CHAPTER ONE

INTRODUCTION
1.1 BACKGROUND OF THE STUDY

Taxation is the central part of modern economic development. Their importance is not only due to

the fact that it is by far the most important of all incomes, but also to the severity of the problems

caused by the current high tax burden (Greene, 2011). The main objective of taxation is to generate

revenue. In a welfare state, a large amount of tax is required to meet its obligations. According to

Musgrave (2008), taxation is used as a means to achieve certain social goals, i.e as a means of

redistributing wealth and reducing inequalities. Taxation in a modern government is therefore not

only necessary to generate the revenues needed to cope with the ever-increasing expenditure on

administration and social services, but also to reduce income and wealth disparities. Taxation is also

needed to withdraw money that would otherwise go into consumption and increase inflation.

In most countries around the world, the goal is to achieve rapid overall development through optimal

tax collection and a broader income base. In order to achieve this goal, many countries of the world,

especially developing countries, have selectively introduced new forms of taxation to boost their

income opportunities in order to improve socio-economic conditions, their citizens and a rapid

economic development of the countries (Iorun, 2012). One of these forms of taxation is value added

tax (VAT), this impressive VAT performance in almost every country in which it was introduced.

According to Ajakaiye (2000), he clearly influenced the decision to introduce VAT in Nigeria on 1

September 1993, although the actual transaction did not begin until 1 January 1994. VAT is a

relatively simple excise tax to manage and difficult to avoid. Adopted by many countries of the

world (FIRS circular, 1999). To date, the evidence supports the view that VAT revenue is already a

significant source of revenue in Nigeria and that VAT revenue is a fairly accurate measure of

economic growth, a purchase that increases performance with the economy.

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VAT is charged on the consumption of goods and services. This includes goods and services

imported into the country. It is calculated throughout Nigeria at a fixed rate of five (5%). The 5%

Exit Tax is calculated for all goods and a service offered by a registered person and the tax burden is

compensated by the end user (Ajakaiye, 2000). The broadening of the VAT base is leading to a sharp

increase in federal revenue, indicating that the consumption patterns of the majority of Nigerians are

increasing. The increase in consumption habits creates a market and has a positive effect on the

economic activities of the country (Unegbu and Irefin, 2011).

The Nigerian economy has been plagued with several challenges over the years such as the

dwindling crude oil price, corruption and over dependence on crude oil revenue. In spite of many,

and frequently changing, monetary, fiscal and other macro-economic policies, Nigeria is yet to

harness her economic potentials for rapid economic development (Ogbole, Amadi & Essi, 2011).

The objective of this paper is therefore to examine the effects of value added tax on business

performance in Nigeria (case study of FIRS) and how it can be improved upon so as to meet the

requirements of equity, effectiveness and efficiency on value added tax administration.

Federal Board of Inland Revenue (FBIR) is a stationary creation of the company incomes tax act of

1961 as consolidated in 1979 and amended by decree NO 3 of 1993. The law has been codified by

the national assembly as the company income Tax Act 2001. Section 1 of the act established the

federal board of Inland Revenue as well as it is operational arm, known as the federal Inland

Revenue services (FIRS). The federal board of Inland Revenue is composed of an executive

chairman (appointed by the president of Nigeria). As directors and heads of department of the FIRS,

these are six other member appointed from act side the services, and representing various interest.

Their external member come from corporate affairs commission (CAC), Revenue Mobilization

Allocation and Fiscal Commission (RMAFC), Nigeria custom of finance, which is the legal of

service and the board secretary (ex-office) complete the board membership list.

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1.2 Statement of the Problem

VAT was introduced in Nigeria following a study group set up by the federal government in 1991 to

review the nation’s tax system. It was this group that proposed VAT and in that same manner, a

committee was set up to conduct feasibility study on the implementation of the VAT (Thacker,

2009). The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given

the opportunity. 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 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 and most of the corporate organizations will fall if not

properly checked. This study therefore attempts to address the issues of impact of Value Added Tax

(VAT) on business performance Nigeria (a case of Federal Inland Revenue Service).

1.3 Objectives of the Study

The primary objective of the study is to determine the effect of Value Added Tax on performance of

business in Nigeria (Case study of Federal Inland Revenue Service). However, it can be the

following specific

Objectives;

i. To examine the impact of tax system in Nigeria economy

ii. To examine the relationship between values added tax and the performance in Nigeria

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1.4 Research Questions

For the purpose of this study, the following research questions have been developed to be answered

in the course of this research

i. To what extend had VAT impacted on the business performance in Nigeria?

ii. What are the relationship between value added tax and the performance in Nigeria?

iii. To what extend does tax system impacted in Nigeria economy?

1.5 Research Hypotheses

Hypothesis one

H1: There is significant relationship between the effects of Value Added Tax on performance of

business in Nigeria (Case study of Federal Inland Revenue Service)

H0: There is no significant relationship between the effects of Value Added Tax on performance of

business in Nigeria (Case study of Federal Inland Revenue Service)

Hypothesis Two

H1: There is significant relationship between the impacts of tax system and Nigeria economy

H0: There is no significant relationship between impacts of tax system and Nigeria economy

1.6 Scope and Limitation of the Study

For the purpose of this study, the scope will be limited to the activities of the Federal Inland Revenue

Service (FIRS). Some of the study will be made to pre-vat years with respect to sales tax and other

non-oil taxes. Emphasis will also be laid on VAT as they affect business performance in Nigeria.

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1.7 Significant of the study

The importance of the study is obvious when one is considered the fact that government is the aim of

tax collection and its serves as the main source of government revenue. The introduction of Vat in

1993 has further diversified the sources of government income from mainly petroleum profit tax and

sales of petroleum product. Value Added Tax generated huge revenue for the government for the fact

it replaces sales tax, it is wider than the sales. Naturally, government raises revenue finance adequate

standard of living. The public at large as appreciate the beauty of taxation in our society especially in

our business environment a result of this, provisions of adequate infrastructure such as construction

and maintenance of bridges, road and other amenities that make like meaningful for us. The

provision of educational facilities and influence economic activities in the economy. As a result,

Nigeria citizens should be made to realize that payment of Value Added Tax and other taxes are the

civil obligation of tax and other tax evasion in the society in which they live and they belong.

Therefore the introduction of the VAT has a better effect on the business environment because it

increases the revenue of the government.

1.8 Operational Definition of Terms

i. Value Added Tax: is a tax impose or charge on goods produce domestically and imported goods. It

is a tax on consumption on goods and services.

ii. Value person: is one who trade in viable goods and services for a consideration. Every vatable

person has an obligation to VAT payment.

iii. Registered person: this is any person that registered under section 8 of Vat decree vatable

Activity: this includes any activity that these in the exempt list but which are listed in schedule 2 of

VAT decree.

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iv. Vat rate: Vat caries a single flat rate of 55 on all vatable goods and services the tax is at a flat rate

of 5%. Exports are zero rated which some goods and services are exempted from the tax.

v. Input Tax: this is the 5% VAT paid on goods and services purchased by the registered person.

vi. Registered Certificate: It is issued to the registered person, which acknowledges the formal

registration of the vatable person.

vii. Viable Goods and Services: this means the goods and services that will attract VAT at 5% of

their consumption.

viii. Output Tax: 5% VAT which is included in the price of goods and services supplied by registered

persons.

1.9 Historical Background of Federal Inland Revenue Services Statutory

The task of the board is to access, an account for all taxes under its jurisdiction in Nigeria. The

administration of VAT was added to its function in 1994, and Education Tax Fund, which was

introduced in 1993. As the operational aim of the board, the federal Inland Revenue services (FIRS)

out the statutory functions specified in the various tax laws under the administration of the board.

Therefore the FIRS carries out on behalf of the boards the assessment collection and accounting of

the following eight taxes. The president subsequently set up a committee to draft a national tax

policy for the country. The committee is headed by the minister of finance and is working to meet

the deadline to produce the document. To give effect to the issue of amendment to obsolete tax laws,

they also set up a white paper bill drafting committee, headed by the attorney General of the

federation after the FIRS presented a harmonized report of the various recommendations to

government. This white paper committee as a separate bill that seeks to establish funding and

administrative autonomy for the FIRS. Government adopted seven of the eight amendments as well

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as the FIRS autonomy bill as proposed by the committee. The bills were in April 2005 presented to

the National Assembly for Legislation.

Administration

Internally, FIRS embarked on administration reform in May 2004 among other things management

embark on programmes and initiative designed to.

- Clarify FIRS mission, value, goals and structure

- Stop leakages and systematic corruption etc.

- Obtained requisite finding and operation autonomy to drive capacity to execute and increase speed

of decision making

- Purpose tax offenders.

Before the reforms, FIRS operated three level of administration structure made by of headquarter.

(Chairman and other management staff) zonal coordinating offices (8) and area tax offices (36). The

area tax office (108 Office) and specialized branches (5, offices). In December 2004, FIRS

established a new organization structure, made up of seven directorate seven regional co-ordination

offices, five large tax payer office, (LTOS) and 87 integrated Tax payer offices, (ITOS). The three

level of administration structure were modified, with the headquarters directorates and division at top

management regional controller and the integrated tax offices. Among the seven new directorates are

five operational land two support departments. The operational department includes Large Tax

Department (LTD), regional co-ordination (RCD), Audit modernization as well as Tax policy

research and development departments. Nine new division and units were made direct reports to the

executive chairman. These include legal unit, investigation and intelligence, corporate

communication vales and doctrine, process operations procurement and due process and quality

assurance others are information technology and internal audit. To assist the FIRS to execute its

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reforms, the government also approved National Assembly ratified the constitutional provision for

cost of collection in tax administration. Through this, the services now obtain a percentage of its

normal tax. Collection of fund it operations. This was a major departure from the past when it was

funded through budgetary provision, and has consequently greatly improved the finding position of

new mission statement, and it committed to a new set of value and doctrine to drive its operations

under the expected autonomy environment. It also created a new value and doctrines to ensure that

staff is adequately rewarded for exceptional productivity and to also promptly punish corruption or

other forms of indiscipline that lead sot a lowers of tax yield and the disruption of operations.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 PREAMBLE

In this section we shall look at the conceptual frame, theoretical and review of empirical studies

work of Value Added Tax before looking at other related literature to VAT as a system of taxation.

2.1 CONCEPTUAL FRAME WORK

2.1.1. Concepts of Value added Tax

Ochiogu (2001) defined value added tax as an indirect form of taxation based on the general

consumption behavior of the people. It is a tax on spending expected to be borne by the final

consumer of goods and services. It covers manufactured goods, imports as well as professional and

banking services. Value-Added-Tax is a consumption tax that has been levied on many countries

world-wide, and because it is a consumption tax, it is relatively easy to administer and difficult to

evade. The yield from tax is fairly accurate measure of the performance of a given country. Value-

Added-Tax according to Ajakaiye (2000) has a number of characteristics that theoretically make it

quite straightforward and as painless as possible. First, it is a single rate tax (5%), which makes it

easier to administer. Second, it uses an input-output method, which makes itself policing, that is,

although it is a multiple stage tax. It expected to have a single effect on consumer prices and should

not add more than the specified rate to the consumer price no matter the number of stages at which

the tax is paid. Third, all goods and services are vatable, with limited and very specific exceptions.

All imports are vatable, whether imported raw materials or finished goods, and VAT on import is

calculated on the total value of the total cost, insurance and freight. Exports on the other hand are

zero-rated, meaning that exporters do not collect VAT on exports but they can claim credit for VAT

paid on their inputs. Ajakaiye (2000) noted that VAT in Nigeria has a very wide base with relatively

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few exceptions. It replaced the sales tax introduced in 1986, which had a narrow base and

discriminated against locally produced goods and services a sit excluded imports. Sales tax revenue

accrues exclusively to the state government, while VAT revenue is shared by all the levels of

government and it assumed to increase government final consumption expenditure. Despite the

achievements recorded so far in the country’s performance by VAT, there has been large degree of

apathy, misconception and apprehension about the tax system among professionals, government

functionaries and the tax paying public.

2.1.2 Value Added Tax (VAT) as a Replacement of Sales Tax

VAT is a replacement of the sales tax, which was earlier promulgated into existence through decree

No.7 of 1986. The rationale behind replacing sales Tax with VAT was informed by a number of

factors and considerations (Ogunbesan, 2015 and Soyode & Kajola, 2006). Notable among these are:

The base of the sales tax in Nigeria as operated under Decree No. 7 of 1986 was narrow. It covered

only nine (9) categories of goods plus sales and services in registered hotels, motels and similar

establishments. The narrow base of the tax negates the fundamental principle of consumption tax

which by nature is expected to cut across all consumable goods and services expected. VAT base is

broader and includes most professional services and banking transactions which are high profit-

generating sectors. Besides, the sales tax decree of 1986 targeted only locally manufactured goods,

although this might not have been the intention of the law. In the case of VAT it is neutral in this

regard. Under VAT, a considerable part of the tax to be realized is from imported goods. This means

that under this new indirect tax, locally manufactured goods will not be placed at a disadvantage

relative to imports. Another reason was that VAT is a consumption tax and is based on the, general

consumption behaviour of people; the expected high yield from it is boosting the revenue collected

by governments with minimum resistance from the payers of the tax

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2.1.3 Relative Merits of Value added Tax

Aruwa (2008), the beauty of Value Added Tax which lies in its relative merits when compared with

other types of taxes include:

Neutrality

This implies a situation where a tax has no influence on the behaviour of both the customer and

producers. If looked from another angle, this tax will have a negative effect on production process or

on the welfare of customers since producers and consumers are expected to continue with their

normal behaviour as if the tax were not imposed. A tax which has a neutral effect will obviously

have non-distractive effects if it is a single rate Value Added Tax with few exemptions. The Value

Added Tax has this potential more than any other type of tax to minimize tax induced distortions.

Large revenue earner

The Value Added Tax is reliable and large potential source of revenue for government. Value Added

Tax contributes a high percentage of revenue in the country’s economic development Odusola

(2006).

Efficiency

The Value Added Tax is relatively efficient. It has often replaced inefficient, distorted or badly

administered sales tax.

Broad base

Value added tax replaced the sales tax which has a narrow base. Value added tax is by nature a

multi-stage broad based consumption tax. The narrowness of a tax base is a complete negation of the

basic principle of consumptions tax that ought to cut across all consumable goods and services.

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Value added tax has the inherent potentiality of having the broadest base in tax history; hence it is a

high revenue yield source.

2.1.4 Types of value added tax (VAT)

Soyode and Kajola (2006), there are three types of Value Added Tax. These are;

The consumption Value Added

Tax Under the consumption VAT, capital purchases are treated the same way as input. It has some

advantages, one of which is that it is easier to compute, as the firm does not have to separate

expenditure on other items of purchases in determining the VAT base. The main disadvantage of this

type of VAT is that it creates refined problems where very heavy and expensive machinery are

involved.

The income Value Added Tax

With this type of VAT, the tax paid on purchases of capital inputs is amortized (that is credited

against the firm’s VAT liability) over the expected lives of such capital inputs.

The gross product Value Added Tax

This is the Nigeria type of VAT. Under this type of VAT, no deduction of tax on input of capital

purchases is allowed against the firm’s output tax. The taxable firm is treated as a final consumer of

all of its capital input. The tax period on capital input is treated as part of cost of that capital input.

Under this arrangement, the Federal Inland Revenue Service (FIRS) is saved the problem of having

to make cash refunds.

2.1.5 Objectives of Value Added Tax in Nigeria

According to Aruwa (2008), the introduction of Value added tax in Nigeria was necessary because

government expenditure was steadily overshooting revenue resulting in .wide deficit financing;

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besides, the authorities of Economic Community of West African States (ECOWAS) were pursuing

a tax harmonization programme in the process of introducing trade within the sub-region.

Additionally, record shows that within 1960-1970, income from indirect taxes in Nigeria dropped

suddenly. The decline was characterized by the oil boom of the 1970’s, it’s contributions relatively

declined and more so in 1980s and 1990s due to dependency on oil. Specifically, Value added tax

has the following objectives that informed its introduction in Nigeria to boost its economic

development in line with Alan (1998).

1. To distribute the burden of taxation more evenly across different goods and services, through a

broader coverage to avoid multiple taxation.

2. To consolidate and modernize the tax system in order to provide the base for strong revenue

growth and flexible management in 1994 and beyond.

3. To shift taxation towards consumption rather than that of income.

4. To reduce dependency on petroleum oil revenue.

5. To provide incentives for export production.

6. To provide members for export and enhance balance of payment position.

7. To encourage the issuing of receipts for sales and demanding of receipts for purchases since it is

based on self-assessment system.

8. To enhance voluntary compliance as it is based on self-assessment system.

9. To enhance record-keeping by small businessmen.

10. To address the regressive issue in taxation, the more you buy, the more you pay as the richer

tends to buy more and pay more.

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2.1.6 List of Vatable Goods and Services

The Federal Inland Revenue Service (FIRS) through its circular no 9304 provided a list of goods and

services that attracts value added tax as shown in tables 2.1 and 2.2 below

Table: 2.1. Vatable Good

S/N Vatable Goods at 5% Tax Rate

1. All goods manufactured or assembled in Nigeria
2. All goods imported into Nigeria
3. All second hand goods
4. Household furniture and equipment
5. Petrol and all petroleum products including grease, engine oil and gas
6. Jewels and jewelleries
7. Textiles, clothing, carpets and rugs
8. Beer, wine, liquor, spirits, soft drinks and bottled water including mineral water.
9. Cigarette and tobacco
10. All vehicles and their spare parts excluding commercial vehicles and their spare parts.
11. All aircraft, aircraft bodies and their spare parts
12. Perfumes and cosmetics including toiletries
13. Soaps and detergents
14. Mining and minerals
15. Office furniture and equipment including toiletries
16. Electric materials of any description
17. Such other goods that may be determined by the board from time to time as taxable

goods.
Source: VAT Decree (1993), FIRS information circular No. 9304

Table 2.2. Vatable Services

S/N Vatable Services

1. All services rendered by financial institutions to their customers excluding the then peoples

bank, community bank now microfinance banks and mortgage institutions.

2. Accounting services, including any type of auditing, book-keeping or related services
3. The provision of report, advice, information or similar technical service in the following areas:

a)Management, financial, taxation and related b) Recruitment, staffing and training c) Market

research d) Public relations and e) Advertising

4. Legal services including services supplied in connection there with
5. Computer services, including the provision of bureau facilities, system analysis, design

software, site development and training.

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6. Services supplied by architects, including landscape architects and draughtsman
7. Services supplied by consulting engineers.
8. Services supplied by land building quality surveyors
9. Services supplied by auctioneers, estate agents and valuers. Services supplied by agents,

including insurance agents and any person who acts for or represents someone else in

arranging or conducting a transaction or other activities.

10. Services supplied by brokers
11. Services supplied by typing, photocopying, telex facsimile and other related services.
12. Services supplied by security companies and enterprises
13. Courier services
14. Repairs, alteration, processing or any other services provided in connection with designated

goods by designated dealers

15. Repairs, 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, packaging, bottling or

manufacturing goods owned by another person.

17. Telecommunication services, including renting of telecommunication equipment, installation

and maintain services.

18. Letting of video tapes or any other audio visual video tapes and similar services
19. Entertainment services including plays or performances, crimes shows and music concerts,

excluding plays and performances conducted by educational institution as part of learning.

20. Accommodation and all other services provided by a hotel owner or operator including bars,

beverage, telecommunications, entertainment, laundry services safe deposits, conferences and

business services.
21. Restaurants services rendered by a restaurant owner or operator.
22. All goods and services or repairs and malignance including accessories of vehicles, plants and

machineries, equipment, aircraft and related services

23. Air travels and company care lines
24. Any other services as may be determined by the board from time to time as taxable services.
Source: VAT Decree (1993), FIRS information circular No. 9304

2.1.7 Administration of VAT in Nigeria

Soyode and Kojola (2006) citing the VAT Act of 1993 (then Decree) section 7(2) which states that

VAT shall be administered and managed by the Federal Board of Inland Revenue (FBIR) but shared

by the three tiers of government in Nigeria from 1999 to date as follows:

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Federal Government: 15%

State Government: 50%

Local Government: 35%

To ensure VAT’s effective administration, certain amendments were made on the existing tax

structures in Nigeria. According to Odusola (2006), the amendments includes inter alia:

i. Reduction of the personal income tax burden through increased tax allowances, and reduced tax

rates;

ii. Monetization and taxation of fringe benefits;

iii. Deduction of R&D expenditure from the gross earnings of companies

iv. Extension of tax-free status to companies in rural areas and granting of incentives based on the

infrastructure available in the areas;

v. Reduction of company tax rate from 40 to 35 percent and subsequently to 30 percent; and

vi. Payment of petroleum profit tax in dollars.

The implementation of fiscal federalism in Nigeria tax administration especially with respect to the

ratio of 15: 50:35 as provided by the VAT Act, is plagued with various problems. A critical aspect of

this is the issue of multiple taxation on individuals and corporate consumers. In fact this is applicable

to all the study groups.

2.1.8 VAT and its Challenges

Tax evasion and tax avoidance are two broad challenges faced by every tax authority or

administrator. Olatunji (2009) identified the following challenges relating to VAT administration in

Nigeria.

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i. Inadequate machinery for tax remittance: Lack of adequate resources in the form of qualified tax

personnel and facilities is a major challenge in the administration of tax in Nigeria. Consequently

there are a lot of leakages in the form of tax fraud, refusal to complete tax return forms etc.

ii. Dishonest tax officials: The dishonesty by most tax officials in Nigeria pose a serious threat to

effective tax administration in the country. In most cases they will deliberately reflect wrong tax

figures in consumers’ invoices or documents. This goes a long way to discourage honest tax payers

from being committed to prompt and adequate tax payments.

iii. The regressive effects of VAT: Practically, value added tax is a tax on consumption of items. Its

computation is based on a fixed rate on taxable commodities, consequently, the burden of VAT falls

more on low income earners than other groups. Hence low income earners in Nigeria see VAT as a

tax skewed against them. iv. General increase in price levels: VAT simply means add some amount

to the cost or price of items at each stage. In other words VAT as a tax system tends to increase the

general price level of goods and service in the economy. This can have the adverse effect of

reduction in the demand for goods and services.

v. The difficulties in calculating VAT on retailers: Nigeria is a country infested with numerous

retailers and small professional service providers. The ability to compute VAT amount for these set

of people prove to be very difficult. The problem of registration with tax authorities and remittance

of collected VAT amount is equally a major challenge here.

2.1.9 Taxation and firm’s performance

The tax policy is known to affect the business competitiveness of a country because higher tax rate

lead to higher cost of doing business and subsequently higher prices on consumers goods and

services. In this case, tax levies significantly impact the businesses in terms of financing decision and

performance. This is supported by Ezejiofor, Adigwe, Echekoba and Nwaolisa (2015) where tax

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policies affect the effectiveness and efficiency on manufacturing sector. Among these taxes are

income tax, employment tax, corporation tax, capital gain tax, value added tax and sales tax.

Gemmell, Kneller, Sanz and Sann-Sanz (2011) found that the corporation tax is negative correlated

with the firm’s productivity and investment performance.

This is supported by Teraoui, Kaddour, Chichti, and Rejeb (2011) that found higher tax rate

negatively affects the firm’s financial performance in examining the relationship between taxation

and corporate financial performance. They found that net profit of the firm declines by 0.07% and

output declines by 0.31% with every increase of 1% of corporate tax rate. This is because higher tax

rate increases the tax burden of the firm and ultimately limit the fund for reinvestment and

expansion. This supports the study by Vartia (2008) where higher corporate and personal income

taxes are negatively impact on the firm’s investment activity and results to low productivity.

Sebikari (2014) also reveals that taxation reduces capital base of small and medium size business and

hinder the performance of the business. Similarly, a study from Assidi, Aliani and Omri (2016) also

conclude negative relationship between corporate tax optimizaton and firm value. The higher the

corporate tax rate will reduce the returns on equity investment and lead to difficulty to raise finance

for small entrepreneurial business.

On the other hand, Belotti, Porto and Santoni (2016) found that property taxation is negatively

correlated to firm’s employment, capital and sales as well as affected total factor productivity

significantly of italian manufacturing firms. This proves that existence of taxes negatively related to

the firm’s profitablility and liquidity (Temimi 2016). Hence, the excessive taxation would jeopardize

the performance of the firm in terms of financial and productivity. A sound fiscal policy on tax is

crucial to overcome the negative impact of taxation on manufacturing sector’s performance. They

advocate that the fiscal policy in a country crucially and require managed carefully in order to attract

18
foreign direct investment. Further literature explains more in depth in regards of VAT as part of the

tax structure has significant impact to the manufacturing sector.

2.1.10 Transition to the new vat rate

The Finance Act increased the applicable VAT rate in Nigeria from the 5% (specied in the VAT Act)

to a new rate of 7.5%, without stating the commencement date for implementation of the new rate.

Taxpayers had generally assumed that January 13, 2020 (being the commencement date of the

Finance Act) was the effective date of the new rate but that position was fraught with accounting

difculties. The Circular claries that the new rate takes effect from February 1, 2020. This clarication

is a welcome development as it has resolved the confusion amongst taxpayers regarding the effective

date of the increased rate.

Further, the Circular refers to section 13A (2) of the VAT Act, which states that “a tax invoice shall

be issued on supply whether or not payment is made at the time of supply”, and then provides

guidance on what constitutes “the time of supply”, for VAT purposes, as well as transitional

arrangements regarding implementation of the new VAT rate. Hence, as clarified by the Circular:

1. A service is supplied when it is performed or an agreed milestone is reached;

2. Goods are supplied upon delivery or transfer of risk, whichever occurs first;

3. With respect to “i” and “ii” above, where it is not practicable to determine the time of supply, the

FIRS may rely on the dates indicated on the relevant invoices, bills, debit notes, goods-received

notes, waybills, and journal entries etc. to reach a decision;

4. The VAT rate for taxable supplies made prior to February 1, 2020 shall be 5%;

5. For a contract of taxable supplies signed prior to February 1, 2020 in respect of which supplies or

performance occurred on or after February 1, 2020, the applicable VAT rate shall be 7.5%;

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Firstly, we note that, by virtue of Section 6 of the VAT (Amendment) Act No. 12 of 2007, the

provisions on Tax Invoice, which the FIRS sought to clarify, is now Section 11(A) 2.

Notwithstanding the error in the cross reference, we note that the provisions are correctly reproduced

by the FIRS in the Circular.

Further, whilst the transitional arrangements provided in the Circular are helpful and commendable,

it is difficult to ascertain the legal basis upon which they were made. It is trite law that an Act comes

into force on the commencement date stated therein or where no commencement date is stated, on

the date it receives Presidential assent. However, we note that the Minister of Finance had announced

that the new VAT rate would take effect on February 1, 2020 and that the President had already

written a letter to the House of Representatives requesting an amendment of the Finance Act in order

to react a new commencement date of February 1, 2020. Whilst it appears the adoption of

commencement date of February 1, 2020, by the FIRS, is in line with the proposed amendment of the

Finance Act, it should be noted that unless and until the proposed amendment is properly concluded

by the National Assembly, the clarification by the FIRS in the Circular regarding the commencement

date will remain legally unenforceable.

2.2 Theoretical Frame work

2.2.1 Theories of taxation

According to Bhartia (2009), a taxation theory may be derived on the assumption that there need not

be any relationship between tax paid and benefits received from state activities. In this group, there

are two theories, namely, (1) socio-political theory and (2) the expediency theory. Also, a taxation

theory may be based on a link between tax liability and state activities. This reasoning justifies the

imposition of taxes for financing state activities and also providing a basis for apportioning the tax

burden between members of the society. This reasoning yield the benefit received theory and cost of

service theory. There is also the faculty theory of taxation.

20
Socio Political Theory

This theory of taxation states that social and political objectives should be the major factors in

selecting taxes. The theory advocated that a tax system should not be designed to serve individuals,

but should be used to cure the ills of society as a whole.

Benefit Received Theory

This theory proceeds on the assumption that there is basically an exchange relationship between tax-

payers and the state. The state provides certain goods and services to the members of the society and

they contribute to the cost of these supplies in proportion to the benefits received (Bhartia, 2009).

Anyanfo (2006) argues that taxes should be allocated on the basis of benefits received from

government expenditure.

Cost of Service Theory

This theory is similar to the benefits received theory. It emphasizes the semi commercial relationship

between the state and the citizens to a greater extent. In this theory, the state is being asked to give up

basic protective and welfare functions. It is to scrupulously recover the cost of the services and

therefore this theory implies a balanced budget policy.

Faculty Theory

This theory states that one should be taxed according to the ability to pay. It is simply an attempt to

maximize an explicit value judgment about the distributive effects of taxes. Bhartia (2009) argue that

a citizen is to pay taxes just because he can, and his relative share in the total tax burden is to be

determined by his relative paying capacity.

21
Ability to Pay Theory

The ability to pay theory was propounded by MS Kendrick in 1939. The theory considers tax

liability in its true form-compulsory payment to the state without quid pro quo. It does not assume

any commercial or semi-commercial relationship between the state and the citizens. According to

this theory, a citizen is to pay taxes just because he can and his relative share in the total tax burden

is to be determined by his relative paying capacity. This doctrine has been in vogue for at least as

long as the benefits theory. A good account of its history is found in Seligman. This theory was

bound to be supported by socialist thinkers because of its conformity with the ideas and concepts of

justice and equity. The basic tenet of this theory is that the burden of taxation should be shared by the

members of society on the principles of justice and equity and that these principles necessitates that

the tax burden is apportioned according to their relative ability to pay.

Faculty Theory

According to Ola, (2011), this theory states that one should be taxed according to the ability to pay.

It is simply an attempt to maximize an explicit value judgment about the distributive effects of taxes.

Okafor, (2012) argue that a citizen is to pay taxes just because he can, and his relative share in the

total tax burden is to be determined by his relative paying capacity.

The Expediency Theory of Taxation

The expediency theory of taxation states that every tax revenue collection proposal must pass the test

of practicability, which must be the only consideration when the county government is choosing a

revenue collection proposal. Proposition is that the economic and social objectives of the government

should be treated as irrelevant, since it is useless to have a tax which cannot be levied and collected

efficiently. However, there are pressures from economic, social and political groups. Every group

tries to protect and promote its own interests and county government is often forced to reshape tax

structure to accommodate these pressures (Bhartia, 2009).

22
In addition, the administrative set up may not be efficient to collect the tax at a reasonable cost of

collection. Taxation provides a powerful set of policy tools to the authorities and should be

effectively used for remedying economic and social ills of the society such as income

inequalities, regional disparities, unemployment, cyclical fluctuations and so on (Bhatia, 2009). The

expediency is relevant to the present study in that, it seeks to explain influence of

administrative set up, such as efficient e-payment system, in revenue collections by County

Governments.

2.3 Review of Empirical Studies

Onwuchekwa and Aruwa (2014) investigated the impact of value added tax on economic growth of

Nigeria. The study used ordinary least square technique to test the hypothesis of the research with

data spanning the period 1994-2011. The result revealed that VAT contributes significantly to the

total tax revenue of government and by extension, to economic growth of Nigeria. It further showed

that VAT revenue had consistently increased but it is not that explosive.

Another study by Owolabi and Okwu (2011) empirically evaluated the contribution of VAT to the

development of Lagos State economy. Development aspects considered included infrastructural

development, environmental management, education sector development, youth and social

development, agricultural sector development, health sector development and transportation sector

development. The findings revealed that VAT revenue contributed positively to the development of

the respective sectors. However, the positive contribution was statistically significant only in

agricultural sector development.

Asogwa and Nkolika (2013) examined the impact of value added tax on investment growth in

Nigeria. Time series data on investment, government expenditure, real exchange rate, real interest

rate and trade openness from the central bank of Nigeria statistical Bulletin (CBN) were analyzed,

using multiple regression analysis. The results showed that Value Added Tax has significant effect

23
on investment growth in Nigeria. The study recommends that there should be dedicated and honesty

on the parts of all agents of VAT with respect to the collection, and government should try as much

as possible to improve on the way of collecting value added tax.

Yadirichukwu and Ebiringa (2012) examined empirically, the effect of various forms of tax on the

economic growth of Nigeria. Secondary data was utilized within the periods of 1985-2011, and the

econometric technique adopted were OLS regression and Granger causality technique the result

showed that among the determinant factor of economic growth in the country through tax, only

custom and exercise duties are capable of influencing growth, and have significantly inverse

relationship with the GDP. The study therefore recommended that the company income tax system

should be generally restructured to bring about more revenue capable of contributing more

significantly to the Nigerian economic growth as it is evidenced in the advanced countries of the

world. The study also observed that custom service operations and revenue generations in the border

is not practically reflected in the economy due to non-accountability and transparency as well as

leakages in the system.

The study by Njoku (2015) examined the impact of indirect taxes on economic growth of Nigeria,

utilizing time series data spanning a thirty-four year period, from 1981 to 2014. The data collected

from secondary sources, were analyzed and tested for stationary, using the Augmented Dickey-Fuller

test. The Value Added Tax (VAT), Petroleum Profit Tax (PPT) and Custom and Excise Duties

(CED), were stationary at second difference while the Real Gross Domestic Product (RGDP) was

stationary at level. Consequently, the study utilized the Error Correction Model to evaluate the

impact of VAT, PPT and CED on the RGDP. The findings revealed that VAT and PPT exert a

positive and significant relationship on the RGDP. It was also revealed that CED of two period lags

has a positive relationship with RGDP and VAT of two-period lags showing a negative but

significant relationship with RGDP.

24
Izedonmi and Okunbor (2014) empirically investigated the contribution of VAT to the development

of the Nigerian economy. Time series data were used on the Gross Domestic Product (GDP), VAT

Revenue, Total Tax Revenue and Total (Federal Government) Revenue from 1994 to 2010. The data

were analyzed using the econometric methodology of multiple regression technique. Their findings

showed that VAT Revenue accounted for 92% significant variations in Nigeria’s GDP. It revealed a

positive but insignificant correlation between VAT Revenue and GDP.

Bakare (2013) investigated the impact of VAT on output growth in Nigeria. The study used the

ordinary least square (OLS) regression technique. It was found that a positive and significant

relationship exist between VAT and output growth in Nigeria. The results of the findings from this

work also showed that the past values of VAT could be used to predict the future behaviour of output

growth in Nigeria. The main conclusion of the study was that Value Added Tax has the potential to

assist in the diversification of revenue sources, thereby providing enough funds for economic growth

and development and reducing over dependence on oil for revenue.

Olatunji (2009) conducted a study on the effectiveness of the administration of VAT in improving

government revenue and boosting economic growth in Nigeria. It used simple percentage and chi-

square to analyze the data. The study showed a positive correlation between VAT and GDP.

Okoli and Matthew (2015) examined the extent to which VAT has contributed to Nigeria’s total

federally collected revenue and its position among the other tax components using data spanning the

period 1994-2012. Adopting the Error Correction Model (ECM) for the analysis, the findings

revealed that VAT was the second long term source of the total federally collected revenue.

Chigbu (2014) examined the impact of value added tax on the economic growth of Nigeria. The

author used relevant secondary data from for the period 1994-2012. The data collected were analysed

with relevant econometric tests of Breusch-Godfrey Serial Correlation LM, White

Heteroskedasticity, Ramsey RESET, Jarque Bera, Johansen Co-integration, and Granger Causality.

25
The findings revealed a long run equilibrium relationship between economic growth and VAT. It

was also found that VAT does granger cause gross domestic product of Nigeria. The paper

concluded, on the basis of the findings that VAT is one of the most important components of indirect

taxes that affects economic growth in Nigeria.

Ugochukwu & Azuibike (2016) examined the effect of tax policy on Economic Growth in Nigeria.

The study used annual time series data of 20 years from 1994-2013. OLS regression analysis was

adopted to estimate the relationship between the dependent and independent variables. The findings

revealed that tax have a significant effect on the economic growth of Nigeria. It also revealed that the

proportion of indirect to total tax have increased over the years.

The study therefore recommended among others that the government tax policy should shift more to

indirect tax due to the expansionary and non-distortionary nature. Ihenyen and Mieseigha (2014)

examined taxation as a financial instrument for economic growth in using data obtained from the

Central Bank of Nigeria for the period 1980-2013. They used corporate income tax and value-added

tax as the independent variable and proxy product (GDP), the dependent variable. The study

employed Ordinary Least Square technique (OLS) data, and the results revealed that corporate

income tax and value-added tax impacted positively on gross domestic product. They therefore

concluded that taxation is `an instrument of economic growth in Nigeria.

In a similar study, Edame and Okoi (2014) examined the impact of taxation of investment and

economic development in Nigeria, using data covering the period 1980-2010. They collected data on

corporate income tax, personal income tax and gross domestic product (the study variables) from the

statistical Bulletin of the CBN and the National Bureau of Statistics. They defined three regression

models, investment, Gross domestic product and government expenditure models, and employed

multiple regression technique to analysis the study data. The study found that corporate income tax

26
and personal income tax were negatively related to investment, but positively related to government

expenditure.

Also, Chude and Chude (2015) investigated the impact of company income tax on the profitability of

brewery companies in Nigeria. The study employed the Augmented Dickey Fuller Unit Root test,

Johansen Co-integration test and Ordinary Least Squares technique to analyze time series secondary

data. The study revealed positive correlation between taxation and profitability.

Ayuba, (2014) investigated the impact of non- tax revenue on economic growth in Nigeria, using

secondary data collected from the Statistical Bulletin of the CBN from the period 1993- 2012. The

study employed ADF Unit Root test, error correlation model and OLS technique to analyze the study

data collected on the variables. The results showed that non-oil tax revenue impacted positively on

economic growth in Nigeria.

27
 CHAPTER THREE
CONCLUSION AND RECOMMENDATIONS
3.1 Conclusion

We set out to evaluate effect of value added tax on business performance in Nigeria (a case study of

FIRS) in an attempt to crystallize the benefit to the economy. Having reviewed the mass of literature

available and the analyses of data available, along with personal observations, the analyses

performed yielded a lot of facts that ultimately become useful in the study. The indirect nature of

VAT makes resistance less and so the system has been a reasonable means of revenue generation to

the Nigeria economy; consumers looked at VAT as a mean in which manufacturers and wholesalers

and even retailers cheat on them because of relative additional cost aside the real price without

obstacle; patchy information causes doubts to the citizens on the benefit of VAT as well has posed as

implementation obstacle; VAT is an ideal tax in Nigerian tax system; it is also envisaged by some

experts that there are complications/problems that will erupt, for example inflation, as the system is

being operated. This burden, they maintain may manifest into higher prices of goods and services.

VAT has been a kind of replacement to sales tax and therefore has the potentials of discouraging

domestic production since these goods has to pass through some chain of distribution before the final

consumers, which will make the home-made goods less competitive price-wise in relation to the

imported ones. However, it is an ideal form of tax in the Nigerian tax system, and has contributed

positively and significantly to business performance as well as capital formation to the Nigerian

economy.

3.2 Recommendations

Following the empirical findings of this study, the following recommendations are made for the

purpose of effective policy formulations in the area of economic management, accounting and

financial management:

i. Government should put in place adequate measure to ensure that revenue generated from VAT are

effectively utilized to develop and grow the economy through proper infrastructural development

28
ii. The positive impact of VAT on business performance can be sustained and enhanced if efforts are

made by the government and its relevant agencies to exempt infant industries from VAT payment

over reasonable period.

iii. The management, administration and implementation of VAT in Nigeria should be done in such a

way that it will not have adverse effect on the economy by distorting the free forces of demand and

supply.

iv. The proceeds of VAT should be attractive enough to prevent a reintroduction of sales Tax which

may constitute double taxation.

v. The government must put stein punitive measures in place to sanction corrupt officials as well as

establishments that refuses to remit collected VAT funds

vi. In order to encourage speedy economic growth, government should embark on periodic review of

tax

29
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