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THE EFFECT OF VALUE ADDED TAX ON GOVERNANCE OF NIGERIA “A CASE STUDY OF ONDO STATE”

CHAPTER ONE

1.1    BACKGROUND TO THE STUDY

The history of Value Added Tax (VAT) in Nigeria dates back to November 1991 when the Federal Government of Nigeria set up a committee to review the entire tax system in the country, Adesina (2005:173).  Through the efforts of the committee Value Added Tax (VAT) was proposed and a sub – committee was inaugurated to carry out the feasibility study to ensure its implementation by June 1992 (Ibid : 175).

The Federal Government of Nigeria in January 1993 agreed to introduce VAT by the middle of the year which was later shifted to the 1st day of September same year when the relevant legislation was expected to have been concluded.  Value Added Tax is a replacement of the formerly existing sales tax which had been in operation under Federal Government of Nigeria Legislated Decree Number 7 of 1986 but was operated on the basis of residence consumption tax which was operational in most developed countries of the world due to the fact that it is relatively easy to administer and difficult to evade (FIRS information circular on VAT 1995; 109:2).

Of note, VAT covers both goods and services in comprehensive manner whereas, the other type of consumption covers mainly goods, for instance, some other tax regime such as “sales tax Decree Number 7 of 1989 which applies to Nine (9) categories of goods and to one type of services, Arowomole (2006:18).

According to the United Kingdom Statement of Standard Accounting Practice (SSAP) Number 5, which also opines Value Added Tax is a kind of tax on supply of goods and services which is eventually borne by the final consumer but collected at the final stage of consumption but collected of each stage of the production and distribution chain (FIRS VAT Training note module VII:1995:2).

Apart from the fact that sales exclude a large number of consumer goods; it almost exempt a large service sector of the economy.  The VAT system in Nigeria is administered by Federal Internal Revenue Service (FIRS).  The VAT Directorate with Federal Inland Revenue Service is centrally located at the Regional and ITO offices throughout the Federation.

Although, it is designed to further enhance revenue generation for the government, the Federal Government is responsible for revenue collection and revenue allocation for development programme at the three levels of government in the country.  It is further expedient to state that the introduction of Value Added Tax since 1993 in Nigeria has contributed immensely to revenue base of government even as it is much broader than sales tax. (op-cit:22).

1.2    STATEMENT OF THE PROBLEM

At the time Value Added Tax (VAT) was introduced in Nigeria, the necessary and required machinery for the proper implementation had not been put in place which includes publicity, tax enlightenment and adequate consumer education, Arowomole and Oluwakayode (2006:104).  Even as at then, many companies were yet to register with the necessary authorities for VAT and many tax prayers were confused.  These among others adversely affected the result of the directorate in terms of evaluation, the problems created by the inadequate preparation and lack of understanding of how Value Added Tax (VAT) was to work made it so unpopular (Ibid:107).

Introductory strategy was weak, as the introduction of VAT world over has a lot of prerequisites which certainly will affect the result/output positively, still on the part of government, due to the complexity of the tax and the need for co-operation of the tax payers proper preparation and enlightenment for the public cannot be over emphasized.  Adigun (2000:46).

Also, another problem envisaged is the efficient administration of VAT in this country is the adequacy of records kept by business owners as some organizations do not use in voice at all and since VAT relies much on adequate records and accounts, the system may not serve effectively and not yield properly in terms of the expected revenue anticipated.  This in turn can also give rise to overstated claims of tax refund and falsification of invoice, Ojo (2009:26).

More so, prices of VAT able goods are expected to rise, making final consumers to pay more which inadvertently make retailers in Nigeria to take advantage of the situation to exploit final consumers as a result of arbitrary increase in price.  As noted by Adigun (2000:47) business has seized the opportunity to increase profit margin on their goods whether VAT able or not which have resulted to excessive price increase that has further led inflation in the country.

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Updated: — 4:45 pm

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