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PROJECT TOPIC- IMPACT OF VALUE ADDED TAX ON THE NIGERIAN ECONOMY

PROJECT TOPIC- IMPACT OF VALUE ADDED TAX ON THE NIGERIAN ECONOMY

CHAPTER ONE

1.0 INTRODUCTION

Tax Revenue is compulsory payment made by individuals and organization to the government for her citizens and the organizations. This tax payment is normally on a fixed rate or graduated rate. These taxes come in form of pay as you earn, sales/purchases tax, value added tax, capital tax etc. Tax constitutes the major source of government revenue. There are two distinguishing features about tax; firstly, it is a compulsory payment for all concerned. Once somebody who is supposed to pay a tax fails to comply, he will be punished accordingly.

Tax is not paid for any specific services rendered to the payer or any benefits received by him directly payment. There are two types of taxes; they are direct and indirect tax. The Value Added Tax (VAT) has become the main prominent revenue in Nigeria and almost all developing countries. It is a tax levied at the point of sales on the value added by each producer pays the tax on his own product at one hand and he collects on his sales on the other hand.

The difference between the amount of VAT he collects on his sales on the amount VAT be pays on his purchases which represent the tax on the value added by him is what he pays to the government as tax.

1.1 GENESIS OF VALUE ADDED TAX (VAT)

Simply called the Goods and Services Tax (GST), it is levied on value added that results from each exchange. It is an indirect tax collected from someone other than the person who actually bears the cost of the tax. It was invented by a French Economist Maurice Laure in 1954 and was first introduced in France on April 10, 1954.

The Federal Government introduced VAT in January 1994. The Nigerians believed it was introduced as a means of avoiding taking loans from international agencies. According to analysts, the tax was intended to be a “Super Tax” to eradicate completely many other taxes related to goods and services. VAT was then imposed on virtually all goods and services whether produced or rendered in Nigeria or not. Exemptions however, were granted in respect of medical and pharmaceutical products, basic food items, fertilizers, agricultural and verterinary medicine, books and Education items, farming and transport equipment etc. The value Added tax effectively replaced the “former sales Tax” which under the constitution, was supposed to be charged by states and not the federal government stats and not the federal government since 1994 Vat has become a major source of revenue for the government.

VAT PROCEEDS SINCE INTRODUCTION

In 1994, a total of N8, 194 million was generated from VAT. This figure was 36.5% higher than the projections made for that year ever since then, VAT proceed have been on the increase and it is now the third generator of revenue for the government after Petroleum Profit Tax (PPT) and Company Income Tax (CIT).

VAT collected by the federal Inland Revenue Service (FIRS) rose from N48.7 billion in 1999 to N232.7 billion in 2006. In the year 2000, federal government raked in N58 billion from VAT. Details of further proceeds are as follows:

Year                         Amount (N billions)

2001                                    91.7

2002                                 108.6

2003                                 136.4

2004                                 163.3

2005                                 192.7

In 2005, a total of N1.7 trillion was generated from different taxes with VAT contributing 11.10%. Last year, AT represented 12.53% of the N1.8 trillion generated from various types of taxes including the petroleum profit Tax and Educational Tax.

PROJECT TOPIC- IMPACT OF VALUE ADDED TAX ON THE NIGERIAN ECONOMY

1.2 STATEMENT OF THE PROBLEM

The government may be happy about the high and growing VAT revenues, but there are increasing complaints from the organized private sector about the effects of the VAT on their operating costs and the prices of their product.

The complaints about the adverse affects of Nigeria’s VAT suggest that there is a problem with the way VAT able organizations are treating their liabilities especially the VAT they pay on their inputs. Moreover, there may be a problem with the way government is managing the expenditure of the VAT revenue. It is the official view that the VAT should have no cascading or cumulative effect whatever. Yet no, feasibility study was done on the impact of the tax before it was introduced, nor have impact assessments have been done since, to ensure the sustainability of the tax and its beneficial effects, government needs to know its macroeconomics impact on price, 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.

1.3 OBJECTIVES OF THE STUDY

The idea of introducing a valued added tax in Nigeria started in 1991 in the context of a review of the country’s entire tax system.

Therefore, this study seeks the following:

  1. To analyze that the impact of VAT on the Nigerian economy.
  2. To examine the reactions of Macroeconomic element of Nigeria economy towards VAT.
  3. To assess the possible implementation of VAT since its introduction in January 1994.
  4. To determine the economic function of VAT in Nigerian economy.

1.4 HYPOTHESIS OF THE STUDY

Ho: bi = 0              Value Added Tax does not have significant impact on the Nigerian Economy

Hi: b = 0                Value Added Tax has significant impact on the Nigerian Economy.

1.5 SIGNIFICANT OF THE STUDY

This research study is not only timely but highly desirable for the Nigerian polity that is currently experiencing far reaching transformation. In carrying out this study, which could not have come at a better time than now when the federal government of Nigeria is taking various steps towards reforming tax system, the research work will benefit both the government and VAT able organization.

Nigeria as a Nation with federal political instruction has a fiscal regime that adhere strictly to the same principle, a fact which has serious implications on how the tax system is managed. It is also characterized by unnecessary complex, distortionary and largely inequitable taxation laws that have limited application in the formal sector that dominates the economy. This study will benefits the federal government as it suggests means of adopting good tax system.

Moreover, the bodies for administration of tax in Nigeria will see the need to embark on exercising the powers conferred on them by the VAT decree N0 102 and VAT Amendment Act in 2007.

With this research study, the federal government will make sure that citizens see the rationale for their paying tax. This they will do through selection of good tax system. VAT base and administration would be expended to untapped areas.

With the recently promulgated VAT amendments, certain key features of a standard VAT system will be introduced as the relevant authorities go through this works if good VAT system are upheld, the VAT able organizations will engage on continuous production. Hence, business becomes attractive in the economy. The input-output credit adjustment Mechanism will eliminate inflationary effects.

This study as believed by the researcher will be useful to the students of Economics and other related fields. Also, it will be useful to future researchers who might be working on the topic or related topics.

1.6 ORGANIZATION OF THE STUDY

This work is divided into five chapters, each of which is further subdivided.

  1. The first chapter is introduction, which includes the introductory background of the study, statement of problem, objectives of the study, hypothesis of study, significance of the study, organization of the study, limitations of study and definition of terms and organization of the study.
  2. In the second chapter, relevant theoretical and empirical literature on the impact of VAT on Nigerian economy is reviewed.
  3. Chapter three is methodology. Under this, model of the research work is specified, Data required and sources. Procedures and techniques for evaluating result are stated.
  4. The fourth chapter shows the presentation Analysis and interpretation of Data.
  5. Finally, the last chapter is the concluding part of this work, under which we have the summary of finding conclusion and policy recommendation.

1.7 SCOPE/LIMITATIONS OF THE STUDY

To cut down on the constraints the researcher might encounter in the form of dearth of data, on scope and the coverage of this study has been narrowed down to cover 13 years (1994-2006).

The study will cover the Nigerian perspective and its test of hypothesis will be limited to the impact of value Added Tax (VAT) on the Nigerian Economy.

1.8 LIMITATIONS OF THE STUDY

This research work just like every other economic factor suffered some constraints.

There constraints include:

  1. Time and financial factors, considering the time limit within which this study is undertaken and concluded with the meager available resources, The researcher has decided to limit the coverage under 13 year (1994-2006)
  2. Inconsistency/lack of complete Reliable Data. In most ceases, data collected from central bank of Nigeria (CBN) is apparently different from that collected from the federal office of statistics.
  3. Lack of concert information Pertinent to the light cost of textbooks, the researcher could not afford all the necessary textbooks as regards to this study. These textbooks are not available in some of the libraries visited. All these problems constrains limit the scope of the researcher.

1.9 DEFINITION OF TERMS

It is important to explain at this point the meaning of some termed used in the course of this research study, Value Added Tax (VAT)

  1. According to Jennings (1990:279) VAT is a tax levied at each stage at which supplies change hands. In case of manufactured items, this would be at primary producer, manufacturer, wholesaler and retailer stage. It is ultimately borne by the consumer who is not being registered for VAT purposes is unable to reclaim it”. VAT is a consumption tax or VAT is a tax on spending. The tax is born by the final consumer of goods and services because it is included in the price paid”. Value Added Tax is also a consumption tax levied on the increase in the value of goods and services in the course of the production or supply.
  2. VAT Rate: VAT carries a single flat rate of 5 percent on all VAT able goods and services, i.e. the tax is at a flat of 5 percent. Exports are Zero rated while some goods and services are exempted from the tax.
  3. Modified value Added Tax (MCT) this is a glorified sales tax which has registered for VAT is classified as registered person”. Such persons will pay 5 percent VAT on goods and services purchased but can claim credit for this tax (Called input tax) when sold.

Input tax

This is the 5 percent VAT paid on goods and services purchased by the registered persons.

Output Tax

5 persons VAT which is included in the price of all goods and services supplied by registered persons.

References

Akpakpan, E.B (1994), How to Save the Naira and Nigeria. Thompson and Thompson Nig. Ltd Rivers State.

Alade, S.O. (1994), Value Added Tax in Nigeria Bullion. April/June, 1994. Vol 18, N0 2.

Federal Inland Revenue Service Information Circular (1993), N0. 9304. 20th August.

Jennings A.R (1990), Financial Accounting DP, Publication Aldire Palace London W128. AW.

Grossman, Gene M, Border tax adjustments; Do They distort trade? Journal of International Economics, February 1980, 10 (1), 117-128.

 McClure, C.E, 2000 “Implementing Subnational VATS on Internal Trade: The compensating VAT (CVAT)” international Tax and public finance, 7:723-40.

Nigerian Tax News (1995) Why VAT Rubbles in Ghana, Vol 1, N0 1 and “is there any incentive to Pay Tax” Vol 1, No 2.

PROJECT TOPIC- IMPACT OF VALUE ADDED TAX ON THE NIGERIAN ECONOMY

 

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