Vat__Pay_as_You_Spend

VAT: Pay as you spend Contributed by Ndako Worogi Friday, 18 January 2008 Last Updated Friday, 18 January 2008 What do you know about value added tax' During the anti-VAT and fuel price protests at the inception of the Yar’Adua administration, the acronym—‘VAT’ rent the air. But few people actually knew/know what VAT represents. Ndako Worogi Edotsu painstakingly delves into the details of VAT and its administration as a system of tax. Value Added Tax (VAT) has been defined as a multistage consumption tax imposed on value added to goods as they proceed through various stages of production and distribution and to services as they are rendered. VAT was introduced in Nigeria by VAT Decree 102 of 1993, but came into effect on 1st January, 1994 and replaced sales tax Decree of 1986. It is an indirect tax based on consumption, the incidence of which is borne by the final consumer, value added tax (VAT) covers locally manufactured goods, imported goods, professional services, hospitality as well as banking services. This tax is administered by the Federal Inland Revenue Service (FIRS) and charged at 5% flat rate on goods and services. Some goods and services are exempted from the value added tax. They include basic food items, baby products, medical and pharmaceutical products, books and other educational materials, agricultural equipment, fertilizers and veterinary medicines, commercial vehicles and their spare parts, newspapers and magazines, services of community, peoples and mortgage banks, medical services rendered by private health institutions and all diplomatic items. A vatable person is one who trades or transacts in vatable goods and services. Value added tax Act specifies that every vatable person is obliged to register for value added tax. Therefore, all domestic manufacturers, wholesalers, distributors and suppliers of goods and services are to register. Also, professionals like accountants, engineers, architects, lawyers and other related professionals providing services to clients are expected to register for value added tax as agents. A taxable activity is any activity other than those exempted from value added tax, which is conducted as a business, trade, vocation or profession and includes activities of public or government authorities, associations and clubs. It is not relevant whether the business is carried on for a profit, but it should only involve or intend to involve the supply of goods and services to another person for consideration. Basically, two basic records are required to be kept by all vatable persons. These are the input VAT and output VAT records. Input VAT records show the VAT amount paid by the vatable person on his purchase of vatable goods and services. It includes VAT input analysis book and VAT input analysis schedule. The former is maintained by companies other than banks, insurance companies and finance houses and are used to record payments of VAT to supplies of goods and services. The VAT input analysis schedule on the other hand is used by banks, insurance companies and finance houses to record VAT debit advices sent to customers during the period, while VAT adjustment schedule is used to record events that occur in the course of normal business that cause adjustment to be made in the prices paid on goods and services supplied by companies, which have effect on the amount paid. Some events that may lead to adjustments include goods returned for which VAT invoice had been included in the input VAT; VAT on debit notes received in respect of which liability has occurred, but payment had not been made; VAT on cancelled supplies whose purchase documents have been processed and included in the VAT input among others. On the other hand, output VAT records the VAT amount collected by the vatable person on his sales of vatable goods or supplies of vatable services. It includes output VAT analysis book which shows the sales invoice, the tax invoice and the service bill and the output VAT adjustment schedule which records those events that give rise to adjustments in the output VAT collected which may include value of goods on barter transactions, value of goods and services for private consumption, discounts allowed and bad debts recovered among others. Because of its importance, value added tax (VAT is a federally collected tax and administered by the Federal Inland Revenue Service (FIRS). At the initial stages (1994-1996) the tax accrued almost exclusively to the states (80%) while the Federal Government took only 20%. However, due to successes recorded and the magnitude of collections made, changes were introduced in its allocation among the three tiers of government. In 1997, the Federal Government had 35%, states shared 40% and local governments 25%. Since 1999, however, the distribution has changed to Federal Government 15%, states 50% and the local government 35%. The relevance of VAT in the Nigerian tax regime provides a case study in success. The prediction by some international The Market http://themarketmagazine.com Powered by Joomla! Generated: 6 July, 2011, 22:58 finance institutions was that not more than N1 billion will be collected as VAT in the first year of its introduction, but the Federal Inland Revenue Service was able to collect N7.2 billion; surpassing expected collection by 620%. VAT has been viewed as progressive in its outlook and revolutionary in practical returns as it is a tax on people’s expenditure rather than on their income, thereby resolving the problem of tax evasion by many income earners. VAT by its nature is a consumption tax and since virtually everybody consuming a vatable product or service must pay the tax, it makes compliance easier. VAT has the ability to generate stable and steady revenue to the government unlike the oil revenues whose market government has no control over. It helps to reduce overdependence on oil revenue, thereby sustaining economic growth and development at all levels. Despite the numerous gains of VAT, its introduction is said to have induced inflation in the economy. The common man has been worse off as the manufactures and service provides hiked prices unnecessarily in the pretext that it is VAT that added to their cost of production. Fears have also been expressed not on the inability of VAT to generate revenue to the government, but on the ability of the revenue generated not to be adequately accounted for, due to corruption in the system of tax administration. With the steady growth in VAT collections which surpassed the companies’ income tax and from an initial thirtynine VAT office structure, the network of VAT administrative offices grew to 150 nationwide by 2005 and people started speaking in hushed tones that VAT collection could have been bigger. With successes recorded by VAT, technical knowledge about its administration began to be taken just for granted, according to C.N Onyegbule, a tax analyst and FIRS staff. With such developments, taxable persons began to take advantage and cash in on the technical inadequacies and ignorance of some VAT administrators to undermine VAT collections. This resulted into failure to remit VAT collected, failure to charge VAT and over bloated input VAT claims. This gave a corruption prone perspective about VAT and militated against effective administration and compliance. Quite unfortunately due to inadequate statistics about the vatable persons in Nigeria, especially in the distribution sector of the economy, as well as the professional service, it is believed that many vatable products and persons will escape the VAT net without being noticed. It has been canvassed by the regulatory/administrative body of VAT (FIRS) that the rate of VAT be increased to 10% or more in order to increase revenue generation; VAT to control consumption; and to progressively replace the direct (income) taxes with indirect (consumption) taxes which are easier to collect. From available data, Nigeria according to the FIRS has one of the lowest VAT rates even within the African continent. But Japan with a far better economy as indicated by the GDP and per capita income also has 5% as VAT and even started their VAT at 3% in 1989. In the same vain, Canada with an equally more buoyant economy has a 7% VAT rate which commenced in 1991. The quest for increased revenue should not be at the detriment of the citizens. The level of poverty and hardship in Nigeria at the moment might not be an auspicious time t o increase VAT rate, which was why there was massive public outcry when outgoing President Obasanjo raised VAT to 10%. For an efficient VAT administration and enhanced collection to be achieved, efforts be made to broaden the VAT base, proper documentation of vatable transactions through the input – output mechanism prosecution of VAT defaulters should be stepped up to elicit voluntary compliance. Leakages of tax revenue may be more due to incompetence than it is from corrupt practices. It is therefore important that capacity building of FIRS staff be accorded priority to be technically equipped to handle tax matters, especially VAT. The Market http://themarketmagazine.com Powered by Joomla! Generated: 6 July, 2011, 22:58