CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
There are quite a
number of definitions of tax or taxation depending on the qualities it poses.
In that vein, taxation is the process or machinery by which communities or
group of persons are made to contribute in some agreed quantum and method for
the purpose of the administration and development of the society (Adedeji,
2010).
Taxation is the system of imposing levy
by the government against the income, profit or wealth of the individual,
partnership and corporate organization (Aluko, 2009).
In the present dispensation of Nigerian
economy, taxation has always been a means by which communities are provided
with common facilities such as access roads, security, amongst others from time
immemorial.
In Nigeria, sales tax
came into being in 1986. VAT introduction in 1993 heralded the abolition of
sales tax.
According to Anyafor, (2006), the
rationale behind replacing sales tax with VAT is informed by the following
reasons;
1. The base of the sales tax in Nigeria
is narrow. It covers only nine categories of goods plus sales and services in
registered hotels, motels and similar establishments,
2. The sales tax act targeted only
locally manufactured goods,
VAT is a consumption tax and is based on
the general consumption behavior of the people, thus the base is large.
Igbonyi, (2008) citing the Act (then
decree) section 7 (2) which states that VAT shall be administered and managed
by the Federal Board of Inland Revenue Service (FIRS) but shared by the three
tiers of government in Nigeria from 1999 to date as follows;
Federal Government: 15%
State Government: 50%
Local Government: 35%
Value added tax (VAT)
according to Isah (2011) is a consumption tax, levied at each stage of the
consumption chain and borne by the final consumer of the product or service.
The administration of VAT is relatively easy, unselective and difficult to
evade. Countries all over the world, look for ways to boost their revenue, this
facilitated many nations to introduce value added tax on goods and services.
For instance in Africa, VAT has been introduced in Benin Republic, Cote
d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, Nigeria. Evidence
suggests that in these countries VAT has become an important contributor to
government revenue (Oyebanji, 2010).
Value added tax (VAT)
according to Tabansi (2005) is a tax introduced in Nigeria in 1993 and
implemented in 1994. It is imposed on goods and services at the rate of 5%. The
main aim of this tax is to raise revenue to government and its incidence is
borne by the final consumer. VAT is collectible from both imported and locally
manufactured goods and services.
Adedeji, (2010) defined VAT as a
consumption tax, charged at 5% on all vatable goods and services.
He went further to state the attributes
of VAT as:
1. VAT is a consumption tax;
2. VAT is a multi-stage tax, and
3. The incidence of VAT is on the final
consumer.
Anyafor, (2006) asserted that VAT has tremendously increased
the revenue earnings of government as opposed to the normal system before the
advent of the (VAT), it has reduced the incidence of tax invasion as many
people who hitherto used to avoid VAT has been paying as it is indirect form of
tax system. Many goods that people purchase these days has tax tag sometimes
unknowingly by them. VAT paid by a business on purchases is known as input tax,
which is recovered from VAT charged on company's sales, known as output tax (Anyafor,
2006). If output exceeds input in any
particular month the excess is remitted to the Federal Board of Inland Revenue
(FBIR) but where input exceeds output the taxpayer is entitled to a refund of
the excess from FBIR though in practice this is not always possible. A Taxpayer
however has the option of recovering excess input from excess output of a
subsequent period. Isah, (2011) stated
that recoverable input is limited to VAT on goods imported directly for resale
and goods that form the stock-in-trade used for the direct production of any
new product on which the output VAT is charged.
1.2 Statement of Problem
The attitude of Nigerians
towards Value Added Taxation is worrisome as many prefer not to pay tax if
given the opportunity. This is due to the fact that most people consider tax as
loss in profit. The economy continues to lose huge amount of revenue through
the unwholesome practice of tax avoidance and tax evasion, these loss of
revenue can change the fortune of many economy particularly, developing
countries like Nigeria. This problem has been lingering for so long which
urgent attention and solution is overdue.
The cost of collecting
tax in Nigeria (both social and economic cost) is too high to the extent that,
if left unchecked, the cost may soon outweigh the benefit or value derived from
such operation and that will not be appropriate for the system. The government
spends more to realize a miserable pittance.
The rate of
corruption on the part of tax officials is alarming as most of them connive and
collude with supposed-tax- payer to evade and avoid tax.
Sometimes, the tax officials are not
properly trained on the modern ways of tax administration. The inadequate
social infrastructures in Nigeria call for attention as to how tax revenue
generated is to be expanded and accounted for, especially where those in
authority continue to spend these hand-earned resources with reckless abandon.
1.3 Objectives of the Study
The
broad objective of this study is to appraise the effect of Value Added Tax
(VAT) on profitability of manufacturing firms in Nigeria focusing on a study of
selected manufacturing industry.
The
specific objectives include the following:
1. To determine the extent to which Value Added
Tax (VAT) has contributed to the Gross Domestic Product of Nigeria.
2. To identify how money supply affect VAT
payment in Nigeria.
3. To examine the relationship existing between
the cost of collecting VAT and the benefits derived from it.
1.4 Research Questions
The
following research questions are stated for this study:
1. To what extent has Value Added Tax (VAT)
contributed to Gross Domestic Product of Nigeria?
2. How does money supply affect VAT payment in
Nigeria?
3. Does a significant relationship exist between
the cost of collecting VAT and the benefits derived from it?
1.5 Research Hypotheses
The
following hypotheses are formulated for this study:
Hypothesis One
HO: Value Added Tax (VAT) has not contributed to
economic growth of Gross Domestic Product of Nigeria.
HI: Value Added Tax (VAT) has contributed to
Gross Domestic Product of Nigeria to a great extent.
Hypothesis Two
HO: Money supply does not have significant effect on VAT payment in Nigeria.
HI: Money supply has significant effect on VAT payment in Nigeria.
Hypothesis Three
HO: A significant relationship does not exist between the cost of
collecting VAT and the benefits derived from it.
HI: A significant relationship exists between the cost of collecting
VAT and the benefits derived from it.
1.6 Significance of the Study
This
research work will be an invaluable source of literature for researchers,
student, marketing practitioners, accountants, bankers, companies, government
agencies and related field who might be interest in knowing much about the
concept of VAT.
Its
general contributions to economic development of Nigeria were mentioned. Its
advantages and disadvantages, types of taxes, the origin of VAT, its
application, impact and administration were thoroughly analyzed which will be
an indispensable material to the above mentioned beneficiaries. It will also
help the government in her policy formulation to suggest alternative strategies
that can aid effective administration and monitoring of the VAT process and
procedures. All these will contribute immensely to the knowledge previously had
by some of the beneficiaries mentioned above.
1.7 Scope of the Study
This
study covers selected manufacturing firms in Enugu State. The firms selected
are; Innoson Nigeria Ltd, Emenite Nigeria Ltd and Coca Cola Bottling Company.
1.8 Limitation
of the Study
The researcher encountered diverse constraints in the
process of carrying out this research study.
1. Difficulty in gathering Research Material:
There was
difficulty in gathering the necessary information or materials necessary for
the successful completion of this research study. This is due to the fact that
most of the respondents were either not on sit or were uncooperative in
providing the necessary information as regards to their responses.
2. Time Constraints
Time also posed
as a constraint to the successful completion of this research study. The
researcher had to combine the time for lectures and work to carrying out this
research study. Though it was not easy but she was still able to carry out the
research work.
3. Finance:
There was not
enough finance on the part of the researcher to complete this research study.
Irrespective of
these constraints, the researcher was still able to successfully carry out this
research study.
1.9 Definition
of Terms
Value
Added Tax: A value-added tax (VAT) is
a type of consumption tax that is placed on a product whenever value is added at
a stage of production and at final sale.
Gross
Domestic Product: Gross domestic product (GDP) is the monetary value of all the finished goods and
services produced within a country's borders in a specific time period.
Total
Consolidated Revenue: Total
consolidated revenue is the aggregate of all revenue
generated by a parent company and its majority-owned subsidiaries, after
intercompany eliminations. Intercompany eliminations refer to sales included by
one company to another majority-owned subsidiary or its parent.
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