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1.1Background of the Study

Prior to 1993, only very little was known of Value Added Tax (VAT) in Nigeria. The idea of VAT started with the acceptance of the recommendation of Dr Sylvester Ugoh led 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 recommendation on the reform needed in direct 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 to set up a committee who will carry out a feasibility study on its implication in Nigeria. This committee gave the general guideline for the establishment of a Value Added Tax 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 introduction of VAT in Nigeria through Decree 102 of 1993 makes the phasing out of the Sales Tax Decree No. 7 of 1986. The decree took effect from 1st December 1993 but by administration arrangement invoicing for the purpose did not commence until 1st January 1994, (Okpe 2004).

Value Added Tax (VAT) was introduced in Nigeria in 1993 at a flat rate of 5% on all the vatable goods and services. The rate was increased to 10% by the Federal Ministry of Finance with effect from May 2007. However, following a series of meeting between representatives of the Federal Government of Nigeria (FGW) and the Nigeria Labour Congress (NCE) / Trade Union Congress (TUC), the FGW revoked the increase in the VAT rate. The proceed of the VAT system are to be share in the following proportions: 20% and 80% for the Federal Government and State Government respectively. In the same vein, the state share from VAT proceeds was distributed according to the following; State of Origin 30%, Consumption/Destination 30% and Equality of State 40%. (FIRS 2008).

According to Okpe 2001, the introduction of VAT became necessary because government expenditure was steadily over-shooting revenue, resulting in the wide deficit financing. In addition, records show that between 1960 – 1971, income from indirect taxes in Nigeria constituted the single most important of government revenue. However, with the oil boom of the 1970’s, it contributions declined. It came down from 85% in 1970 to 12% and 13% in 1980 and 1990 respectively. The share of direct taxes rose from 23% in 1970 to 60% in 1980 but came to 45% in 1990.

Similarly, the revenue variable from oil and present non-oil source mainly taxes are not sufficient to meet public needs as expenditure continuous to rise because to pressing and economic needs.

Therefore, if government must have additional revenue to meet up with growing public expenditures, it can only come from taxes by increasing both individual and company taxes, which under the present circumstance is neither feasible nor advisable. Unfortunately, in Nigeria only a small proportion of the population mostly civil servants pay income tax because of tax evasion and the avoidance by a greater proportion of business class. So increasing it is not likely to increase government revenue significantly.

Therefore, a tax increase on a broad based consumption rather than income tax will be suitable as more people will be able to pay. VAT is a consumption tax, which is the broad based. All the essential goods and services were exempted to reduce its burden on the poor and it is relatively easier to pay because it is included in the selling price.

The government believes that the propensity to consume is higher than the propensity save and tax is therefore meant to influence the consumption habit of people and it is directed especially to high income earners.

1.2       Statement of the Problem

Value Added Tax has been administered in Nigeria for many years now. The public (vatable persons and organisations) have expressed their dissatisfaction for the system. Even the issue of cost of administration has been seriously questioned. The researcher embarks on an in-depth study of its administration, assessment and implementation with particular reference to the cost of administration vis-a-vise the yield. This is meant to help the policy makers and government appraise substantially and ascertain how effective it is for the revenue generation. The researcher established the general impact of the tax on the overall economy especially as it affects the poor or low-income group. This will enable government to make some adjustments in policy formulations. Also, the researcher will find out how Value Added Tax (VAT) will achieve those things other related forms of taxation could not achieve.

1.3       Objectives of the Study

The objectives of the study are:

i.              To ascertain the effectiveness of the VAT personnel and machinery for assessment, administration and implementation of VAT in Nigeria.

ii.            To find out the nature of the effect of VAT on vatable goods and services.

iii.           To ascertain whether VAT is really burned to the Nigerian economy.

iv.           To find out whether VAT contributes significantly to the total revenue generated by the Federal Government for economic development.

1.4       Research Questions

The following research questions were formulated by the researcher for the conduct of this project.

i.              How effective are VAT personnel and machinery for assessment, administration and implementation of VAT in Nigeria?

ii.            What are the nature of the effect of VAT on vatable goods and services?

v.             How is nature of the effect of VAT on vatable goods and services?

iii.           How is VAT a burden to the Nigerian economy?

iv.           How significantly does VAT contribute to the total revenue generated by the Federal Government for economic development?

1.5      Significance of the Study

The significance of this study can be viewed from two major standpoints;

       Practical Significance

This kind of study will assist in broadening understanding of the following groups with the following reasons.

a.    To Government: The result from this study is expected to enable the government of Nigeria to know the loophole7s that exist in the administration Value Added Tax (VAT) and to determine how effective and efficient the revenue generation machinery of VAT is and make appropriate adjustment where necessary.

b.    Also to the government, the study will afford them the opportunity to assess people’s feeling about the tax system and its implementation.

c.            To the taxpayer and administrators; the study is expected to be empirical material aimed at enlightening both the taxpayer and administrators on the objectives of Value Added Tax.

d.            To the citizens of Nigeria; it will reveal to them the impact of VAT has had on the revenue generation in this country.

e.            The study will reveal to the taxpayer the vatable goods and services and their rate.

f.             The study will reveal to the taxpayer the basic types of VAT in Nigeria and how they are administered and the method of calculating VAT

 Academic Significance

In the academic arena, this study will prove to be significant in the following ways.

a.            It will contribute to the enrichment of the literature on Value Added Tax.

b.            It will make the students and lectures to know the origin of VAT in Nigeria.

c.            It will throw more light on how to analyse VAT and to relate VAT with other forms of Taxations.

d.            It will serve as a resource material for further work on Value Added Tax or Taxation generally.

e.            The study will serve as a body of reserved knowledge to refer to by researchers.

1.6       Scope of the Study

The study was carried out to study the analysis of the impact of Value Added Tax on revenue generation in Nigeri

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