CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND TO THE STUDY

The essence of value Added Tax (VAT) In Nigeria in 1994 was to boost the revenue base of the government, re-activate the economy and as possible- reduce the poverty level by appropriately re­allocating resources from personal and private sections to promote growth and development. The adoption of this form of consumption tax was also necessitated by the decline in the oil revenue due to fluctuations in the price of oil in the international market, which makes the oil revenue insufficient to run the affairs of the government similarly the present non-oil revenue Sources mainly taxes are not enough to meet public needs, as expenditure continue to rise. Custom duties, which used to be an important source of government revenue in the 80's have dwindled significantly.

However, custom duties provided 75 percent of Federal receipt in 1994 but decrease to 19 percent in 2003. Company income tax, which accrued to 32 percent of federally collected revenue in 1994 fell to 5 percent in Nigerians pay tax 50 increasingly. The bull: of the self-employed traders, farmers and businessmen evade taxes and would only pay flat rate levies when compelled

More so, this gives personal income tax a narrow base that cannot be elongated to yield higher revenue; more so, company income tax cannot also be increased, because of the need to encourage industries.

In 1993 government reduced corporate tax from 40 percent to 35 percent. Till this year, increasing the corporate tax will have a devastating effect on production level and the national output. This there is need for a tax increase and broad based consumption tax rather than an income tax.

Value Added Tax is a consumption tax which is broad based and can start from a low rate, with exemptions for essential goods to reduce its burden on the poor, it was believed that that propensity to consume is higher that the propensity to same. Value Added Tax is therefore meant to influence the consumption habit of the people and it is directed at high-income earners. Value added Tax has provided a visible achievement in terms of its proceeds since its inception in the Nigerian economy with a 5 percent rate on the "Vatable" goods and services. The non -oil revenue has therefore increased tremendously. The proceed from this source (i.e. Value Added tax) in 1994 amounted to N8.2billion. It increased to N21 billion in 1995 and was N29 billion in 1996.

The yield has been witnessing substantial annual Increase. However, the sharing formula adopted for Value Added Tax proceeds in Nigeria has been criticized by economic analysts. They believed it is providing revenue for reckless spending in the three tiers of government. The sharing formula as at 2000 budget is 15%, 50% and 35% to federal, State and Local Government respectively.

1.2    STATEMENT OF PROBLEM

Indeed, Value Added Tax (VAT) is in principle of a good fiscal measure that is intended to broaden the revenue base of the government. The revenue is also to be channeled towards improving the social services being provided to the people. So, Value Added Tax as a fiscal policy cannot be faulted. However, it is pertinent to state on clear term the problem that led to this study. They are;

·                 Apart from passing on tax and compliance cost to consumers, business organizations and enterprises have seized the opportunity to increase profit margin on their goods whether 'Vatable' or not.

·                    Despite the huge proceeds accruing from Value Added Tax (VAT), a remarkable attribute to the source has not been felt on the economic and social activities in the country.

·                    With the nature of Value Added Tax, as self-assessing consumption tax, it is still witnessing considerate evasion.

·                    The Frequent revenue list of Value Added Tax (VAT) exempted goods and services hinder the performance of the tax. It has adverse effect on the revenue base as well as the entire economy.

·                    There is no significant effect of the amount being generated through Value added Tax (VAT) on the federally generated revenue.

1.3     OBJECTIVES OF THE STUDY

Specific: This study is specifically generate toward achieving the following.

·                   To determine whether, there 1S significant relationship between Values Added Tax and the federal generated revenue.

·                   To determine the impact of Value Added Tax on prices of goods and services.

·                   To examine the negative impact of Value added Tax on the Nigerian economy since the introduction.

·                   To identify the effect on Value Added Tax on the revenue of the Federal Government.

1.4     RESEARCH QUESTIONS

This study is prompted by some pertinent questions that must be answer to solve the problem of the study. Some of which are;

§  What have the effects been of value Added Tax (VAT) on the federal Government revenue?

§  How can the performance of Value Added Tax be improved?

§  Is there any significant relationship between Value added tax and revenue generated by the federal government

§  To what extent can we affirm that the percentage of the Value Added Tax cover in the Total Revenue generated in Nigeria?

1.5     RESEARCH HYPOTHESIS

Ho:    Value Added Tax has no significant effect on the Government revenue.

Hi:    Value Added Tax has significant effect on the Government revenue.

Ho:    Value Added Tax has no significant influence on total revenue generated.

Hi:   Value Added Tax has significant influence on total revenue generated.

Ho: Value Added Tax does not increase economy development. Hi: Value Added Tax increases economy development.

1.6     SIGNIFICANCE OF THE STUDY

This research work will contribute immensely to the work of different people willing to explore the area of value Added Tax (VAT). However, it will help in the following areas;

·                   This study will help Government m assessing the effectiveness of the value Added Tax on the Nigerian economy.

·                   It will also be useful to researcher's who are willing to explore this area of research work.

·                   Individual will be conscious of the fact that, for every consumption of some certain good, there is a percentage of their income they pay to the Government.

1.7     SCOPE AND LIMITATIONS OF THE STUDY

This study will focus on Federal Inland revenue services - the operational arm of the Federal Board of Inland Revenue. Data relating to Value Added Tax will be used in the course of analysis. Works on related literature on the field were first reviewed with particular attention to administration in Nigerian.

The study is limited to VAT among other forms of indirect taxes in Nigeria and how VAT will improve the revenue of the Federal Government.

1.8     HISTORICAL BACKGROUND OF FEDERAL BOARD INLAND REVENUE IN NIGERIA

The federal Board of Inland revenue is constituted under section 1 of companies income Tax Act (eITA) 1990 to assess and collect tax .- for the Federal Government. The operational arm of the Federal Board of Inland Revenue is called the Federal Inland Revenue Service (FIRS) as an operational arm of the Board in charge of assessing and collecting revenue taxes.

It carries out the decision of the Board. It is organized into Five Zonal Offices and Thirty area tax offices. Each districts office is headed by an assistant Director of Taxes the Zonal offices and their headquarters are Lagos Zonal (Lagos), North West Zone (Kaduna) Western Zone (Ibadan), Eastern Zone (Enugu) and North Zone (Jos).

The Assistant Director of Taxes is responsible for the assessment and collection of Taxes in the Zonal and Area Offices.

Each zonal office is made up of the administration department in charges of staff matters, office maintenance and office routine matters.