sweden, Turkey, United Kingdom and Austria value added tax is operated. Hungary, Poland and Czech are among the emerging East European free market economies that are still considering the introduction of VAT. In Latin America-Argentina, Bolivia, Brazil, Ecuador, Mexico, Peru, Uruguay, Dominica Republic all operate VAT system. In Asia also, China, India, Indonesia, Korea, Taiwan, Pakistan, Philippine, Japan and Thailand all operate VAT system. In the Middle East, Israel and Turkey still use VAT system. In Africa-Benin Republic, Burkina Faso, Kenya, Mali, Niger, Senegal, South Africa, Togo and Nigeria all operate VAT system.
Nigeria operates a federal system of government and this has a serious implication on the tax system as administered in the country. The government’s fiscal power is based on the three- tier structure of federal, state and local government, and each has different tax jurisdictions.
The tax and revenue system is dominated by oil revenue. The federal government takes the lion share of all taxes and other revenues. Odusola (2006), and Philip (1997), stress that as at 1995, the breakdown of total tax and levy collection of the three tiers was 96.4% for federal government, 3.2°o for state and 0.4% for local government.
Over the years, since the oil boom in the early 1970s, revenue from oil has dominated government revenue source. Instead of transforming or diversifying the revenue base, fiscal management has merely changed from one primary product to another. This over dependence on oil makes the economy susceptible to vagaries of the international oil market (Odusola, 2006: 234).
The need to address this problem of near mono economy led to tax policy reforms. The reforms as well as the yearly amendments given in annual budget were geared towards addressing the failures of effective tax system. The need for tax reforms in the country has been justified on some of these reasons:
There is a compelling need to diversify the revenue base for the country in order to safeguard against volatility of government revenue.
Nigeria operates a cash expenditure budget system where proposals for expenditure are always anchored on revenue projections.
The tax system concentrated on petroleum taxes and less on indirect taxes because of the dominance of the informal sector. Even the formal sector has limits because there are unions that act as pressure groups to deter any appreciable tax increments.
There has been, and a continue recue on government annual fiscal tax revenue base. The group recommended the establishment of value added tax (VAT). Value Added Tax (VAT) became a land mark source of revenue as a part of tax reform agenda. It was introduced by Decree 102 of 1993. The implementation started in January 1994. The rate was fixed at 5% for eligible goods and services. Theoretically, VAT was imposed generally on all goods and services but with some exemptions.
At present, the total revenue collected under VAT is shared in the ratio of 15.50:35 among the federal, state and local governments (Odusola, 2006: 672). Federal Inland Revenue Service (FIRS) is vested with the responsibility of collecting VAT on behalf of all three tiers of governments.
To ensure value added tax and achieve some level of effectiveness, certain amendments were made to the existing tax structure. The amendments were:
Reduction of personal income tax burden through increased tax allowances and reduced tax rate;
Monetization and taxation of foreign benefit;
Deduction of Research and Development (R&D) expenditure from the gross earning of companies;
Extension of tax free status to companies in rural areas and granting of incentives based on the infrastructure availabilities in the areas;
Reduction of company tax rate from 40% to 35% and subsequently to 35%, and Payment of petroleum profits tax in US Dollar.