Taxpayers Perception of Value Added Tax System in Nigeria

Taxpayers Perception of Value Added Tax System in Nigeria

Chapter One

OBJECTIVES OF THE STUDY  

This study is aimed at evaluating Tax Payers perception on Value added tax system in Nigeria. Thus, the specific objectives are:

1. To review, assess and evaluate the Administrative strategies adopted for the collection of VAT proceeds in Nigeria with a view to making recommendations or suggestions for improvement if there are lapses.
2. To assess and evaluate the performance of VAT in Nigeria as it relates to the staff welfare package and VAT payers’ incentives and other associated benefits.
3. To assess the potentialities and cost effectiveness of collection of VAT in Nigeria.

CHAPTER TWO

LITERATURE REVIEW

INTRODUCTION

In many work, it is important that any available related literature be reviewed. This will automatically broaden both the researcher view and views of persons (who will use this work) on the topic under consideration.

This chapter comprises principally the review of other write-ups on taxation and value added Tax (VAT). Its administration, merits goods and services exempted from VAT and also the sharing of VAT proceeds.

This chapter will therefore serve as basis for proper understanding of the subject matter of this project work and will also sample background information, which will serve as a frame work for determining whether the present work has added to the existing body of knowledge on the topic.

NATURE AND PURPOSE OF TAXATION

Tax is one of the ways nations have used to acquire or raise additional revenue. The history of tax in Nigeria dates back to the pre-colonial period where there were various systems of tax. For example, the revenue of Hausa States were obtained from forms of taxes like Kharaji-a land tax based on yearly production; Jangali-a tax on livestock, etc. 

In most economies today – taxes are the most important sources of government revenue. Tax can be defined as a compulsory levy imposed by government on the income, profit and consumptions of individuals and organizations within a country primarily for raising revenue to execute its expenditure programs. John, C.A. (Ph.D) – 1997.

Taxes as sources of revenue are usually collected; and the benefits received are independent of the individual taxpayersn liabilities. Government imposes taxes for several reasons, some of which are:

1. Raise Revenue to cover public expenditure:

Government imposes taxes in order to raise revenue to execute its various expenditure programs. Government spends a lot of money on education, defense, health etc. and a substantial part of the money comes from tax.

1. Economic Management:

Tax is an important instrument for economic management, when the economy is facing instability, taxes could be used to

stabilize it.

• Redistribution of income:

Government could use tax to reduce or bridge the gap existing in the distribution of income.

1. Protection of infant industries:

Industries at their early stage of development can be protected from harsh competition between them and foreign – based industries by the use of taxes.

1. Checking the consumption and production of goods: Government could discourage the consumption of particular goods that may have health implications etc. by imposing high taxes on such goods. But for a particular tax to be effective and efficient, it should posses most of the criteria necessary for a good tax system. Osita, A. (2004).

Two hundred years ago (1807), Adam Smith in his book “The Wealth of Nations” set out certain principles of taxation termed “canons of taxation.” These have been the subject of some elaboration, but are still recognizable in the criteria used by the economists judging a tax system. Conflict between these criteria is inevitable. They are as follows:

1. Equity is traditionally divided into two sorts: horizontal equity, which means that those in equal circumstances should pay an equal amount of tax, and vertical equity which means that those in unequal circumstances should pay different amount of tax. The reason why equity is regarded as important is partly an inherent view that it is right and proper in the same way that equality before the law is right and proper, and partly the view that, if a system is believed to be fair and equal, taxpayers will be more willing to cooperate with it. However, the statement that equity is important does nothing to help us to determine what circumstances are equal and what unequal. Equity may be satisfied by a proportional system just as much as by a progressive system of taxation and benefits.
2. Neutrality: A tax is neutral if it avoids distortions of the market. The Nigerian tax system has many rules, which break the principle of neutrality. Worse there are many technical rules which make significant tax differences according to which of two or more methods are adopted to achieve a given result. The effect is harmful since it encourages the expenditure of money on expert advice, expenditure which is economic terms unproductive, and on schemes which may make a trade less efficient.  

1. Certainly:This means first that the scope of tax should be clear. Penumbral areas cause resentment amongst taxpayers cast into the darkness and undermine the principle of equity, besides increasing the cost of the system. It means next the certainly that the tax can and will be enforced. A tax that is easily evaded causes resentment and often a decline in taxpayer morality. It means also that the government will be able to correctly predict how much tax is gathered in and so perhaps the effects of the tax.
2. Administrative Efficiency: Only those who regard the duty of the tax system as being to confiscate wealth in order to provide employment would be happy with a tax whose administration costs exceeded the tax yield. There is the further problem of compliance cost. A good tax structure must take into account many factors: the effects on economic incentives; its fairness as between persons of similar taxable capacity; its effects upon distribution between rich and poor, whether it is compatible with desirable international economic relations and its simplicity, ease of understanding and absence of excessive administration cost. Abdulrazaq, M.T. FCTI (2005).

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CHAPTER THREE

RESEARCH METHODOLOGY

DESCRIPTION OF RESEARCH METHODOLOGY  

All factual knowledge that is ascertained by research may be grouped in terms of areas of time: the past; the present; or the future. The area of time in which a problem under investigation is situated determines the basic research method to be employed. Drawing from the above therefore, the survey research method would be used for this study. This is because the phenomena under investigation is of the present, and survey research ultimately deals with the present, and is oriented towards the determination of the status of a given phenomena. Osuala (2001) says, “Survey research studies both large and small group of population by selecting and studying samples chosen from the population to discover the relative incidence, distribution, and interrelations of sociological and psychological variables.

RESEARCH DESIGN

This is the blue print of the research that enables the investigator to come up with probable solutions to research questions. The research design is to be viewed, according to Kerlinger (1953), as a programme that leads the investigator through the process of collecting and analyzing and interpreting data; it is a logical model of proof that allows the investigator to draw inferences regarding casual relationships among the variables being investigated; it permits us to either accept, or reject, or qualify the hypothesis being tested. The hypothesis is very central to any research endeavour and thus to the research design. After the hypotheses have been formulated, they must be empirically demonstrated to be correct or incorrect. The basic method to this demonstration is to design the research so that logic would require the acceptance or rejection of the hypotheses on the basic of the resulting data.

POPULATION OF THE STUDY/SAMPLE SIZE

The population of this study covers all the seven zonal offices of the Federal Inland Revenue Service spread across the country. These are North Central Zone, North East Zone, North West Zone, Western Zone, Eastern Zone, Lagos Zone and the South South Zone. In view of the fact that all the records of VAT proceeds are consolidated at the Headquarters of the Federal Inland Revenue Service in Abuja, the study captured the entire proceeds from VAT for the relevant under review (1994-2003).

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

 INTRODUCTION

The success or failure of any given policy is usually judged by its results and quite often these results amount to the achievement of declared policy objectives. In evaluating the performance of VAT in Nigeria, we examined the entire machinery put in place for the implementation of the VAT policy in Nigeria; and the extent to which these structures and processes impacted on the effectiveness or otherwise of the administration of the tax.

The theoretical framework for analysis as indicated earlier in chapter two of this study is rooted in the classical perspective of taxation, which is based on the principles of efficiency, administrative convenience and equity. In an attempt to evaluate the performance of the tax, we analysed the process of administration of VAT in the country; attempt was also made to juxtapose the actual revenue obtained with the potential revenue, where a gap existed the factors responsible were considered. Questions bordering on equity of the tax system were also examined.

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

SUMMARY

While Government particularly those in poor countries may want to make life easier for their citizens by providing more and better health services, educational and communication facilities. It typically fails to meaningfully expand its services because demand grows faster than available resources. The government will usually develop plans for moving away from the state of poverty to a desired state of health; such plans which may seem beautiful and well thought out on paper are often very disappointing in their implementation. The money to spend and invest is simply not enough, this is made worst when it can easily estimate how much money will be available, though it can rightly be assumed that there would be less than original projected or expected. The ground is constantly shifting under the budget officers’ feet and hence priorities in spending must be changed to adapt to the new revenue conditions with its additional problems.

The need to raise revenue from the country will always prompt government to examine the issue of taxation, the ability of government to raise revenue internally is determined by the relatively limited number of channels through which economic develops, government revenue would rise because there would be more opportunities to effectively levy taxes. Less developed economies have fewer taxable bases. It is against this general background that this study was conducted.

The introductory chapter deals with issues relating to the problems warranting the study; the need for government to shift from oil revenue to non oil sectors for revenues and to generate revenues internally to meet the challenges of ever increasing public demands for social services.  This led the Nigeria government to accept the recommendation of the Sylvester Ugoh committee to introduce VAT to the regime. VAT replaced the sales tax, which had been in existence and plagued with multiple problems. VAT was introduced formally to the Nigerian public in 1994 and there was hope on revenue that would accrue to government from this tax. VAT started quite well in spite of the initial resistance by the Nigerian public; however, not very long thereafter reports started filtering out that fraud had been uncovered here and there in several tax offices, state governments were reported to have misapplied VAT allocation. It is these negative reports that influenced the decision to embark on this research, to examine what could be responsible for the problems in the administration of tax. This study sought to determine the actual amounts of VAT collected over the years compared to estimated amounts to determine the factors responsible for the disparity and most of all to examine the machinery responsible for the administration of VAT in Nigeria with a view to identifying problems and suggesting remedies.

The concept of VAT and the machinery put in place for its administration in Nigeria were examined. Also examined were the laws establishing the tax and the administrative structure for its implementation. From the set evident that tax administration, as a component in the field of public finance has not been given adequate attention, scholars were preoccupied with how much revenue was generated through the taxing process.

Hypotheses were made which formed the basis of this study. Operational definitions to key concept related to the field were provided. As a new tax problem created by inadequate knowledge of how VAT works and inadequate preparation on the part ofgovernment tended to make the tax unpopular initially and this also made obtaining information on tax very In chapter two relevant literature was reviewed to acquaint readers with the  ields; the theoretical framework for analysis. Due to the uniqueness in Nigeria, government publications on the tax were relied on. So also were commentaries, magazines, and articles presented at seminars and workshops.difficult. The period covered by this study is from inception in 1994 to 2003.

The importance of administration to the success of any tax policy was emphasized by various scholars such as Akanle, for him, “while a good law is important to a good tax system, the place of administration can not be underestimated, as it is the indispensable element to the attainment of the overall good of the tax system” (Akale 1991). The theoretical basis for analysis is founded in the general theory of taxation which is in the works of classical economic theories such as Adam Smith’s principles of efficiency, administration convenience and equity, which theorist and this project use for analysis.

Chapter three of this study was concerned with the methods used for gathering of information for the research. The time in which a problem under investigation is suited determines the basic research method to be used. Survey research studies large and small groups by selecting and studying proportion or samples chosen from the proportion to discover the relative incidence, distribution and other underlying variables. The concept of sampling was fundamental to the conduct of this study and the interpretation of results there from. Survey research wants to understand the characteristics that make up the whole population, but due to limitation of time, resources, and so forth, a sample of that population could be made. Stratified random sampling technique was used in selecting the sample population. The sample population used for the study fell within two strata; the VATable persons and tax officials, and from these major groups another sample was selected. Questionnaire administration was carried out on the two groups of respondents to obtain factual and opinionated data. The persons interviewed and questionnaires were the major information gathering techniques used to obtain relevant data that would validate or invalidate secondary data. A total of 200 questionnaires were produced for two groups – 100 of the questionnaires were administered to VATable persons and 100 tax official. Each questionnaire contained 16 questions designed to answer questions raised by the hypothesis. The questions were emanating from the FIRS, unfortunately, those too are difficult to obtain.

Chapter four contains the test of hypothesis – the three major assumptions stated in chapter one, which informed these researches were tested. The data obtained from the questionnaires were used for testing. Each hypothesis had relevant questions amongst the 16, which were designed to solicit answers posed by the assumptions. Because two sets of questionnaires were designed for two sets of respondents, for each hypothesis, the test was first conducted with data from the VATable persons after which they were subjected to further test with data from the tax officials.

The data obtained from the respondents were computed and drawn in frequency tables to determine the mean and percentages, which were used to test the hypothesis for each that was tested, evidence from study suggested that we accept all the hypothetical taken.

 FINDINGS/CONCLUSION

The effectiveness or otherwise of any tax policy is a reflection of the fiscal system of the domestic economy which in turn reflects the level of development of the socio – political environment of that society. Therefore, the examination of the effectiveness of VAT administration such as this has to be understood within the social, political, and economic culture of our society. Taking such a view has brought out the various problems that have bedeviled the administration of VAT in Nigeria.

1. The lesson to be drawn from this study is that we should not judge a phenomenon on its face value but that we should always try to understand its underlying properties. The phenomena may not be what it appeared to be after a closer examination. The question had been asked in chapter one of this study if the positive reviews given the VAT system in Nigeria by some newspapers means that the tax is performing optimally. Inspite of the high amounts collected from the tax indicated in chapter four, a lot still needs to be done particularly with regard to the process of its administration, which in the long run increases the amounts collected.
2. In the course of this study, we discovered that, VAT proceeds have been on increase as indicated by facts and figures available at the Headquarters of the FIRS. This is so because VAT collection has been exceeding its yearly target since inception so far.

• Another finding is that the contribution of VAT to non-oil revenue has been positive. This is so because VAT is contributing not less than 20% out of the items that make up the total non-oil revenue. Besides, only VAT has progressive records from its inception till date.

1. Another finding is that the contribution of VAT would have been higher if all the categories of VATable goods and services should have been covered. For example, the percentage of the VAT paying organisations that actually complied during the period covered by this research is too small (just about 20%).
2. Another conclusion drawn is the illiteracy which prevails amongst the operations in the informal sector, makes books keeping practice almost no existent; and on this VAT depends on its operations. One way out of this is to concentrate the VAT efforts on the more formal sectors of the economy.  vi. We can conclude from the study that there exists a tax lag. There is the official tax lag permitted the VATable persons, that is, the difference in time when VAT liability is incurred and the maximum time allowed for making remittance of the net VAT due to the tax authority 30 days. However, this allowance that is made as a form of incentive to taxpayers is being exploited. Commercial banks that were commissioned to collect VAT from organizations and to remit to CBN do not remit same as required and at when due.

RECOMMENDATIONS

Often when considering tax reforms there is always a tendency to focus attention on the need for a new and more progressive tax structure, ignoring the administrative inadequacies of the existing system. Any policy that makes implementation for granted is bound to have some problems, because it is implementation that separates policy from outcomes; no policy can be better than implementation, poor implementation leads to poor policy outcomes. Most observers agree as indicated by findings of this survey that, without any substantial change in policy, tax revenues could still be increased significantly simply by strengthening implementation. The goal of reforming tax administration is strengthening the ability to mobilize resources, however, the problems facing the tax authority are enormous-resources such as budgets, information technologies, expertise personnel facilities – are so limited and the instruments of administration are so weak, unless positive steps are taken to bridge the gap, procedures would not have noticeable impact on the total revenue that is collected. Therefore for any reform to be meaningful to the implementation of VAT, it must be brought to bare on all aspects of the taxing process; tax administration is made up of a number of processes which is integrated to work simultaneously, each process impacting on the other to make the system operate effectively, as concentrating on some aspects of the administration without considering the effects on the other aspects would result in a lopsided tax administration which would fail to meet the objectives set for it. The following recommendations are made to improve VAT administration.

1. One practical suggestion to be made here from the findings  of this research is that the instruments of administration should be strengthened, so that taxpayers would comply voluntarily and thereby, little or not action is necessary to make them pay. This process works on the basis of two principles: Certainty and deterrence. The desired objective here is not to influence each taxpayer directly to comply, but to trigger in each to the conclusion that compliance is preferable behaviour to evasion. It is for this reason that it is recommended that a VAT Tribunal established and constituted for speedy adjudication of VAT cases. The mere fact of the existence of such as tribunal would make complying taxpayers to remain so and those delinquents to comply.
2. Information or lack of it would make or may take tax administration, records, invoices, ledgers and so forth as the back borne of administering VAT, and therefore, solid data base would enhance the administration. Therefore we recommend FIRS computerized the entire operations of the VAT directorate. This will smoothing fiscal coordination and also enhance staff efficiency in computing tax liabilities or cross referencing of information from one taxpayer’s returns to the others. It will improve data base information matching, VAT auditing and the general provision of taxpayers services. It will generally enhance access to information.

• Because of the difficulties encountered with informal businesses and the prevalent illiteracy level of big businesses, men who as a result are ignorant of the requirements of the tax, public enlightment units should be constituted and adequately funded so that it can educate the illiterates, ignorance and generally those who do not see the need for the tax. Information circulars and pamphlets can be published/printed in local languages, staff of this units must have basic understanding of the local language.

1. The need to recruit more personnel with requisite qualifications and skills; provide continuous training for existing staff to meet the challenges encountered in the performance of their duties should be taken seriously.
2. Due to the complexity and anticipated spread of the tax, much funding is required especially if all LGAs were to be fully covered by operational LVOs. The issue of funding is particularly significant because data from this study have indicated that office infrastructure are inadequate; basic furniture such as chairs and tables have to be shared amongst three to four staff in VAT offices. There are poor communication facilities; there are shortages of office stationary, lack of serviceable vehicles.

These problems must be addressed seriously. The administrative process must be made effective if the desired level of revenue generation is to be achieved.

1. Data from the study also indicate that government does not make judicious use of VAT revenue for developmental projects, government is seen as interpreting VAT revenue as a windfall that should be recklessly shared and spent. This study is therefore recommending that a system of accounting should be introduced whereby three tiers of government can periodically account to the Nigeria people specific developmental projects they have utilized VAT proceeds for. This is in line with the operations of the PTF where the effects were visible and are still being felt by the citizens of Nigeria-in areas of road network, drugs to our hospitals, renovation and refurbishing our schools at primary, secondary, and university levels and the provision of other amenities.

Finally, and on the general note, unless and until the cost of VAT administration/collection is at its best (cost effective), what is collectible is collected and the VAT revenue is judiciously utilized by the stakeholders through provision of infrastructural amenities for enhancement of socio-economic development for the benefits of its payers and the citizenry, the target making or how much has been collected should not be yardstick for measuring performance. In other words, the astronomical yearly increase of VAT proceeds collected should not be taken as a performance unless other factors are taken into consideration and proven to be so.

 References

•  Abdulrazaz, M.T. FCTI (2005): The Rules, Concepts and the Laws of Taxation as they affect the working of the Nigeria tax system;   
• Structure of the Nigerian Tax System and its legal framework: Being paper presented on the occasion of Induction ceremony of the special candidates of the Chartered Institute of Taxation of Nigeria, Lagos Nigeria.
•  Abiola, S. (2000). Division of Taxing Powers Under the 1999 Constitution.
•  Ajakaiye, O.O. [2000]. Macro Economic Effects of VAT in Nigeria.
• African Economic  Research Consortium, Nairobi Kenya.
•  Alukos, [1995]. Classical Value Added Tax as operated in selected Countries.
•  Bhatia, H.L. [1993]. Public Finance. 17^th ed. VIKAS Publishing house PVT ltd.  New Delhi, India.
•   Central Bank of Nigeria [2003]. Bullion. Quarterly Statistics Bulletin.
•  David, B. E. (2005). Principles and Practice of Business Management in Nigeria. Being a paper presented at a seminar organized by the Chartered Institute of Taxation of Nigeria, Lagos- Nigeria.

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