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Full Project – EFFECT OF VALUE ADDED TAX VAT

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ABSTRACT

The project evaluates the effects of Value Added Tax (VAT) (A Case Study of the Nigerian Economy) through a systematic approach of study.
It examines the rationale for introducing Value Added Tax (VAT) in Nigeria and tries to expose the role of VAT in the economic development of Nigeria. Its aim being to ascertain how effective the VAT could be used to reduce the countries over dependence on oil revenue. How effective the VAT project is in Nigeria and how the problems of VAT in Nigeria could be solved.
The project is divided into five chapters with the first chapter introducing the project. It outlines the background of the study, statement of the problem, purpose significance, scope and limitations of the study. The research hypotheses and definitions of some important terms.
All related literature to the study were reviewed in chapter two. Some of such related literature reviewed were the measures of VAT effectiveness and the inherent characteristics of VAT. Also dealt with this chapter were the problems of VAT in Nigeria and the suggested solutions to the problems.
The research methodology adopted for the project was discussed in chapter three. The plan, structure and strategy of investigations conceived so as to obtain answers to the research questions were explained. Also explained were the population/sampling procedures, instruments employed in the data collection, the sources of data and the data analysis technique employed.
In presenting and analyzing the data, which was treated in chapter four. The response rates were analyzed, also analyzed were the various data obtained from the questionnaires administered on both vatabase persons and individual respondent. The chapter ended with tests of the hypothesis outlined in chapter one.
Finally, chapter five summarizes the findings made in chapter four, concludes the project and recommends that the administrative machinery of VAT be improved upon and that more vatable persons be brought into the VAT net.

CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY
It is pertinent to note that the word, government, is now, as it has been synonymous with the word tax. Hence, the listing of tax dates back to the first art of governance.
Governments all over the world demand or impose one type of tax or the other. The main purpose of imposing any type of tax has been for the government concerned to use the proceeds of the taxation to run the government and to provide some essential services. It is being noted that the aims and objectives of taxation differ from one country to the other.
However, an essential common feature of tax has been the dynamic nature in every system to reflect the economic and policy needs of that nation, another common feature of tax is that it has always been a compulsory levy.
For government to achieve her laudable objectives, it has been successively trying all techniques in the pass which include grouping and segregating tax and those who pay it and even varying methods and time of payment. It has been the view that the sole objectives of these grouping, segregation and variations have been the same to enable government generate enough revenue without really inconveniencing the tax payers.
It’s this idea of trying to collect tax efficiently on the part of government and pay tax conveniently on the part of the tax payer and together with the fact that the existing monetary policy in Nigeria is not generating the much needed revenue to meet up with government expenditures and the need to review the entire Nigerian Tax System which is the major non-oil source of revenue that has promoted the introduction of Value Added Tax (VAT) in Nigeria.
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 the implementation. In January 1993, government agreed to introduce VAT by the middle of the year. It was later shifted to 1st September 93 by which time the relevant legislation would have been made and proper groundwork done.
VAT is a replacement of the existing sales tax, which has been in operation under Federal Government Legislated Decree N0. 7 of 1986 but is operated on the basis of residence.
The rationale behind replacing sales Tax with the Value Added Tax is informed by a number of factors and considerations, notable. The base of the sales tax in Nigeria as operated under Decree N0.7 of 1986 is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels, and similar establishments. The narrow base of the tax negates the fundamental principle of consumption tax, which by nature is expected to cut across all consumable goods and services.
VAT base is broader and includes most professional services and banking transactions, which are high profit – generation sectors.
Only locally manufacture goods were targeted by the sales Tax Decree of 1986, although this might not have been the intention of the law. VAT is neutral in this regard, under VAT; a considerable part of the tax to be realized is from imported goods. This means that under the new VAT, locally manufactured goods will not be placed at a disadvantage relative to imports.
Since VAT is based on the general consumption behaviour of the people, the expected high yield from it will boost the formers of the state government with minimum resistance from the payers of the tax.
VAT by its nature is a consumption tax that has been embraced by many countries worldwide. Because it is a consumption tax, it is relatively easy to administer and difficult to evade.
The yield from VAT is a fairly accurate measurement of the growth of an economy since purchasing power (which determines yield) increases with economic growth. Vat is a self-assessment tax that is paid when returns are being rendered. In built in the new tax is the refund or credit mechanism which eliminates the cascading effect that is a feature of the retail sales tax. The input-output mechanism in VAT also makes it self-policing because of the need to obtain receipts at each stage of the transaction.
In essence, it is the output tax less input tax that constitutes the VAT payable. It is the equivalent of the VAT paid by the final consumer of the product that will be collected by the government.
Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.
The VAT system in Nigeria is administered by the Federal Inland Revenue Services (FIRS) through the VAT Directorate which is located at the Head Office in Abuja with a net work of Zonal and Local VAT Offices throughout the federation.
Although VAT is administered centrally by the federal government using the existing tax machinery of the (FIRS) in close co-operation with the Nigeria customs service (NCS) and the State Internal Revenue Services (SIRS), the net proceeds from the new tax accrue lonely to the state and local governments after making a relatively small percentage to the Federal Government to cover the cost of administration. In effect, the state and local government will benefit more out of the entire VAT collection.
The implementation of VAT officially commenced on the 1st of September 1993 although actual operation did not begin until 1st January 1994. in this regard, registered persons were allowed up to the last quarter of 1993 to adjust their accounts, particularly the incorporation of VAT information in their general ledgers, in order to comply with the requirements of the tax. That means all registered persons were to start issuing VAT invoices to their customers as from 1st January 1994.
According to Proffessor Sam. Aluko, a renowned economist, Nigeria is the 14th Country in Africa to introduce VAT. Out of the 14 countries, only 6 adopt a single rate. The others adopt multiple rates. He also disclosed the 76 countris in the world now operate VAT while several others are currently considering its introduction.

1.2 STATEMENT OF PROBLEM
The issue of VAT and its effect on the Nigerian economy has lately drawn concerns to many Nigerians. VAT was introduced to the Nigerian tax’s system with the best of intentions one of which is the achievement of a fair and equitable distribution of the burden of taxation among the various strata of taxpayers.
The new tax has however encountered a number of problems some of which harmonies with the habitual resistance to taxation generally while some are purely administrative. Other problems may also continue to crop up from time to time.
Despite the amount of publicity so far carried out by the directorate, the level of awareness is still low. The directorate should increase the intensity and coverage of its enlightenment campaign.
The classification of items may generate confusion. It would appear that there is need to clarify the following:
I. BASIC FOOD ITEMS
Cultural health and other dietary factors may continue to make the list open-ended and therefore open to abuse if sufficient clarification is not made.
II. MOTOR VEHICLES & THEIR PARTS
Commercial vehicles and their spare parts are exempted from VAT. Most of these are imported and the same types of parts can be used for both commercial and private motor vehicles. It should therefore be accepted that importers would evade VAT by declaring motor vehicles meant for private use as being for commercial use.
Smuggling and underground economy would pose formidable problems, which the board alone cannot cope with. Smuggling has become endemic in, and a source of drain to our economy despite the various task forces and border patrol by the customs services and other security forces. Black market now exist for virtually, all goods and services. For as long as these leakages exist, the nation stands to loose substantial VAT revenue.
Finally, the clamour for an equitable sharing formula has been loud. What an equitable sharing formular is poses another problem. These issues will be looked at and their solutions proffered.

1.3 PURPOSE OF THE STUDY
The purpose of this study is to asses the effect of VAT on the Nigerian economy, its role in expanding the revenue base of the government and the overall economic development of the country.
Therefore, the objective of this study is to show:-
I. How effective the VAT administration machinery is in Nigeria and also, the accounting system adopted;
II. How VAT could be used to reduce the countries over dependence on Oil revenue;
III. How effective the VAT project is in Nigeria;
IV. How the problem of VAT in Nigeria could be solved;

1.4 SIGNIFICANCE OF STUDY
The relevance of this study can first be appraised in the light of its usefulness to the Nigerian nation as a whole.
This study, among other things, will expose the macroeconomic impact of VAT on prices, output, income and consumption. Concern over the economy wide effect of VAT is important because of the possibility that the tax may cause consumers to cut consumption of certain commodities, hence affecting labour productivity.
Essentially, this research work is intended to expose the role of VAT in the economic development of Nigeria, the knowledge of which, therefore makes the research important to policy makers, the Federal Inland Revenue Service (FIRS), collectors of VAT, students as well as the general public who may require information about VAT and its performance.

1.5 SCOPE AND DELIMITATION OF THE STUDY
This research work is geared at evaluating the effects of Value Added Tax (VAT) on the Nigerian economy. VAT affects the economy in so many ways and is known to have macroeconomic impact on microeconomic variables like prices, output, income and consumption.
For clarity and simplicity, the scope of this research work would be limited to:-
i. Showing that VAT can and will increase the revenue of government.
ii. Showing that VAT can and will assist in the development and growth of the Nigerian economy;
iii. Showing that VAT is a more organized and easier way of taxation than the sales and purchase tax.
Among the factors limiting and constraining the scope of this study are:-
i. The inadequacy of data and relevant literature on the subject;
ii. Insufficient financial resources;
iii. The poor response to questionnaires by respondents and sometimes-outright refusal;
iv. There is also the issue of lack of time to carry out a more indepth study.
However, since these factors were foreseen, proper care was taken in constructing the questionnaires so that the questions asked were not so exact or direct is warrant reluctance in their response.
Also, all efforts were made to ensure that correct information was gathered and adequate provisions were made for errors so that the authenticity and credibility of the research finding are not several affected.

1.6 DEFINITION OF TERMS
For clarity purpose, the definitions and explanation of a few of the term used in this study are as follows:-
1. TAXABLE PERSONS:- This means a person who independently carries out in any place on economic activity as a producer, wholesale trader, supplier of goods and services (including mining and other related activities) or a person exploiting tangible or intangible property for the purpose of obtaining income there from by way of trading or business and include a person or an agency of government acting in that capacity.
2. VATABLE PERSON:- This is one who trades in vatable goods and services for a consideration. Every vatable person has an obligation to register for VAT operation. The registration is to cover all the business activities of the vatable person. The person can be a sole proprietor (e.g. a trader); a professional (e.g. a lawyer); a partnership (e.g. Ibrahim and Mike & Co); a Limited Liability Company (e.g. E. Afe Consultancy Ltd); a club or Association or a charity.
A resident of Nigeria who performs services outside Nigeria needs to register with the local VAT office.
Also a non-resident who has a business trade, profession or vacation in Nigeria still needs register using the address of the person with whom it has subsisting contract as its local address.
3. TAXABLE ACTIVITY:- Taxable activity includes any activities other than those in the exempt list conducted as a business, vacation, trade or profession. It includes the activities of public or government authorities associations and clubs. It is not important whether the business is carried on for profit, but it should involve (or be intended to involve) the supply of goods and services to another person for a consideration.
4. RATE OF VAT:- Presently, VAT carries a single rate of 5% on all vatable goods and services except where a good or service has been described in the law as exempted. Exported goods and services are exempted under the VAT Decree. The input VAT incurred in the course of production of exempted good or service is to be borne by the seller.
5. RETURNS:- A manufacturer or supplier of taxable goods or services is to render a return to the VAT Directorate on or before one calender month following that in which the supply was made.
Thus, every vatable person must keep records of all supplies made and received. He must also make a return on form VAT 002.
He has to fill in details of supplies made and received during the period and pay the net VAT due to the local VAT office or claim a refund if tax is owed to him.
Every importer of goods into Nigeria is to render VAT returns on all imports into Nigeria to the local VAT office. The VAT returns must reach the VAT office on the due date. Importers are required to pay VAT on imports to government while compliance is to be exerted by the Nigeria customs service before releasing the imported goods.
6. SUPPLIES:-
i. Def:- Supplies means any transaction whether it is the sale of goods or the performance of a service for a consideration, i.e for money or money’s worth.
ii. Place of supply:- The supply of goods under Nigerian VAT has to be in Nigeria, supplies made outside Nigeria are outside the scope of Nigerian VAT.
iii. Imported goods:- VAT will be charged on all taxable goods imported into Nigeria irrespective of whether or not the goods have to attract customs duties and the person importing the goods is registered for VAT.
The VAT changeable is in addition to customs duties and other charges that may be due. The value of such imported goods include all the duties and changes that may be made.
iv. Imported service:- VAT is payable on services received from outside Nigeria if such services are supplied to a Nigerian customer
v. Exported goods:- All exported goods are to enjoy exemption status. This means that no VAT is collected from the foreign buyer. Although any input tax incurred will be borne by the business or the seller.

7. LIABILITY TO VAT:-
Liability of VAT arises when the output VAT is more than the input VAT. The net VAT in a tax period is the amount to be remitted to the local VAT office.
i. Output VAT:- Output VAT is the VAT that is due to vatable supplies. It is dervised by multiplying the tax value of the aggregate supply by the tax rate.
ii. Input VAT:- The input VAT is what is changed on business purchases and expenses. These include goods and services supplied in Nigerian or imported. In this connection, it is to be emphasized that only input taxes paid on raw materials meant for production of goods meant for resale will quality for set-off. For avoidance of doubt, input VAT incurred on capital items or other items not directly related to the goods and services meant for sale will not quality for set-off.
iii. Computation of VAT:- Every vatable person is required to change VAT on supplies. The exact amount of sale, the rate of VAT and the VAT payable would be stated separately on the invoice.

8. RECORDS AND ACCOUNTS:-
i. Every vatabase person is required to keep proper records and books of all transactions, operation, imports and other activities sufficient enough to calculate the correct amount of VAT payable. These include cashbook, sales and purchase daybook, ledger account, and balance sheet, among others. Specifically for VAT purposes, tax invoices are to be issued for all supplies and VAT accounts are also to be kept.
ii. Tax Invoice:- Whenever a person suppliers vatable goods or services to another person, he must issue tax invoice in support of the transaction and retain a copy for himself. The customer also needs the tax invoice to support his claim for input tax.
iii. VAT Account:- The VAT account is the summary of the output and input VAT in a normal ledger account form. that is, VAT on purchases, VAT on services, bad debt relief, etc are debited to the account. While VAT charged on sales for the month or VAt changed on services, etc are credited.
Where there is a credit balance, a draft is prepare and paid over to the local VAT office through the designated banks. Conversely, a debt by the FIRS after necessary verification by audit officials.

1.7 RESEARCH QUESTIONS
The research questions used in this work are purely based on the purpose of the study, which will therefore assist in the provision of solutions to the problems at the end of the research work.
Some of the question used in this work includes:-
1. Is there need for us to pay Tax in this country?
2. Would you say that Nigerians are been over taxed by paying VAT?
3. Should VAT be abolished?
4. Do you think that the VAT rate of 5% is ok?
5. Do you think that VAT can actually be used to bridge the income gap between the rich and poor?
6. Would you say that the revenue from VAT is an adequate supplement to oil revenue?
7. Does VAT have a positive impact on the economy?
8. Do you make adequate returns on VAT?
9. Does the economy affect your commitment to pay VAT?
10. Is the revenue from VAT properly utilized?
11. Would you say that VAT payment & have loved your revenue generated?
12. Should more goods and services be cover by VAT?
Above are some of the research questions used in this research work.
Furthermore, a cheer presentation of the analysis data, for the research question and responds rate is in detail explained in the chapter four (4) of this research work.

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