LEGAL IDEAS FORUM

VALUE ADDED TAX (VAT) A MAJOR CONTRIBUTOR TO REVENUE GENERATION AND ECONOMIC DEVELOPMENT IN NIGERIA : A THEOROTICAL OVERVIEW

INTRODUCTION:
Over the decades around the globe especially in the developing economies, Value Added Tax revenue has been recognised as accounting for a significant percentage of the total government revenue. Value added tax has been adopted by several countries of the world because of the growing concern about economic efficiency and tax simplicity in a competitive and integrated world economy (Jenkins & Kuo, 1995). (VAT) was suggested to the government of the Federation to replace the existing sales tax which though was nationally levied; the proceeds from it are collected and retained by the State Government. Value Added Tax (VAT) is an indirect tax on spending. That is, it is a consumption tax imposed on goods consumed and services rendered. It is borne by the final consumer and it is progressive in nature. The Federal Ministry of Finance and Economic Development was mandated to study and make recommendations on the reforms needed on the direct taxes in Nigeria.
A second study on indirect tax set up by the Federal Ministry of Budgeting and Planning was inaugurated on 26th April, 1991 by then Minister of Finance and Economic Planning. Therefore, the genesis of Value Added Tax can be traced to the report of the 1991 study group on the review of direct taxes in Nigeria under the chairmanship of Dr. Sylvester U. Ugoh. It was this study group that out the feasibility study of the new tax regime which government accepted. A Modified Value Added Tax (MVAT) committee headed by Mr. E. Ijewere was set up to look into the possible modification or simplification of the new tax in 1992. The government adopted what we now have as Value Added Tax (VAT) by promulgating the relevant decree. The Value Added Tax (VAT) came on stream on 1st December, 1993 by Decree No. 102 of 1993, although the actual implementation commenced on 1st January, 1994. The VAT decree automatically abrogated the sales tax (Noko, 2016).
The indisputed contribution of VAT to total government revenue in countries where it has been in existence influenced the government decision in 1993 in Nigeria to introduce VAT to replace the sales tax which has been in existence prior to the time. The Federal Inland Revenue Service (FIRS) stated that VAT is easy to administer and of course very difficult to evade. Also, the result of a study conducted by IMF to ascertain whether countries with VAT system had higher tax revenue to GDP ratio proved more tantalizing as the study revealed that VAT system generates higher revenue to the government. The introduction of VAT assisted immensely to diversify the revenue base of the nation as VAT revenue in 1994 accounted for about 36.5% of the budgeted revenue and 4.06% of the total government revenue and 5.93% in 1995. VAT at present contributes higher to total government revenue in Nigeria as it provides the government with expected revenue to embark on developmental project to fasten economic development in the country. Through VAT as a consumption tax, the government can control the production and consumption of certain goods and services, control adverse economic conditions, inflational rates and help sharpen the economy and curb the level of unemployment through building of industries, skill acquisition centres, encourage local manufacturer which inturn will help curb the level of unemployment in the country.
Value Added Tax (VAT) has become a major source of revenue in many developing countries like Nigeria. In sub Sahana Africa for example, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo. Evidence suggests that in these countries VAT has become an important contribution to total government tax revenue; (Ajakaiye 2000) the value Added Tax decree was established in 1993 and was imposed on 1994. Value Added Tax (VAT) in an ideal form of taxation in Nigeria tax system and has significantly contributed to resources mobilization as well as capital formation to the economy. It has positive and significant impact on revenue mobilization in Nigeria; it also has positive relationship with consumption.
VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries worldwide (Federal Inland Revenue Service 1993). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example, actual VAT revenue from 1994 was N8.189 billion which is 36.590 higher than the projected N6 billion for the year. Similarly, actual VAT revenue for 1995 was N21 billion compared with the projected N12 billion. In terms of contribution to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1%) of total revenue in 2008.
VAT revenue is generated for distribution to the state and local government in Nigeria. Unlike the oil revenue whose market government has no control over. This helps to reduce over dependence on oil revenue, this assures a sustainable economic growth and development. 
What Is Value Added Tax ?
Value Added Tax ( VAT ) is a tax levied on goods and services consumed . It is an indirect tax wherein the burden of the payment is borne by the final consumer of the goods and services. The tax was created by the VAT Act No. 102 of 1993 which became effective from January, 1994. The tax is collected only by Federal Inland Revenue Service at the rate of 5 % of the value of the goods and services supplied. The VAT rate in Nigeria of 5 % is said to be among the lowest in the world and has remained unaltered from commencement of the Act till date . From inception to date, the tax has proven to be a strong source of revenue to the government. Consequently, few attempts had been made to push up the rate to about 10 % but were jettisoned by the public resentment against the proposed increase.
All proceeds of VAT flow into the VAT pool account which are distributed monthly to the Federal, States (including Federal Capital Territory) and Local governments in the proportion of 15 %, 50 % and 35 % respectively (with consideration for derivation principle)

Importance of Value Added Tax
The drop in oil prices, which has led to dwindling revenues for Government in Nigeria, has once again brought into sharp focus the need to diversify the source of Government revenue away from oil and more toward taxation. This is because, apart from being a major source of revenue for Governments world over, taxation has the remarkable effect of stimulating economic growth and job creation through its impact on investment and capital formation in the economy. In other words, the more tax revenue a country generates, the greater developmental growth it attains.
Federal Inland Revenue Service, (FIRS) recently released its proposed tax collection targets for 2016 , showing that Value Added Tax ( VAT ) will account for N 2 trillion ( 40 %) of the N4 . 957 trillion target for the year. This informs the importance both the Service and Federal government place on VAT as a dependable source of government revenue .
Furthermore, VAT is designed to be borne ultimately by the final consumers of the goods and services. The operating mechanism therefore allows for output- input adjustment to take care of taxpayers in the chain of distribution that are not consumers of the goods they deal in.
Another unique feature of this tax type is that its cost of collection is low as an indirect tax. Business owners are made compulsory agents (non -commission – earning agents) to the Federal government in the collection and rendition of the returns .
How is VAT Computed and Paid ?
The VAT Act (VATA ) requires all taxable persons to register for VAT within six months of the commencement of the Act (in 1993 ) or within six months of the commencement of business, whichever is earlier, with the Board for the purpose of the collection of the tax. All taxable persons are required to register for VAT notwithstanding that they may be dealing in exempt items. In this connection, it should be pointed out that exemption status as contained in the VAT law are conferred on goods and services and not on persons or institutions.
The 5 % of the value of goods and service sold is called the input VAT while 5 % of the goods bought for resale is called the input VAT . The following principles must be observed in the computation :
The input VAT to be allowed as deduction from the output tax shall be limited to the tax on goods purchased or imported directly for resale and goods which form the stock – in – trade used for the production of any new product on which output tax is charged.
VAT incurred on administrative expenses or overheads does not qualify as allowable input VAT . Such VAT are expensed in the profit and loss account with the related expenditures
VAT paid on purchases of capital items or assets does not qualify as input VAT , rather they are capitalized (taken as part of the capital expenses of the business and capital allowances claimed)
There is no provision in the VAT Act for input tax claims on supplies of services.
VAT on inputs for the production of exempt goods are written off to profit and loss accounts.
VAT on input for the production of zero – rated products are reclaimed from FIRS through refund claims application.
Reimbursable expenses (where applicable) not forming part of the fees should be clearly and separately disclosed on the invoice and VAT would not be applicable to it.
VAT rendition and payment is monthly and this has to be done not later than the 21st day of the month following the month in which the transaction occurred. In any month there is no transaction, the law requires that a nil return is rendered.
VAT is invoiced-based. That is, the computation and payment of VAT is not done on cash receipt but rather on the total invoices raised with other cash receipts . If any portion of the invoices are not received ultimately , adjustments are done for bad debts.
Nigeria operates a VAT exclusive system . This system requires that the VAT element of transaction is openly stated on the face of the invoice. The tax authority frowns at anything to the contrary notwithstanding that VAT is being paid.
THE ADVANTAGE OF VALUE ADDED TAX IN TERMS OF REVENUE GENERATION
The year 1991 is a major landmark in the administration of Nigeria. In the year, Professor Edozien led a study group on the review of the Nigeria tax system first identified on the need to transform the outmodes sole tax that was then administered by the government. Within the year 1991, a parallel study group on the effect of indirect taxation led by Dr. Sylvester U. Ugoh was giving the responsibility to study the feasibility of the value added tax in Nigeria as an improvement on the existing sole tax.
After making series of empirical studies and research tours both within and outside the country, the Ugoh study group came up with a firm recommendation in November 1991 that VAT should be introduced in Nigeria after two years of preparatory work. As a follow up, by 1992, the Ijewere – led modified value added tax (MVAT) committee was set up to undertake the preliminary work for the introduction of the new tax. The committee was later to work in lose collaboration with the federal inland revenue service in 1993 for the later to take over the administration of the new tax which was scheduled to come in streams as VAT by 1st September 1993.
The successful execution of the fiscal policies depends not only on the quality of public administration but also on the election of policies that are realistically adapted to the available resources. The success or failure of any tax system depends largely on how it is properly managed. The extent to how the tax law is interpreted and implemented as well as the publicity brought into it will determine how a particular tax is able to meet its objectives. Hence one of the acid test in the determination of the success of a tax is the management of the policy. 
▶VAT stand out clearly as a better procedure for financing government expenditure than deviate financing which generally is known to be more inflationary
▶VAT has the advantage of economic neuritis and it has less tendencies of inducing structure distortion in the use of economic resources.
▶VAT is a tax on consumption expenditure. In developing economic, struggling to push up growth rate, the most important allocation that needs to be affected is that between saving and consumption. A VAT design to promote saving has a greater potential to promoting economic growth
BENEFIT OF THE MODIFIED VALUE ADDED TAX
i. VAT is a tax on spending meaning that the tax is borne by the final consumer of goods and services as it is included in the price paid.
ii. A business or organization which has registered for VAT is classified as a “registered person”. Such a person will pay 5% VAT on goods and services purchased by it but it can also claim credit for this tax (called the Tax  Input) when such  goods are sold. To claim a credit for input tax however, a registered person must hold a “Tax Invoice”.
iii. VAT base is broader and includes most professional services and banking transactions which are high and profit generating sector unlike the old sale tax which was narrow in its coverage.
iv. A considerable portion of tax realized on VAT is from imported goods. This means that under the new VAT locally manufactured goods will not be placed at a disadvantage.    
v. Since VAT is based  on the genial consumption behaviors of the people, the expected high yield form it will boost the fortune of the state governments with  minimum resistance from the payers of the tax 
THE ADMINISTRATION AND MANAGEMENT OF VAT IN NIGERIA 
The administration and management of vat in Nigeria vested in the federal board of Inland Revenue (FBIR), which implements its day –to-day function through the executive agent known as the federal Inland Revenue service (FIRS). The FIRS operates through six operational departments. The VAT directorate is part and parcel of the first headquarters, which is centrally located at the office in Abuja with the administrative tentacles in the five zonal offices in Lagos, Ibadan, Enugu, Kaduna and Jos for the respective regional zones. Each have the VAT zonal office exert and executive control over a group of local VAT office (LVO) under its jurisdiction. For instance LVO’s in Ibadan, Osogbo, Benin, Akure, Warri, Illorin, and Asaba and under the west zonal coordinator (ZC) located in Ibandan and the ZC report the activities of the LVO’s to the VAT director at Abuja.
Similarly, administrative arrangement is maintain in all other zone. In terms of physical location, the local vat officers are suspected form income area office in most of the operational office of the FIRS. But the same zonal coordinators are maintaining for both the income tax and VAT at this level. Although the filed local VAT office are independent in the discharge of the duties, they relies o the area tax controller (ATC) of their income tax area office to source the basic information to close-check the retune of the income tax payers. The role of the area tax officer is to candid the successful implementation of vat that requires some intentions. He is the filed officer who gives the initial publicity and enlightenment campaign to the vat payers. Therefore the officer must be acknowledged in the product he offers for sale. The registration of the vat agent, that is suppliers of Vatable goods and services as well expansion of the vat officers. He is to receive the monthly VAT return together with the remittance and track down non-and stop fillers. He is also to carry out regular vat visited to ensure compliance and Educate VAT payer on their responsibility. The execution of the office and filed audit as well as VAT investigation is his routine assignment.
F.I.R.S AND N.C.S
Although vat is administered centrally by the FRIS, there is a close co-operation between the FIRS and the Nigeria custom service. FIRS have appointed. FIRS have appointed the NCS to be collecting VAT in all Nigeria boarders and ports on their behalf. This co-operation is very unique and lends greater support to the success of the Vat scheme in the country. With FIRS concentrating on the collection of VAT on non-import and assigning the collection of VAT on import to the NCS, it was possible to enhance the technically skills and professional experience of the two collection against the success of the tax. It was a common occurrence to help regular constitution on the area of logistics and interpretation particularly at the inception of the tax. There was many theory question raised by the field officers which called for prompt action by the VAT management of FIRS and that of the NCS helped a lot to throw more light into the grey area while implementing the new tax.
Beside the NCS, there are a lot of collection agent of the tax on the behalf of
the FIRS, the manufactures, the wholesaler, big –time enterprise, partnership, the professional firms, the government minister, agencies and peristalses and other suppliers of goods and service all are recognized as agents of FIRS in the VAT scheme. They raise indices and add VAT charges in their bills to customers and help to make remittance of net VAT proceed to the local VAT nearest to them. Their various roles make the VAT scheme a huge success.

ADOPTION OF VALUE ADDED TAX IN NIGERIA
Most countries adopted vat after the second world war of 1945 – 1993 and the economic depression that followed. The first country to adopt value added tax in 1955 was France. The state Michigan in U.S.A also adopted it in 1955. in 19967, the counsel of ministers European economic community (EEC) adopted a directive o harmonize their indirect taxation among themselves on the basis of VAT, however, the VAT adopted were not comprehensive and the first country to impose VAT in the comprehensive form was Brazil in 1967 by abolishing the antilogous turn over tax. Denmark adopted a comprehensive system of taxation in late 1967 at the national level. France and Jermyn followed in 1968.
The VAT replace several types of taxation for instance the local tax on retailer (France) turnover, (Denmark), Belgium, Holland< Sweden and Norway erected VAT to replace their initial sole tax (RST) in 1969 and in 1970 respectively. In 1973, Italy, Ireland, united kingdom (U.K.), in the developing countries of Latin America, Asia and Africa were traceable to all pioneering steps taking by brazil in case of Latin America and the storing influence of industrial countries with which they have historic trace of link. Example France.

VAT AS A REPLACEMENT OF SALE TAX
Sale tax is an indirect tax levied on luxury goods and services governed by the federal government decree No.7 of 1986, which sought to unify and structure the operation throughout the country. Vat on the top the hand as a form of taxation is different from sale tax. This is, the more you consume, the more you pay. VAT dose not make it easy for a person not o pay. Vat at one stage or the other unlike the sale tax where a person not concern about the end product of a good may not necessarily pay the sale tax.
Value Added Tax, according O.T Odienyi is a tax on the supply of goods and services, which is eventually born by the final consumer but collected at every stage of the production and distribution chain. The effect is that VAT is paid by the final consumer while the registered person play a role in the process of collecting the tax for the federal inland revenue service (FIRS).
The VAT, which too effect rom 1993 was to replace the then existing under the federal government, regulated decree No.7 of the 1986. The need for the replacement of sale tax with VAT is;
1. The base of the then existing sale tax was narrow as it cover only nine categories of the luxury goods.
2. VAT is the broader covering the most professional goods, which will not be placed at the disadvantage, related to import.
3. The narrow gate of the tax negates the basic principles of the consumption tax, which should cot across all consumable goods and services. The nature of VAT is such that it is the consumption that has been embraced by many costumers world wild. Bemuses it a consumption tax, it is relatively easy to administer and difficult to evade. VAT carries a single rate of 5% on all valuable goods and services
IMPLEMENTATION OF THE VALUE ADDED TAX IN NIGERIA
Value added tax, the Ugoh Slid group after making series of empirical research and tour both within and outside the country came up with a firm recommendation in November 1993 that should be introduce in Nigeria. As a follow up, the Jewere led modified value added tax (VAT) committee was inaugurated to prepare the ground work and appropriate machinery for the smooth take off o the VAT by 1 September 1993. However for logistic reasons could not take off until 1 Jan. 1994. The committee is made up of the government officials, retired academician and representative from the private sector of the economy covering all side of the opinion.
In coping out this task, the committee drew and accepted the following principle, namely;
1. Nigeria with a peculiar economic characteristic undergoes a peculiar socio-economic experience and transaction will require a lot of resources to meet its responsibilities. Some of these characteristics are recorded transaction, poor record keeping. Low level of literacy, high propensity to evade or avoid tax. Pathetic attitude of the collection agents who may be corrupt. Vat is o replaces sale tax entirely and since it is a consumption tax, it will cover a wild range of goods and service more than the sale tax.
2. The system should be as simple and practicable as possible and its administration less complex.
3. Enough lead-time should be allowed to permit careful planning preparation and publicity and tax education. The committee members have the honor of leaving system of taxation that is result oriented, achievable and workable. 

LEGISLATION OF VALUE ADDED TAX
The legislation that gave the legal stand was assembled and submitted to the federal government on 30 September 1992, the trid running commenced 1 July 1993 and finally it became fully operative 1 January 1994. it was backed up by a commission fully independent and self-sustaining with the lead quarters in Abuja to be manage by a professional.
THE COMPOSITION OF THE VAT TECHNICAL COMMITTEE
i. A chairman who  shall be the chairman of the Federal Board of Inland Revenue Service
ii. The legal adviser of the Federal Inland Revenue Service 
iii. The legal adviser of the Federal Inland Revenue Service 
iv. Three representatives of the State who shall be members of the joint Tax Board

Functions of the VAT Technical Committee
i. Consider all the tax matters that require professional and technical expertise and make recommendations to the board 
ii. Advice the board on its duties 
iii. Attend to all such other matters that may from time to time be referred to it.
TAXABLE GOODS AND SERVICES UNDER DECREE 102 OF VALUE ADDED TAX DECREE 102 OF 1993
All goods manufactured or assembled in Nigeria
1. All goods imported into Nigeria 
2. All second hand goods
3. Household furniture and equipment 
4. Petrol and all petroleum products (including engine oil, greases and gas 
5. Jewels and jewelleries  
6. Textiles, clothings, carpets and rugs 
7. Beer, wine, liquor, spirits, soft drinks and bottled water including mineral water
8.  Cigarettes and tobacco 
9.  All vehicles and their spare parts excluding commercial vehicles and their spare parts.
10. All aircraft, aircraft bodies and their spare parts 
11. Perfumes and cosmetics (including toiletries)
12.  Soaps and detergents 
13.  Mining and minerals 
14.  Office furniture and equipment (including  toiletries)
15.  Electric materials of any description

(ii) Taxable Service 
1. All services rendered by financial institutions to their customers (excluding People’s Banks Community Banks and Mortgage Institutions)
2. Accountancy services, including any type of auditing book-keeping or related services 
3. The provision of report, advise, information or similar technical services in the followings areas: management, financial, taxation and related consultancy services, recruitment, staffing and training, market research, public relations and advertising
4. Legal services, including services supplied in connection therewith
5. Computer services, including the provision of bureau facilities, system analyzing design, software, site development and training
6. Services supplied by architects (including landscape architects )
7. Service supplied by land and building surveyors, quantity surveyors, insurance companies and assessors, fire and marine insurers, loss adjusters or similar services.
8.  Service supplied by consulting engineers 
9.  Services supplied by auctioneers, estate agents and valuers
10. Services supplied by agents, including insurance agents and nay person who acts for or represents someone   else in arranging or conducting a transaction or other activities.
11.  Services supplied by brokers
12.  Services supplied by secretarial agencies, including the supply of typing, photography telex, facsimile and type-setting facilities and related services
13.  Services supplied by security companies and enterprises 
14.  Courier services 
15.  Repair, alteration, processing or any other services provided in connection with designated goods by designated dealers
16.  Services supplied in the course of altering, processing assembling, packing, packaging, bottling or manufacturing goods owned by another person.
17. Telecommunication services, including rental of telecommunication equipment, installation and maintenance services
18.  Letting of video tapes or any other audio visual records or hiring, copying and rewriting of video tapes and similar services 
19. Restaurant services supplied by a restaurant owner or operator 
20.  Air travels and company car hires
21.  Entertainment services including plays and performances, cinemas, shows and music concerts, excluding plays and performances conducted by educational institutions as part of learning 
22.  Accommodation and all other services provided by a hotel owner or operator including bars, beverages, telecommunications, entertainment, laundry, dry  cleaning storage, safe deposits,  conference and business services.
GOODS AND SERVICES EXEMPTED FROM VAT UNDER DECREE 102 OF VAT 1993
GOODS EXEMPTED FROM VAT
i. Medical and pharmaceutical products
ii. Basic food items
iii. Books and educational materials 
iv. Newspaper and Magazine 
v. Baby products
vi. Commercial vehicles and their spare parts 
vii. Agricultural equipments and products,  fertilizers  and veterinary medicines 
SERVICES EXEMPTED FROM VAT
i. Medical services 
ii. Services by community banks, peoples bank and mortgage institutions 
iii. Plays and performances conducted by educational institutions as part of learning 
iv. Supply of educational goods and services  incidental to education by an educational institution 
OFFENCES AND PENALTIES UNDER PART V OF VAT DECREE 1993
1. Furnishing of false information 
Where a taxpayer produces, furnishes or sends or makes use of a false document or makes a statement which is false use of a false document or makes a statement which is false is liable to a fine of twice the amount under- declared
2.Resisting an Authorised Officer
Where  a taxpayer resists, hinders, obstructs or attempt to resists, hinders  an authorized officer or makes any  statement in response to a requirement made by an officer  which is false or incomplete or procures or attempts to procure by any means a document that is false, he will be liable to a fine of N10,000 or imprisonment for a term of 6  months  or both.
3. Failure to Register
Where a taxpayer refuses or neglects to register, he will be liable to a fine of N5000 and if after one month the registration has not been  made, the premises where the business is being carried on shall be sealed.
 4. Failure to submit return 
Where a taxpayers fails to file its return, there will be a penalty of N5,000  for every month in which the failure continues.
Issuing Tax  Invoices by an unauthorized person where an unauthorized person issues an invoice, he will be liable to a penalty of N10,000 or imprisonment of 6 months.
EFFORTS PUT IN PLACE TO IMPROVE ADMINISTRATION OF VAT
1. The creation of a separate directorate of VAT at the headquarters of the Federal Inland Revenue Service
2. The creation of more local VAT office spread all over the federation 
3. The appointment of Local VAT officers who are senior officers to man the Local VAT officer  
4. The direct payment of VAT liabilities to designated bank accounts
5. The registration of every branch of an establishment wherever they are located to make collection easier. 
RECOMMENDATIONS FOR IMPROVEMENTS 
1. The  refund system in Nigeria has to be significantly improved so as to obtain the confidence of the taxpayers. Currently, the impression is that VAT is all about collection and no transparency.
2. There is the need to have a look at the definition of VAT input. A situation where all VAT output is collectible but not all VAT input is deductible is not punitive, it is discouraging.  3. There is the need to look at the issue of payments of VAT in all locations where a company is established.  If you consider a company with say 100 depots and plants spread  all over the country, the necessity to register and pay  in each of their location is laborious. While returns may be filed in each of the locations, payment could be  made at the central point. The administrative cost to the taxpayer is very high.
4. VAT  registration numbers should be compulsorily quoted on letter- heads of taxpayers.
5. There should be a VAT clearance certificate issued  to taxpayer on annual basis. This should  be requested for at the same time that Tax clearance certificate is being issued. This will force taxpayers to perform their  civic duty to government.
For knowledge and Justice

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