Contributions_of_Vat_to_Revenue_of_Goverments_of_Nigeria

Contributions of value added tax (vat) to government revenue in Nigeria Paul O. Yabugbe B. Sc. M. Sc. FCA, Felix Olurankinse B. Sc. M. Sc. ACA, and Robert W. Odewale B. Sc. M. Sc. ACA E-Mail: rowodewale@yahoo.com GSM: 08035777556 Lecturers in Department of Accounting Adekunle Ajasin University, Akungba-Akoko, Ondo State, Nigeria. Abstract Government’s revenue drive has been on the increase as a result of its increasing responsibilities to the citizenry and the desire not to rely on oil alone as the major source of revenue. Prior to 1994, sales tax was in operation in Nigeria and was administered by the various State Governments. In order to have a central distributable pool of funds to all the three tiers of government the Federal Military Government enacted and gazetted The Value Added Tax Decree No. 102 (The Principal Decree) in 1993 and came into effect from January 1, 1994. It thus serves as a replacement for sales tax. Since its introduction VAT has become a major source of revenue to the three tiers of government. This paper examines the impact of Value Added Tax (VAT) as a source of income to the three tiers of Government using the Federal, Ondo State, and Ilaje Local governments as case studies. The methodology employed involved the use of secondary data obtained and analyzed using simple statistical tools from which deductive conclusions were made. The results and findings revealed that VAT is an assured and reliable source of income such that at the Local Government level, it constitutes one-third of Total income yearly. The problems associated with its administration and collection is mainly “Tax Evasion” and “Tax Avoidance”. This study recommends that the intensification of VAT inspection to ensure compliance would reduce the problems to the barest minimum. Keywords: CONRTIBUTIONS, IMPACT, VAT, REVENUES. 1. Introduction VAT has become in recent times an important source of revenue for the three tiers of Government in Nigeria. The fact that there is monthly distribution by the Federal government to all levels of government made VAT an issue which has attracted the attention of everyone. To that extent, the states and particularly the local governments look forward to it as it is considered as “manna from heaven.” VAT is not the only source of income. Other sources include crude oil sales, customs and excise duties, company tax and royalties for the Federal Government; Personal income tax and statutory allocations from the Federation Account for the States and income from rent and rates for the Local governments. The question that therefore arises is; why has VAT become an important source of income' This study is motivated to find out the reasons for this development. The aim of the paper is to evaluate the contribution of VAT to Government revenue in Nigeria. In doing so, the objectives of the study include: - To examine the administration of VAT. - To evaluate the consumption of VAT. - To determine the compliance with VAT Act. - To evaluate the assessment and collection of VAT. - To examine the environment that supports VAT administration. 2. Literature Review Theoretical Framework Molson (2008) says that VAT is a tax on turnover and is added at every stage of manufacture or process based at the value added at each stage. A trader nets the VAT paid on purchases (input VAT) against that collected on sales (output VAT) and either pays the excess output VAT or claims a refund if there is an excess of input VAT. VAT is generally, therefore, not a cost to a registered trader. According to Onyenkpa (1999:1), VAT is an indirect form of taxation. Unlike the traditional forms of taxation such as income tax, VAT is levied on the consumption of goods and services. Prior to 1994, sales tax was in operation in Nigeria. This tax was administered by the various State Governments. FMBP (1992:1) states that in 1991 the Federal Government of Nigeria set up a study group under the leadership of Professor Edozien, to review the Nigerian tax system, with a view to increase revenue and redirecting the consumption pattern. The group recommended the introduction of VAT as a replacement for sales tax. The Value Added Tax Decree No. 102 (The Principal Decree) was subsequently enacted and gazetted in 1993 and came into effect from January 1, 1994. VAT has been a major source of revenue since its inception. The sum of N9 Billion was realised in 1994, the year VAT was first introduced. The amount quickly rose to N21 Billion in 1995 and N31 Billion by 1996. The revenue from VAT in the 1999 budget was over N50 Billion (FMF, 2002). The success recorded with VAT has led to the reduction of the rates of the direct taxes. The top rate for personal income tax was reduced from 35 to 30 percent in 1995 and then to 25 percent in 1996. Corporate income tax rate was reduced from 35 to 30 percent in 1996 (FMF opcit). VAT in Nigeria is administered by the Federal Board of Inland Revenue (The Board). Even though the tax is federally administered, 80 percent of the revenue was originally meant to accrue to the State Governments, including the Federal Capital Territory, Abuja. The remaining 20 percent was to accrue to the Federal Government, to cover the cost of administration and collection. Since then, the allocation formula has undergone several changes. The most recent, which is contained in the 1999 budget, allocates VAT revenue in the ratio of 15%, 50% and 35% to the Federal, States, and Local Governments respectively. Zukogi (1993:1) states that the idea of introducing Value Added Tax (VAT) in Nigeria came from the Report of the Study Group set up by the Federal Government in 1991 to review the entire Tax System. Hence, VAT was proposed and a committee was set up to carry out feasibility studies on its implementation. In January 1993, Federal Government agreed to introduce VAT by the middle of the year. It was later shifted to 1st September 1993 by which time the relevant legislation would have been made and proper ground work done. According to FIRS (1993:2), VAT is a replacement of the existing Sales Tax which has been in operation under the Federal Government legislated Decree No. 7 of 1986 but was operated on the basis of residence. VAT is a consumption tax that has been embraced by many countries worldwide. Because it is a consumption tax, it is relatively easy to administer and difficult to evade (De voir, 1972:128). The yield from VAT is a fairly accurate measurement of the growth of an economy since the purchasing power (which determines yield) increases with economic growth. VAT is a self-assessment tax that is paid when returns are rendered. In built in the new tax is the refund or credit mechanism which eliminates the cascading effect that is a feature of the retail sales tax. The input-output tax mechanism in VAT also makes it self policing. In order to facilitate the easy understanding of the implementation of VAT in Nigeria the following facts need to be borne in mind: i. VAT is a tax on spending and is borne by the final consumer of goods and services because it is included in the price paid. ii. The tax is at a flat rate of 5%. iii. The tax is collected on behalf of the Government by businesses and organisations which have registered with the Federal Inland Revenue Service (FIRS, VAT Directorate) for VAT purposes. iv. A business or organisation which has registered for VAT is classified as a “registered person”. Such person will pay 5% VAT on goods and services purchased but can claim credit for this tax (called input VAT). v. The registered person includes 5% VAT in the price of all goods and services supplied (called output VAT). vi. The registered person has to make regular VAT returns and either pays to or receives from FIRS (VAT Directorate) the difference of the input VAT and the output VAT. vii. VAT returns (and payments) are normally made monthly to the local VAT office on or before the 14th day of the month following that in which the supply was made. viii. To claim a credit for input VAT, a registered person must hold a “Tax Invoice”. ix. Records and accounts have to be kept. x. FIRS (VAT Directorate) provides a free information and advisory services to help you with VAT. 3. Methodology The research examined the impact of Value Added Tax (VAT) as a source of revenue to government at the three levels as well as to identify the problems that arose since its inception. The study further proffers solutions to those problems. The study is an exploratory research where mainly secondary data were used from which deductive conclusions were made after analysis. The analysis have been kept simple by emphasising the relationship between VAT and total sources on income at the Federal Government, Ondo state and Ilaje Local Government levels but this would by no means affect the quality of the results obtained nor the interpretations or policy implementations of the findings. 4. Results and findings The growing profile of VAT since its inception and its impact as a source of revenue to Government are better examined from the various reports of the three tiers of government to date. For the Federal Government, the relationship between total revenue and VAT collected is shown in the Table 1 below. Table 1: Federal Revenue and VAT |Year |VAT (NM) |Total revenue (NM) |Percentage of VAT | |1999 |65,127 |468,268 |13.90 | |2000 |51,690 |1,046,900 |4.86 | |2001 |91,758 |1,570,657 |5.48 | |2002 |110,170 |1,663,679 |6.62 | |2003 |125,953 |1,690,140 |7.45 | |2004 |124,398 |2,035,262 |6.11 | |2005 |140,842 |2,411,965 |5.84 | |2006 |155,941 |3,095,311 |5.04 | |Total |865,879 |13,999,282 |6.19 | Sources: Derived from Federal Ministry of Finance financial records. Over the period of review, VAT constituted 6.19% of total revenue collected. This source is an assured and certain avenue for income more so because VAT is a consumption tax. This factor was largely responsible for government to increase VAT rate to 10% in 2007 which was vehemently opposed by organised labour. This reaction forced government to revert to its original rate of 5%. Here, Government realised the extent to which VAT can be used to shore up Government revenue. The relationship between State Government revenue and VAT as exhibited by Ondo State Government is shown in Table 2 below. Table 2: Ondo State Government and VAT |Year |VAT (NM) |Total Revenue (NM) |Percentage of VAT | |1999 |268 |3,911 |6.85 | |2000 |659 |13,246 |4.98 | |2001 |937 |19,513 |4.81 | |2002 |1,151 |15,108 |7.62 | |2003 |1,394 |18,616 |7.49 | |2004 |1,824 |26,959 |6.77 | |2005 |1,595 |39,890 |4.00 | |2006 |1,963 |42,434 |4.63 | |Total |9,791 |179,677 |5.45 | Source: Derived from records of Ministry of Finance, Akure, Ondo State. The percentage of VAT to total revenue was an average of 5.45%. However, one point must be made known; it is the Federal Government that determines the amount of VAT that should be allotted to the States and Local Governments on its own terms. This policy does not go down well with Lagos State which is responsible for about 60% of all VAT collected nationwide. It is for this reason that the Lagos State Government is threatening legal action against the Federal Government. Therefore, the picture of VAT as a percentage of State revenue may not be objective because VAT allocation is not based on derivation. The Local Governments revenue as represented by Ilaje Local Government is shown below: Table 3: Ilaje Local Government and VAT |Year |VAT (NM) |Total revenue (NM) |Percentage of VAT | |1999 |11 |50 |22.00 | |2000 |18 |65 |27.69 | |2001 |27 |77 |35.06 | |2002 |29 |160 |18.13 | |2003 |53 |98 |54.08 | |2004 |70 |212 |33.02 | |2005 |75 |240 |31.25 | |2006 |81 |265 |30.57 | |Total |364 |1,167 |31.19 | Source: Finance Records of Ilaje Local Government, Ondo State. Ilaje Local Government has its VAT component of Revenue put at an average of 31.19%. What this means is that VAT allocation by the Federal Government direct to the Local Governments constitute one-third of the Revenue available to them. VAT is therefore, a source of revenue to the Local Government which is awaited with much expectations and enthusiasm. It is unlikely that the Local Government as constituted today can operate successfully without VAT allocation from the Federation Account. The analysis above underscores the relevance and importance of VAT to the finances of both States and Local governments of Nigeria. Therefore, the Federal Government is very much concerned about VAT administration and collections. While it is expected that a one rate VAT system should facilitate the assessment and administration of VAT, it is not so in Nigeria. The problems encountered at present are derived from the attitudes of tax evasion and tax avoidance. These attitudes manifest in the following ways: a. Qualifying Businesses not registering for VAT purposes. b. Registered Persons not keeping proper records. c. VATable Persons not rendering correct and/or prompt returns. With regard to VAT collection, designated banks hold on to funds unlawfully and even the Central Bank of Nigeria fails to render prompt statements of accounts to enable FIRS carry out monthly reconciliation of payments. All these lapses have placed extra responsibility on the shoulders of the VAT Inspectorate unit of the FIRS. The success of the VAT system will therefore depend on the effectiveness and efficiency of the unit in the years ahead. 5. Conclusion and policy implications VAT has remained till today, a major source of tax revenue for Government. Beyond revenue generation, there is need to put more emphasis on stimulating the economy. There is need to encourage exports of no-oil products. In this regard, recent amendments to the VAT Decree have focused more on generating money for the Government, rather than economic growth. The non-deductibility of input VAT on services is an additional cost of business. If businesses are to charge output VAT on services, then they need to recover input VAT incurred on services, necessary for the generation of the output VAT. The backdating of the 1998 amendments to take effect from January 1997 was not only punitive; it is also against the certainty tenet of taxation. Tax payers need to know very clearly what the rules are. Imposing new rules after the facts is a disincentive, especially if we are serious about attracting foreign investment into the country. The exempt status of exports makes Nigeria’s goods and services uncompetitive in the international market. There is need to address the question of refund of input VAT. The philosophy of refund is at the very heart of VAT operation in most other countries of the world. 6. Recommendations The following recommendations are made in consideration of the findings of this paper: a. VAT Inspection should be intensified to secure compliance with the VAT legislation in all its ramifications as well as ensuring that full amount of VAT deducted are promptly accounted for. b. With respect to VAT collection, a possible solution to the problem of bank reconciliation is a specific directive by the Governor of the CBN to all its Branch Controllers that statements of accounts be made available on the first or second working day of each month. c. Bank statements should be produced, where necessary, by means other than with the computer. Provided it is properly authenticated, even a hand written statement of account should have the same weight as a computer printout which also has to duly stamped and signed to be adjudged authentic. Ogundele (1999:9) says that in 99.90% of the cases of delayed statements, the computer or the power to activate it is blamed as being responsible by CBN officials. d. Finally, FIRS should ensure prompt legal action against offenders of the provision of the VAT Act to serve as a deterrent to others. References Ajayi, C. A. (1993), “VAT operation in Banks and other Financial Institutions”, Paper presented at Federal Inland Revenue Service Workshop on VAT in 1993 held in Lagos. Aluko, S. (1993), “Modified Value Added Tax: A new challenge”, Paper presented at a Tax symposium in Abuja. Awa, A. (1993), “Imposition of Value Added Tax in Nigeria”, Paper presented at Federal Inland Revenue Service Workshop on VAT in September 1993. De Voir, P. W. (1972), “Value Added Tax”, Butterwort: United Kingdom FGN (1993), Value Added Tax Decree No. 102 Published by Federal Government Press, Lagos, Nigeria. FIRS (1993), “Value Added Tax (VAT)” Information circular No. 9304 published under the authority of the Chairman/Chief Executive of the Federal Inland Revenue Service. FMBP (1992), “Report of the Study Group on Indirect Taxation in Nigeria”, Unpublished Report of the Federal Ministry of Budget and Planning, Abuja. FMF (2000), Reports of the Federal Ministry of Finance, Abuja, Nigeria. Ikokwu, B. C. O. (1993), “VAT Inspection”, Paper presented at Federal Inland Revenue Service Workshop on VAT in September 1993, held in Lagos. Molson, K. (2008), “VAT Update” ACCA Student Accountant, February, Pp. 36 – 49. Ogundele, E. A. (1999), “Accounting for Value Added Tax”, Paper presented at Seminar organised by K. A. Amusa & Co. at Airport Hotel, Ikeja. Onyenkpa, V. (1999), “The administration and legal aspects of Value Added Tax”, Paper presented at Seminar organised by K. A. Amusa & Co. at Airport Hotel, Ikeja. Zukogi, A. I. (1993), “Value Added Tax Administration and Policy”, Paper presented at Federal Inland Revenue Service Workshop on VAT in September 1993, held in Lagos.