The_Administration_and_Problems_of_Value_Added_Tax_in_Nigeria

THE ADMINISTRATION AND PROBLEMS OF VALUE ADDED TAX IN NIGERIA Finance and Accounting Research Monitor Volume 2 Number 2, September 2008 Suleiman A.S. ARUWA1 Abstract This study analyses the relevance and the problems of Value Added Tax (VAT) in Nigeria. Three research questions were formulated for the study. A survey of VATable Nigerian organizations, FIRS staff and the publics was conducted to gain insights into the way VAT is administered, its relevance in revenue generation, savings and consumption of consumers and the problems hindering its efficiency. Both secondary and primary data were used and descriptive statistics as tool for analysis. The survey shows that a majority of the FIRS staff perceive that they are not adequately equipped technically and administratively to handle VAT operations, VATable organizations have inappropriate knowledge of VAT operations, the government at the three tiers in Nigeria have raised substantial revenue from VAT but it is presently perceived as been underutilized due to high rate of tax evasion, lack of record keeping by business enterprises, use of unqualified FIRS staff and low VAT education is found among the VATable organizations and the public. It was found that these organizations treat VAT as cost contrary to expectations. Evidence from the way VAT revenue is being shared among the three levels of government in Nigeria suggests that this revenue is being reinjected into the economy through public expenditure. Governments should consider strategies for securing appropriate treatment of VAT by the VATable organizations while taking steps to ensure that the VAT revenue is targeted at sectors most likely to ameliorate the inadvertent adverse effects of VAT on consumer welfare, production, employment and income. Introduction An important landmark in tax reform in Nigeria was the adoption of the value-added tax (VAT) in January through the VAT Act No. 102 of 1993 but its implementation actually began in January 1994. Ajakaiye (1999) avers that since its introduction, 15 of the 42 sections of the Act have been amended. Replacing sales tax, VAT was originally imposed on 17 categories of goods and 24 service categories. Such items as basic foods, medical and pharmaceutical products, books, newspapers and magazines, house rent, commercial vehicles and spare parts and services rendered by community and people•s banks, however, were VAT-free. Value added tax (VAT) has become a major source of revenue in many developing countries. In sub-Saharan Africa, for example, VAT has been introduced in Benin, d•Ivoire, Guinea, Kenya, Madagascar, Mauritius, Niger, Senegal, Togo and, lately, Nigeria (Landau, 1983). Evidence suggests that in these countries, VAT has become an important contributor to total government tax revenues. Naiyeju (1994) find that VAT accounted for about 30% of total tax revenues in d•Ivoire, Kenya and Senegal in 1982. The oil producing countries are not excluded from the list of countries introducing this tax handle. Schnepper (1996) shows that VAT has been in effect in Ecuador and Mexico since at least 1973, and by 1983 accounted for 12.35% and 19.71% of total government revenues in these countries, respectively. The introduction of VAT requires a lot of preparation because of the complexity in the implementation of VAT which require the cooperation of the tax-payers. In January, 1994 1 Mr. Ibrahim is a lecturer at the Department of Accounting, Ahmadu Bello University, Zaria. when the implementation of the tax began there were no adequate machinery, public enlightenment and consumer education (Bargo, 1993). The problems created by inadequate preparation and lack of understanding of the workings of VAT coupled with administrative bottleneck. Although prices of VATable goods are expected to rise, businesses are taking advantage of the existence of VAT to increase prices of goods and services arbitrarily. The excessive price increase has further led to higher inflation in Nigeria. The VAT rate in Nigeria at 5% is considered too low because of high cost of administration. At 5%, the cost as a proportion of revenue will be very high. Data on cost of introducing and administering VAT are not yet available but it is expected to be significant. It is believed that for most countries, a VAT is probably not worth introducing at less than 10% (Twins, 1993). Specifically, the traditional incidence studies tend to concentrate on the issue of who pays the tax, so that the question of who gains or loses from the tax, whose income and welfare are reduced or increased, and whose employment opportunity is threatened or promoted are not sufficiently considered (Ajakaiye, 1999). For efficient administration of VAT, businesses must keep proper source documents and books of accounts. Unfortunately, it is the very problem with most enterprises in Nigeria (Aruwa, 2006). The invoicing of all sales, the need to compel businesses to keep records of transactions and encourage consumers to demand receipts for every purchase have become mandatory. This study would seek to provide the necessary impetus towards resolving some of these problems identified; to identify the factors contributing or mitigating the efficient administration of VAT in Nigeria and to suggest possible remedies to identified constraints in the VAT Act and its implementation and VAT administration in Nigeria. Key Features of Nigerian Value Added Tax (VAT) According to the Federal Inland Revenue Service (FIRS, 1993), the idea of introducing VAT in Nigeria originated from the report of a study group set up by the federal government in 1991 to review the entire tax system. Subsequently, a committee was set up to carry out feasibility studies of its implementation. It should be noted that the committee was not requested to carry out any analysis of the impact of the tax. Neither was there an active debate among the various interest groups such as the organized private sector, labour unions and academics as well as other professionals through which certain aspects of the impact might have been considered and taken into account in its design and implementation. Eventually, government agreed to introduce VAT but the actual implementation did not commence until January 1994 after the promulgation of the Value-Added Tax Act No. 102 of 1993. According to the VAT Act, a VATable organization is an existing manufacturer, distributor, importer or supplier of goods and services. The following are the main features of the Nigerian VAT. First, it is a single rate (5%) VAT, which makes it easier to administer. Second, it adopts the input-output tax mechanism, which makes it self policing. Specifically, although it is a multiple stage tax, it is 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. In essence, it is the official view that the VAT should not be cascading whatsoever since the tax liability of a VATable organization is the difference between VAT on output and VAT on inputs. In other words, the credit method of collection should eliminate any cascading effects. Third, all goods are VATable with the exception of the following (FRN, 1993): Medical and pharmaceutical products; Basic food items such as peas, beans, yam, cassava, maize, rice, wheat, milk and fish; Infant food items; Books, newspapers and magazines; Educational materials (laboratory equipment); Baby products such as carriages, clothes and napkins, as well as sanitary towels; Commercial vehicles and spare parts, tractors, public transport passenger vehicles, motorcycles, tanks and other armoured fighting vehicles, and bicycles. Agricultural equipment such as those for soil preparation or cultivation, harvesting or threshing, milking and dairy machinery, and poultry keeping machinery; Veterinary medicine equipment; and Fertilizers and farming transportation equipment. Similarly, all services are subject to VAT except: Medical and health services; Services by community banks, people•s banks and mortgage institutions (interest earnings on loans by commercial banks and premiums paid to insurance companies are not VATable); Performances conducted by educational institutions as part of learning; Social services such as orphanages, charities and fire fighting; Pure postal services; Religious services; Non-commercial cultural services; Overseas air transportation; and Public telephone and telegram services (excluding business or commercial services). The following other goods and services are also exempted from VAT salt, water, salary or wages from employment, director•s emoluments, hobby activities, private transactions such as sale of domestic or household articles, vehicles, personal effects orprivate motor vehicles, and residential house rent. For avoidance of doubts, these goods and services are exempted from VAT but their inputs are VATable and they cannot claim credit for such input taxes. On the other hand, all exports are zero-rated, implying that exporters do not collect VAT on exports but they can claim credit for VAT paid on their inputs. All imports are VATable, whether imported raw materials or finished goods. Moreover, VAT on imports is calculated on the total value of the total cost, insurance and freight (CIF) plus customs duties and all other charges on imported goods. Amounts expressed in foreign currency are converted into naira using the exchange rate adopted by the Nigerian Customs Service Between January 1994 and August 1995, the Nigerian Customs Service (NCS) used the exchange rate prevailing on the date the good was cleared from the ports. In this connection, it is recalled that by the beginning of 1995, when the exchange rate depreciated by over 70% in the autonomous foreign exchange market (AFEM), the organized private sector put enormous pressure on the government to review this procedure for computing VAT liability on imports so that by August, the NCS was directed to use 65% of the prevailing exchange rate on the date of clearance of imports to determine the VAT liability on all categories of imports. Fourth, with effect from 1 January 1995, all ministries, parastatals and other agencies of government as well as religious and other organizations and similar persons that are normally exempted from income tax are expected to pay VAT on their consumption in addition to the contract price of items consumed by them. For the contractors to render monthly returns, all government agencies must obtain receipts from the FIRS for the VAT paid on behalf of the contractors. It may be pertinent to mention that this way of broadening the base of VAT is consistent with the policy of exemptions, especially the provision that all inputs used for the production of VAT exempted goods are themselves VATable. A Value Added Tax (Amendment) Bill 2005 is been considered in the National Assembly which proposes that the ´The tax shall be computed at the rate of 10 per cent on the value of all goods and services as determined under sections 5 and 6 of the Act (CITN, 2005). An increase of 100% will fuel inflation and put pressure on the consumers. Zero rates are for those producing for exports. Zero rate goods and services will also include non-oil exports, goods and services purchased by diplomats and goods and services purchased for use in donor funded projects. VAT as a Veritable Source of Government revenue In addition to raising revenue, tax policy also must satisfy a nation's social, economic and political aims. The pros and cons of a VAT can be debated at length in these terms (Price and Porcano, 1992). Twins (1993) discovered three types of sales value added tax that could be imposed to produce a substantial amount of government revenue: a value added tax, a retail sales tax and a sales tax which takes place other than at the retail level. He went further to subdivide VAT into: the addictive, the subtractive and credit method. A tax imposed on the sum of all values that an individual producer or distributor of goods or services adds to those goods or services. The subtractive method imposes a tax on the difference between the aggregate of gross receipts from the sales of goods and services from tax payers. Under the credit method, tax payers pay a VAT on the gross business sales (outputs) and then claim a credit for the VAT paid on all goods or services (inputs) purchased by them for use in their business. This method has a significant advantage over others and is commonly used. VAT is invoicing, it encourages the issuance of invoice and demanding of receipts during sales of gods and services. Bargo (1993) believes, VAT will enforce full accounting procedure on even small scale businesses and minimize evasion. Levison and Laing (2003) posit that VAT is advantageous for its neutrality, VAT is self-policing (Alan, 1994) and VAT helps in curtailment of consumption of luxury and socially undesirable goods (Obademi, 1994). According to Okele (1994), VAT provides incentives for export and thus promotes international trade and a positive balance of trade. The idea of taxation involves three basic characteristics which must be properly stressed, viz it is a compulsory levy, it is imposed by an organ of government and that it is for public purposes. Many Nigerians in some quarters are still in the very tight cobweb of confusion if the rationale and needs of taxation tax imposition has two major objectives and aims (Ajakiaye, 1999): the original purpose of taxation was to raise revenue to finance government expenditure. This is still the primary purpose. In 1995, the VAT revenue distribution formula was modified as the share of federal government increased from 20% to 50%, while the share of the state governments decreased from 80% to 25% and the share of local governments increased from 0% to 25%. However, probably in response to complaints by State Government officials, the VAT distribution formula was modified later in the year when the federal government share was reduced to 40% while that of state governments was increased to 35%. In 1996 the share of the federal government was further reduced to 35% while that of the state government increased to 40% leaving that of local governments unchanged. The revenue generated was to be shared 20:80 between the federal and state government: currently it is shared 15:50:35 among the federal/state/local levels. The state•s allocation was to be earmarked as 30 per cent for the state of origin, 30 per cent for consumption/destination and 40 per cent for equality of the state. To ensure VAT•s effectiveness, certain amendments were made to the existing tax structures. These include (Odusola, 2006): 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 per cent, and subsequently to 30 per cent; and vi) payment of petroleum profit tax in dollars. Although VAT is a consumption tax, a 5 per cent rate is levied on suppliers (i.e., taxable individuals) who are expected to add this amount to invoices for collection from customers and for further remittance to the VAT authorities on a monthly basis. VAT is retained at 5 per cent regardless of the stage of production or distribution. This assumes the absence of cascading effects. Although enforced by federal legislation, VAT was excluded from federal jurisdiction by the 1999 Constitution. This was unusual because at the time of introduction, the federal government•s tax administrative machinery was used to collect VAT on behalf of the state governments, as they had had jurisdiction over the sales tax that was being 11 Introduced by Finance Decrees (Miscellaneous Taxation Provisions) Nos 30, 31 and 32 of 1996 and Nos 18 of 1998 and 30 of 1999. This consumption tax replaced the Sales Tax Decree No. 7 of 1986 that was considered to be too narrow-based as it covered only nine categories of goods, excluding imported items, and could not generate sufficient revenue. It had a single rate 5 per cent. Sales tax is replaced by VAT. It is a non-discriminatory tax with regard to locally manufactured or imported goods. The Act designated the FIRS as the responsible instance for implementing VAT. In practice, however, the Nigerian Custom Service collects VAT on imports on behalf of FIRS. An important challenge to administering VAT is the Nigerian business environment. Written records are crucial for VAT; not only do invoices need to be issued, but recordkeeping is also important. Apart from the fact that keeping records is not common in Nigeria yet, the economy is dominated by informal activities where traders are continually on ¶the move•. African trading activities hinge on bargaining, and a commodity is sold at different prices, depending on the haggling powers of each buyer (Aruwa, 2006). It should be clear that the Nigerian VAT has a very wide base with relatively few exemptions and only exports are zero-rated. Moreover, VAT is not a replacement of any of the usual indirect or income taxes. Rather, it replaced the sales tax introduced in 1986, which had a narrow base and discriminated against locally produced goods and services as it excluded imports. The sales tax revenue accrued exclusively to the state governments while the VAT revenue is now shared by all levels of government. As such, it can be assumed that the VAT revenue is not sterilized but injected through increased government final consumption expenditure. Moreover, the VAT is paid on virtually all goods and services but the credit system implies that the VAT revenue received by government should be devoid of any cascading. In the absence of cascading effects, the increase in prices of final goods and services should not be more than the VAT rate of 5%. Meanwhile, there are increasing complaints from various quarters, especially the organized private sector, about the effects of the VAT on their operating costs and the prices of their products. These complaints about the effects of VAT under a system that allows VATable organizations to claim credit for the input VAT suggests that there is some problem with the ways the VATable organizations are treating their VAT liabilities, especially the VAT they pay on their inputs. The implementation of fiscal federalism in Nigeria, particularly with regard to tax administration, has been plagued with problems. A critical aspect of this is multiple taxes (Odusola, 2006). In fact, all the study groups on tax reform have highlighted this as the most serious problem for the country•s tax administration. In addition to federal income tax, companies are subjected to a wide range of taxes, levies and rates at the state and local levels. Apart from driving up the cost of production, this imposes restrictions on inter-state commerce and trade, making locally produced goods uncompetitive and in some instances, causing business closures (CITN 2002). While it may not be plausible for companies to be subjected to federal taxes only, it is imperative that enterprises are always aware of their tax liabilities at each level. Enterprises should not be exposed to the whim of lower levels of government, as is currently the situation. The declining and fluctuating earnings from oil since the mid-1980s have compounded the aggressiveness with which the state and local governments impose taxes. Indonesia introduced VAT in 1983 and by 1988, the ratio of VAT revenue to GDP had risen to 4.5% (RiahiBelkaoui, 1999; European Commission, 2003)). This impressive performance of VAT in virtually all countries where it has been introduced clearly influenced the decision to introduce VAT in Nigeria in January 1994. Specifically, the Federal Inland Revenue Service (FIRS) pointed out that VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries world-wide (FIRS, 1993). Evidence so far supports the view that VAT is already a significant source of revenue in Nigeria. For example, actual VAT revenue for 1994 was 36.5% higher than projected for the year. In terms of contributions to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995. For 1996, VAT is expected to yield more and on the basis of past experience, it is quite possible that the actual VAT revenue will be much larger (CBN, 1998). The indication is that Nigeria may soon join the growing list of developing countries where VAT contributes at least 20% of total government revenue, thereby assisting in the diversification of revenue sources and reducing dependence on oil for revenue. Analysing government revenue in terms of tax and non-tax receipts provides a clearer picture of the performance of each tax component in total revenue. Tax revenue rose from 38.5 per cent in 1990 to 53.4 per cent in the following year, fluctuating thereafter between 28.7 and 45.6 per cent for the years 1992-2001. In 1990, 45.2 per cent of government revenue came from tax receipts; petroleum profit tax (PPT) and royalties accounted for 31.7 per cent, customs and excise taxes and company income taxes 10.1 and 3.4 percent, respectively. During the same period, non-tax oil revenue (mostly petroleum based) hovered between 46.6 and 71.3 per cent, with oil revenue contributing the largest chunk of the total. In 1990 for instance, oil-related revenue accounted for 52.8 percentage points of the total (54.8 per cent) generated through non-tax revenue (CBN, 2002). Even after the introduction of certain other taxes (i.e. VAT), the picture remained unchanged. In 1996 while PPT accounted for 14.7 per cent, other tax receipts included in the 35.5 per cent share of this sub-group were 14.7 per cent from PIT; 10.6 per cent from customs and excise duties; 5.9 per cent from VAT and 4.2 per cent from CIT. The decline in PPT in 1995 was the result of the transfer of royalties and other oil-related revenues into non-tax revenue category. Consequently, oil-related revenue accounted for nearly all the income generated by non-tax groups. The picture did not change in 2001 with non-oil tax revenue accounting for only 15.6 per cent compared to 20.7 per cent in 1996. However, there was some improvement in the first half of 2003 (CBN, 2004). According to CBN (2005), VAT grew from 91.8 billion naira in 2001 to 108.6 billion naira in 2002, 136.4 billion naira in 2003, 159.5 billion naira in 2004 and 178.1 billion naira in 2005. While the performance of VAT as a source of revenue in these sub-Saharan African countries is clearly encouraging, it remains difficult to find attempts to systematically assess the applicability, relevance and problems of VAT on these economies. Nevertheless, policy makers considering the adoption of a VAT should be interested in the macroeconomic impact, especially on prices, output, income and consumption (Mclure, 1987; Alan and Francesco, 1994). This concern over the economy-wide impact of VAT is all the more important because of the possibility that the tax may cause consumers to reduce their consumption of certain commodities that have direct and/or indirect effects on labour productivity (Ajakaiye, 1999). Problems of Tax Administration The Nigerian tax administration faces serious, complex and multidimensional problems. As Odusola (2006) summarizes: Revenue realized from income tax is low because of the low level of literacy, poor relationship between taxpayers and income tax authorities, and the inadequate number, or complete absence, of trained and qualified accountants on the staff of the tax authorities. Unqualified staff does not know how to get information or the technical methods of how best to use information made available to them. According to Leitman et al (1996), the problems are the deficient tax administration and collection system, complex legislation and apathy of the Nigerians caused by the lack of value received in return for their taxation money. The general perception that the rich do not pay taxes in Nigeria has further worsened the situation. The military government•s practice of using the budgetary process to amend several tax laws concurrently through a single omnibus decree created confusion. It was difficult to separate tax issues from financial ones because these were usually lumped under a single standardized caption. It also made the process of ascertaining the legal position laborious and complex (Anderson, 1994). Consequently, the eventual codification of tax laws has become difficult and lengthy (Basinski and Forman, 2000). Since the inauguration of the democratic government in Nigeria on 29 May 1999, not a single tax law has been passed. This, given the urgent issues in the country•s tax laws and administration, is quite disturbing. The Nigeria tax system is beset by a myriad of problems, some of which are highlighted below (Odusola 2006, Study Group on Tax Reform 2003). Taxation has been the oldest governmental activity since the country•s unification in 1914, so one would expect tax statistics to be readily available. This expectation, however, is misplaced. With the exception of the states of Delta, Lagos, Kaduna and Katsina and the Nigerian Customs Services, other agencies of the states and relevant federal tax offices have serious failures in data management. Moreover, there are no efforts to have the limited data that are available collated or analysed on a routine basis, not to mention, having it stored, or made more easily assessable or retrievable. This situation does not provide much input to policy process. The political economy of revenue allocation in Nigeria does not prioritize tax efforts. It is, instead, anchored on such factors as equality of states (40 per cent), population (30 per cent), landmass and terrain (10 per cent), social development needs (10 per cent), and internal revenue efforts (10 per cent). The approach, discouraging a proactive revenue drive, particularly for internally generated revenue, makes all government tiers heavily reliant on unstable oil revenues which are affected by the volatility of the international oil markets. Aside from the national syndrome of ¶cake sharing•, the instability and volatility of oil revenue should have created an opportunity for improved tax efforts within the provisions on taxation ratified in the 1999 Constitution. Although some state governments have initiated measures to enhance their tax generation attempts, the outcome has not reflected any level of serious effort. Tax administration and individual agencies suffer from limitations in manpower, money, tools and machinery to meet the ever increasing challenges and difficulties. In fact, the negative attitude of most tax collectors toward taxpayers can be linked to poor remuneration and motivation. Ajakaiye (1999) considers the paucity of administrative capacity as a major impediment to the government in its attempts to raise revenue in Nigeria. As of March 2003, the Federal Inland Revenue Services (FIRS) had 7,643 staff members throughout the country; of these a mere 12.6 percent, or 964 employees, were tax professionals/officers. The predominance of support staff in a professionally inclined agency like the FIRS does not augur well for the country. The situation at the local government level is more precarious. For instance, while Oyo State has 370 tax officers to cover 33 local government councils, Kwara has 111 to administer tax across the state•s 16 local councils. Anecdotal evidence shows that staff are not provided with regular training to keep them abreast of developments in tax-related matters. This makes the administration of taxes in terms of total coverage and accurate assessment very weak. A major problem facing the country is the multiplicity of taxes. Individuals and corporate bodies complain about the ripple effects associated with the duplication of tax. The expectation of oil wealth since the oil boom of 1973/4 has influenced government disposition to non-oil revenue. The sudden upsurge in oil revenue created the Dutch disease syndrome, a part of which is the neglect of non-oil revenue. Cheap oil revenue limited the resourcefulness and imagination of the tax authorities in searching for alternative sources of revenue. Since the early 1990s, Nigeria has been moving away from direct to the indirect tax considered to be less distortionary. VAT, for instance, is less distortionary because it is applicable to the value-added contents of imports and of domestically produced goods (Nellen, 1995). The potential for maximizing the benefits of this taxation form, however, is constrained by structural problems in the economy. The predominance of the informal sector, constituting more than 50 per cent of the country•s economy, enables most domestic production to circumvent VAT. Income tax also faces the same risk. Since operations in the informal sector are rudimentary without adequate recordkeeping, tax assessments are difficult to make. Often tax administrators resort to estimates that are prone to a wide margin of error, or open up tax evasion opportunities. Naiyeju (1994) points out that the proportion of self-employed relative to the total working population is substantial, yet tax authorities have not devised appropriate means of collecting effective personal income tax from this group. In fact, income from the self-employed or informal sector activities is grossly untapped. This situation applies equally to excise tax and VAT. Retail trade in Nigeria is incredibly large but substantially informal. VAT collection at this stage is bound to be a logistical nightmare, particularly where a large portion of trade is by transient agents and receipts rarely issued (CITN, 2002). This is further compounded by the country•s social structure where price is determined by the bargaining ability of the buyer; this creates a system of differential pricing that complicates VAT administration. The coverage of these forms of taxes depends largely on the extent of economic progress. It is important to note that in Nigeria the administration of VAT has been beset with problems, namely: i) tax evasion and avoidance; ii) Inadequate funding for the revenue services; iii) limited or lack of independence of revenue services; iv) the lack of the VAT Tribunal, as recommended under VAT Act of 1993; v) proposals by some state governments (e.g., Lagos) to re-introduce sale tax; vi) Discontentment in states applying Sharia law with regard to VAT-taxable items that are prohibited on a religious basis; and vii) practical problems related to the implementation of VAT•s dual elements (input and output). Experts consider this to be a major challenge (Leitman et al, 1996). According to the chief tax inspector of FIRS (2005), these problems are preventing the government from reaping VAT•s potential benefit, but the lack of autonomy for the FIRS is considered to be the critical drawback. In addition to the generally poor nature of data collection, individuals and enterprises do not keep proper records, subsequently making tax assessment difficult. As CITN (2002) concludes, ¶recordkeeping is not yet a popular culture• in Nigeria. Evaluating tax liabilities is contingent on proper accounting records. Widespread illiteracy among business owners, however, precludes the existence of such accounting details. Outright falsification of records to undercut the system is also a problem, for which some sanctions have recently been imposed by the Joint Tax Board (JTB). Corruption is prevalent in the administration of taxes and duties. Until very recently, it was commonplace to collect tax payments partly on behalf of one•s self and partly for the government. Evaders prefer to bribe officials rather than pay taxes. Tax assessors collude with taxpayers, particularly with regard to the PIT, or in some cases, in connection with the assessment. The multiple processes of clearing imports is not only a source of administrative delay, but also an avenue for entrenching corruption. This is further compounded by the pilferage of goods at port. As CITN notes, ¶governments in Nigeria are perceived as a corrupt and selfish lot, to whom money should not ever be voluntarily given. Taxes paid are expected to end in private pockets, not in public utilities• (CITN 2002). This attitude has eroded tax consciousness on the part of Nigerians. Although some progress has been made by the present administration, there is still room for improvement. The failure of the three tiers of government to provide social amenities affects tax compliance. Apart from the problem of mismanagement of resources, more than 70 per cent of the revenue is spent on recurrent operations. To many taxpayers, the fundamental principle of government has been defeated and the moral obligation to pay taxes for the salaries of government officials no longer exists. The Chartered Institute of Taxation of Nigeria has stated that before the introduction of VAT, traders were known to keep two sets of records: one for their personal business accounting purposes and the second for haggling customers who refuse to buy unless they believe they are getting the item at a bargain price for which other buyers had paid more (CITN 2002). Methodology In this study, the target and accessible population which are the Staff of FIRS in Abuja and Kaduna totalling three hundred and eighty (380) staff and randomly selected 311 adult public respondents. It is believed that such a population will provide the most authentic and dependable data necessary for providing answers to the research questions. Data were obtained from questionnaires using a 5-item Likert-scale measures, structured interviews and secondary sources. In order to ensure that the data collected provides unbiased, suitable and close estimates of the characteristics of the sample population, a sample which is a representative was drawn using the systematic sampling technique, one hundred and eighty (180) randomly selected out of the three hundred and eighty (380) FIRS staff. In analyzing the data collected in this study, the researcher adopted the summated or Likerttype rating scale where a list of statements about what is being measured is generated and providing a set of graduated response options that enable the individual to indicate his degree of agreement or disagreement with the statements. Also the sample statistical technique used is the percentage method of analysis. The cut-off mean of 3.0 was determined along the following logic. The sum of weights 5, 4, 3, 2 and 1 is 15 which when divided by 5 (number of response categories) yields 3.0. It follows from these that a group of respondents can be considered as exhibiting positive perception when the grand mean score on the questionnaire is equal to or greater than 3.0 (• 3.0) and negative perception if the mean score is less than 3.0 (” 3.0). The methods of data analysis used in this research are descriptive statistics such as percentages and mean and combined mean. Results and Discussions Table 1 FIRS staff VAT Educational, Administrative and Technical skills Strongly Agree (SA) Scores Agree (A) Scores Undecided (U) Scores Disagree (D) Scores Strongly Disagree (SD) Scores Total Scores Mean Scores Remark 1 2 FIRS staff have requisite educational qualification to administer VAT efficiently. FIRS staff have requisite technical skills 280 604 102 102 104 1192 3.01 Agree 245 380 99 240 99 1063 2.68 3 4 5 to administer VAT efficiently. FIRS staff have requisite training to professionally to administer VAT efficiently. FIRS periodic workshops and conferences impart sufficient skills to staff for effective VAT administration. FIRS manpower development plan would improve VAT administration. Disagree 235 380 93 242 102 1052 2.66 Disagree 205 288 87 282 113 975 2.46 Disagree 165 Overall Mean Scores 248 96 390 74 973 2.46 2.65 Disagree Source: Field data (2008). Table 4.1 depicts the perceptions of FIRS staff•s on the state of their administrative skills with specific skills requirement for the applicability of VAT in Nigeria. Judging from the results, there are indications that basic educational qualifications are met by the employees of FIRS, given that the mean score exceeds the cut off mean of 3.0, however, other factors that account for administrative skills such as technical skills, VAT-specific training, workshops and the manpower development plan felt short of the computed cut off mean. Overall cut off mean (2.65 points) fall short of the cut-off mean of 3.0. This is an indication of weak manpower for the administration of VAT in Nigeria. The staff were in agreement during interview that educational qualifications is only a pre-requirement for employment into FIRS, further training they submitted was required to inculcate tailored knowledge and skills to staff for effective delivery of VAT programme. Table 2 Relevance of VAT to Revenue Generation, Consumption and Saving patterns Strongly Agree (SA) Scores Agree (A) Scores Undecided (U) Scores Disagree (D) Scores Strongly Disagree (SD) Scores Total Scores Mean Scores Remark 1 VAT increases your general consumption of goods and services. 65 2 VAT services encourage individuals to save part of their income. 75 140 99 438 96 838 2.12 Disagree 336 123 350 81 965 2.44 Disagree 3 VAT targets revenue generation for government and are detrimental to consumption and saving. 225 4 Increase in Vat rate from 5% to 10% would generate more revenue for government but detrimental to consumption and savings. VAT contributions to public expenditure in the three tiers of government enhance economic stability if spent on preferred sectors that impacts of citizens• welfare. 492 183 264 35 1199 3.03 Agree 395 612 153 184 21 1365 3.45 Agree 5 285 Overall Mean Scores 560 132 164 73 1214 3.07 2.82 Agree Source: Field data (2008). Table 2 presents the responding VATable organizations and public respondents• perceptions on Relevance of VAT to revenue generation, consumption and saving patterns. They claimed that the VAT on their goods and services caused decreases in their general consumption of goods and services (Table 2). They agreed that VAT targets revenue generation for government and are detrimental to consumption and savings. They also claimed that Increase in Vat rate from 5% to 10% would generate more revenue for government but detrimental to consumption and savings. It was suggested that the increase in rate without efficient mechanisms for assessment and collection might not significantly improve government revenue generation yet impact negatively on the consuming public. Clearly, they agreed that a situation in which VAT contributions to public expenditure in the three tiers of government enhances economic stability if spent on preferred sectors that impacts on citizens• welfare. It was suggested during interview that the leakages in the collection and appropriation of revenue accruing from VAT should be made effective. Table 3 Problems militating the effective administration and impact of VAT Factors SA Scores A Scores U Scores SD Scores D Scores Total Scores Mean Scores Lack of VAT education Limited or lack of independence of revenue services (FIRS). Deficient tax administration and collection system apathy of the Nigerians caused by the lack of value received in return for their taxation money Low level of literacy Poor relationship between taxpayers and tax authorities Practical problems related to the implementation of VAT•s dual elements (input and output). Poor remuneration and motivation of FIRS staff. Tax evasion and avoidance. Inadequate funding for the revenue services. Corruption is prevalent in the administration of taxes. Unqualified, Untrained staff The lack of the VAT Tribunal, as recommended under VAT Act. Overall Mean Score 45 32 0 2 3 82 3.90 10 28 9 6 4 57 3.00 25 32 3 6 2 68 3.58 15 10 40 36 0 3 6 6 3 4 64 59 3.37 3.11 0 48 6 6 2 62 3.26 25 48 6 0 0 79 4.16 35 45 44 24 0 3 0 2 1 2 80 76 4.21 4.00 40 28 6 2 1 77 4.05 15 30 28 40 9 3 6 2 3 1 61 76 3.21 4.00 15 310 44 472 3 51 2 46 3 29 67 908 3.53 3.64 Source: Field data (2008). In order to find out precisely the problems of VAT administration some VATable organizations, FIRS staff and the public respondents• opinions were surveyed as presented in Table 3. The list of registered VATable organizations as at December 2005 was obtained from the Federal Inland Revenue Service (FIRS). Among the problems of VAT administration, thirteen (13) problems identified in the literature review were evaluated using a Likert-scale rating mean score on the questionnaire. The results in Table 3 depicts that all the factors maintained minimum mean scores of 3.0 indicating that the factors tested were responsible for inefficient administration of VAT in Nigeria at various degrees. The most significant of these problems maintained scores of 4.0 and above, these include the poor remuneration and motivation of FIRS staff (4.21 points), practical problems related to the implementation of VAT•s dual elements of input and output (4.16 points), inadequate funding for the revenue services (4.05 points), tax evasion and avoidance and problem of unqualified, untrained staff (4.0 points). The lowest rated problem on the scale was limited or lack of independence of revenue services (FIRS) with a mean score of 3.0 points. However, earlier in-depth interviews with a few of the VATable organizations indicate that input VAT is wrongly treated as production costs. The responding organizations do claim that input VAT actually caused their working capital requirements to increase. Therefore, the argument that the system is not properly understood by the VATable organizations remains. There exists empirical evidence in this study to support that VAT administration has not been fully implemented due to myriads of problems. Most outstanding of these limitations is weak administrative and technical manpower of the implementing agency, FIRS. VAT has been found to have high capacity to improve tax revenue generation in Nigeria. However, increases in tax rate might not significantly improve revenue generation as expected if the framework for assessment and collection of VAT remain ineffective. Yet it would impact negatively on public consumption and savings patterns. More seriously, if revenue earned are not judiciously spent on key public expenditure sectors. Several problems requiring resolutions have been identified in various degrees. Most outstanding is general lack of knowledge of the operations of VAT mechanism by VATable organisations, FIRS staff and the public. Conclusion and Recommendations A major problem facing the country is the multiplicity of taxes. Individuals and corporate bodies complain about the ripple effects associated with the duplication of tax. The expectation of oil wealth since the oil boom of 1973/74 has influenced government disposition to non-oil revenue. The sudden upsurge in oil revenue created the neglect of nonoil revenue. Cheap oil revenue limited the resourcefulness and imagination of the tax authorities in searching for alternative sources of revenue. VAT proceeds are becoming significant source of government revenue but inequitably distributed irrespective of derivation. Lagos State is a good example of efforts to offset the inequitable distribution of VAT proceeds: it imposed certain taxes and proposed a re- introduction of the sales tax. To control multiple taxation, the Joint Tax Board has created a degree of harmony. Since the early 1990s, Nigeria has been moving away from direct to the indirect tax considered to be less distortionary. VAT, for instance, is less distortionary because it is applicable to the value-added contents of imports and of domestically produced goods. The potential for maximizing the benefits of this taxation form, however, is constrained by structural problems in the economy. The predominance of the informal sector, constituting more than 50 per cent of the country•s economy, enables most domestic production to circumvent VAT. The conclusions emerging from these study are three-fold: the FIRS staff does not possess the administrative skills for efficient applications of VAT operations,, VAT influences revenue generation, the consumption and saving patterns of Nigerian consumers and the they exists myriads of problems strongly militating the effective administration and impact of VAT in revenue generation in Nigeria. The following recommendations emerged from the findings and conclusions of the study: 1. The administrative machinery of FIRS should be improved to eliminate weaknesses and internal control lapses in the assessment and collection of VAT. The Inspectorate, Audit and Investigation departments are specialized departments and therefore should be manned by professional officers. The entire staff should be given requisite orientation on VAT operations along with technical skills. 2. VATable organizations and individuals• databank need to be appropriately captured for effective administration. The FIRS has a responsibility to engage professionals to undertake public enlightenment on VAT education among these organizations and even provide professional assistance in the handling of input and output VAT issues, assessment of VAT and remittance of VAT collections. 3. VAT tribunal recommended by the VAT Act 1993 should be established to reduce cases of tax evasion, corruption and non remittance of VAT collections by clients. 4. The recommended increase in VAT rate in the proposed VAT (Amendment) Bill 2005 should be suspended in view of adverse effect of such rate on consumption and savings. Rather effort should be made to maximize the collection of the 5% VAT rate which is grossly under assessed and underutilized. 5. VAT revenue should be equitably distributed among the three tiers of government according to principle of derivation. 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