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Chapter one


1.1 Background of the Study

There are three types of VAT: consumption income and gross product types; the only difference between them is how purchases of new capital inputs (i.e. plant, furniture, equipment, etc.) are treated in the determination of the tax base. For the purposes of this study, the emphasis will be on the consumption type.

With consumption as the basis for the value added tax, consumption can be described as the acquisition and use of goods and services to satisfy the desires of an individual, business organisation, or any other body, whether private or public. The three main characteristics of VAT that should always be highlighted in its definition are:

i. The Federal Inland Revenue Service (1993) (FIRS, Information Circular) defines VAT as a consumption tax.

ii. The VAT incidence affects the final customer and

iii. The VAT is a multi-stage tax.

Given the government’s diminishing oil revenue, she formed a study group in 1991 to analyse the e-tire tax system.

As one method of obtaining more non-oil revenue locally, the Federal Government was advised to impose a Value Added Tax to replace the existing sales tax, the revenue from which is collected and maintained by the state government.

The Federal Government established two research groups in 1991 to discuss tax reform in Nigeria. The Federal Ministry of Finance and Economic Planning established the first group (focused on direct taxes).

The other group on indirect taxation was established by the Federal Ministry of Budget and Planning and was inaugurated on April 25th, 1991, by the then Honourable Minister of Budget and Planning, Alhaji Abubakar Alhaji.

This group’s suggestions provided general parameters for the repeal of the sales tax, which was implemented under decree No. 7 of 1986.

In this budget speech on January 1, 1992, Retired General I. B. Babangiga, the then President and Commander in Chief of the Armed Forces of the Federal Republic of

Nigeria has announced that the government will establish the necessary machinery for the implementation of a Value Added Tax to replace the existing sales tax in order to broaden the tax revenue base, shift taxation towards consumption rather than saving, reduce reliance on oil revenue, and encourage investment in non-oil export sectors of the economy.

Non-oil sources have always provided tiny amounts to revenue. Customs duties (taxes on imported goods), which were formerly a major source of revenue in the 1980s, have drastically decreased.

More crucially, individual and corporate income taxes have dropped as sources of non-oil revenue. For example, customs duties accounted for approximately 20.6% of federal receipts in 1988 but declined to 11.6% in 1992. Company income tax collections, which accounted for 5.6% of federally collected revenue in 1988, decreased to 3.9% in 1992.

As a result, if the government needs additional money to cover rising public spending, it can only do so by raising individual and corporate taxes, which is neither practical nor advisable under the current conditions.

In Nigeria, only a small proportion of the population (mainly governmental servants) pays income tax, therefore raising it is unlikely to increase government revenue considerably.

Furthermore, actual income has stagnated for a long time. The vast majority of self-employed people, traders, farmers, and business owners avoid paying taxes and will only pay flat rates when forced to. This provides the personal income tax a small base that cannot readily be expanded to generate more money.

Company taxes cannot be increased either, due to the need to encourage industries. In the 1993 Budget, the government decreased the corporation tax rate from 40% to 35% as an inducement to local and foreign investors

and tax breaks were offered to several rural businesses. Increasing business taxes at this time will undoubtedly have a negative impact on productivity and national GDP.

As a result, there is a need for a tax increase; a broad-based consumption tax, rather than an income tax, would be more appropriate because more individuals could pay.

1.2 Statement of Problem

Taxes have been a powerful agent or instrument of revenue generation in Nigeria since time immemorial, but when we look back at the efficiency and effectiveness of the entire taxation system, we can easily see that tax evasion and avoidance are rampant

which is one of the major issues impeding the maximum collection of taxes from both individuals and corporations alike. There are other issues that impede the successful application of the Value Added Tax system in Nigeria, particularly in the banking industry.

Such problems include:

i. Insufficient people and facilities for proper administration and collection of

ii. There may be an issue in determining which services/expenses

Banks are VATable.

iii. The communication gap between VAT executors and clients is considerable.

iv. The raising and forwarding of counting entries relevant to VAT at both the Head Office and the branches (particularly where inter-branch VATable transactions

are involved.

This research will also seek answers and solutions to the following problems:

a) Determine whether VAT can actually broaden the government’s tax collection base.

c) With VAT, has the burden of taxation been transferred from savings to


b) Is VAT self-policing, with an input-output mechanism?

d) If VAT is levied on financial services, it reduces the volume of transactions, lowering the bank’s profit.

e) Does VAT have a single effect, adding no more than the prescribed rate to the consumer price/service charge regardless of the number of stages at which tax is paid?


The primary goal of this research is to investigate the impact of value-added tax (V AT) on Nigerian economic growth and development.

Other study aims are as follows:

i. Evaluate tax as a viable alternative to sales tax in Nigeria.

ii. Identify the mechanisms for collecting Value Added Tax.

iii. Evaluate the efficiency of VAT.

iii. Identify potential flaws and loopholes in VAT and its application in Nigeria.

v. Determine whether Nigerians are aware of and comply with VAT.


The study will be broken into the following problems.

i. Is VAT an appropriate replacement to sales tax in Nigeria?

ii. How effective is its administration by the Federal Inland Revenue Service?

Could the situation be different if managed by other independent bodies?

iii. What are the techniques of collecting VAT in Nigeria?

iv. To what extent does the tax comply with or contradict the taxation principles?

V. To what extent has VAT contributed to Nigeria’s growth and development?

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