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.