CHAPTER 1

1.0 INTRODUCTION

1.1 Background to the Problem:

Tax, the world over, is a major source of revenue to the government. The

major reason why government imposes tax is for the generation of revenue in

support of government programmes and to enable it continues to perform the

legitimate functions of the state. Tax is also used by government as a tool for

income redistribution and economic regulation. For these reasons, government

imposes various forms of taxes grouped under direct and indirect taxes. Value

Added Tax (VAT), our subject matter, falls under the indirect types of tax.

Value Added Tax (VAT) is a consumption tax that has been embraced

by many countries of the world.

Traditionally, income has been the major base for taxes for a very

long time. However, major tax reforms by many countries in recent times

have led to the discovery of consumption as having potentials for higher

yield and greater chances of success than income. Thus, emphasis has

been shifted from income-based to consumption-based taxes in developed

and developing economies.

Again, of all the consumption-based taxes such as Custom and

Excise duties, Import & Export duties, Sales and Purchase taxes, VAT is

rated the highest in terms of yield and ease of administration. It was in

realisation of these great potentials of VAT and mainly to increase the

revenue profile of government that led to the introduction of VAT by the

1
Nigerian government in 1993, through Decree 102 of 1993. This decree

actually took effect from 1st January, 1994. Value Added Tax was to replace

the Sales Tax, which was already in existence but operated on a very

narrow scale by state governments.

Since its emergence on the Nigerian fiscal scene about ten years ago,

VAT has witnessed some teething problems and scathing criticisms. For

instance, Lagos state government has threatened to re-introduce Sales Tax

against the letter and spirit of the VAT decree. This, in a way, is a protest to

the failure of the VAT policy in achieving its objectives.

This research is therefore to investigate the contributions VAT has

made to the revenue profile of governments (measured in terms of

collections), and the problems in the implementation of the VAT policy, with

the aim of proffering suggestions for improvement.

1.2 Statement of Research Problem:

When VAT was introduced into the Nigerian fiscal system in 1993, it was

vaunted as the panacea for all government’s problems concerning revenue

generation, especially from indirect taxation which has been experiencing very

low yield in terms of revenue, prior to this time. VAT came with a promise that it

was the main (and only) answer to all indirect taxes, and that the administration

and management of VAT would ensure that it completely obviates the need for

Sales Tax. Thus VAT came on board with an expanded (tax) base and

enhanced list of goods and services subject to tax under the VAT system.

2
 In recent times however, there have been widespread complaints and

criticisms about the collection and the general administration of VAT in the

country, to the extent that some states (like Lagos State) have threatened to re-

introduce Sales Tax against the spirit and letter of the VAT Decree 102 of 1993,

as a way of protesting the failure of VAT in achieving it objectives. Therefore

this research is an appraisal of the VAT system and its administration in the

Nigerian nation, using Akwa Ibom State as a case study. Essentially, the study

appraises the contributions VAT has made to the revenue profile of government

and the problems militating against its performing better.

1.3 Objectives of the Study

This study in broad terms, intends to undertake an appraisal of Value

Added Tax as a revenue source for government.

In specific terms, the study seeks:

(i) To evaluate the procedures for the implementation of the Value Added

Tax (VAT); in Nigeria.

(ii) To assess the amount of revenue generated from VAT in Akwa Ibom

State and the allocation of this revenue to the state by the Federal

Government;

(iii) To examine the contributions of VAT revenue to the economic

development of Akwa Ibom State.

(iv) To identify the problems of VAT administration and examine possible

ways of improvement.

1.4 Significance of Study

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 This study is significant in the following ways:

(i) It will explore the working dynamics of VAT and create awareness on

operations of this novel tax,

(ii) VAT payers and the general public would be better informed on VAT-able

and non-VAT-able products and services and how to take advantage of

VAT- inputs.

(iii) Administrative lapses and implementation difficulties of this tax policy

would be x-rayed and suggestions proffered for improvement.

(iv) The findings of this study would be useful in fiscal policy formulation.

(v) The study would also bridge the gap in knowledge about the Value

Added Tax and serve as a source of reference for further research on this

subject.

1.5 Major Research Questions and Hypotheses

This study will use both research questions and hypotheses.

(a) The Research Questions:

The study will seek to answer the following questions.

(i) How does the actual implementation of VAT in Nigeria adhere to

the VAT Policy and the procedures for the implementation of a new

tax?

(ii) To what extent does the collection and accounting for VAT comply

with the generally accepted accounting principles?

(iii) In what ways does VAT revenue contribute to the economic

development of Akwa Ibom State?

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 (iv) What are the problems encountered in the administration of VAT in

Akwa Ibom State and in what ways can this be improved?

1.6 (b) The Research Hypotheses

(1) There is no significant difference between the actual

implementation and the theoretical set up of VAT in Nigeria.

(2) The collection and accounting for VAT revenue does not comply

with the generally accepted accounting principles.

(3) There is no significant relationship between VAT collections and

VAT allocations as stipulated in the VAT policy.

(4) Value Added Tax revenue has made a significant contribution to

the economic development of Akwa Ibom State.

(5) There is a significant relationship between the inherent defect in

VAT administration and the amount of revenue generated from

VAT in Akwa Ibom State.

1.7 Scope and Limitations of the Study:

Although VAT is a “national product”, but the scope of this study is

limited to Akwa Ibom state only because of the limited resources in carrying

out a wider study. There is no intention to generalize the findings of this

study because of the limited scope already explained. But it is hoped that

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the findings of this study, among other things, could provoke further

research work on this subject, this time, on a larger scale than this.

1.8 HISTORICAL BACKGROUND OF VAT IN AKWA IBOM STATE

The Uyo VAT Office was created alongside other local VAT offices in

November 1993 when VAT was billed to takeoff all over the country. Active

operations however started in January 1994 when VAT eventually took off

throughout the country. The Uyo VAT office was given the mandate to

administer VAT throughout Akwa Ibom State VAT jurisdiction. The office had

MR. P. A. Okon as the first VAT Officer. The Uyo Local VAT Office (LVO) being

an arm of the Federal Inland Revenue Service, the VAT Officer works under the

Federal Tax Officer. The State VAT office is under the Eastern Zonal Office

which is responsible for setting targets for the Local VAT officers under it, as

well as Co-coordinating the activities of the Local VAT Offices.

As VAT activities in the State began to increase, there was need to create

additional sub-offices in the other two senatorial districts of the State to

coordinate the collection and administration of VAT in those areas. Accordingly,

the Ikot Ekpene and Eket sub-offices were created in 1996. These Offices were

manned by Tax officers who also reside in these areas with minimal autonomy.

However, about early year 2000, this arrangement was dispensed with as it

tends to bring about friction and was fast becoming inimical to the goal

congruence of the State VAT office. Although the sub-Offices arrangement still

6
 subsist, but they now exist as units in the Uyo Local VAT office, reporting

directly to the State Controller of Taxes.

A lot of changes have taken place in the management of the State VAT

office in the last ten years. These changes are as a result of policy at the

National Headquarters in Abuja, which is communicated down to the States for

implementation. For instance, towards the end of year 2003, the office of the

state Local VAT Officer has been abolished. Each State Office of the Federal

Inland Revenue Service now has only one head, called Area Tax Controller. He

is the one controlling all VAT activities as well as other federal tax matters in the

State. The Organization Structure of the Federal Inland Revenue Service in the

State is depicted as below:

Diagram i: Organogram of Uyo VAT Office.

Tax Controller

Collection Monitoring Tax Officer Ikot Tax Officer Assessment Central

Officer Unit Ekpene Zone Eket Zone Officer Registry

Payments WHT/VAT Arrears Book keeping Registration of Tax Financial

Enforcement Reconciliation payers Service General Admin.

Source: FIRS – Uyo VAT Office

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The Tax Controller is assisted by the following five Units :

1. Collection Unit:

This unit is very sensitive and central in the overall tax administration of

the State Office. Headed by an officer in the rank of a Tax Inspector. The Unit

has other sub-units working under the supervision of the unit head designated

as Collection Officer. These sub-units are:

(i) Payments Unit which is responsible for all payments accruing to the tax

office under any head whatsoever.

(ii) The Withholding Tax /VAT units which is responsible for matters

relating to Value Added Tax and Withholding Taxes.

(iii) Arrears Enforcement Unit is responsible for sorting out all complains by

Tax payers with respect to taxes they (Claim to) have paid and the notice of

indebtedness served on them. The unit also maintains the record of

transactions of all tax payers for reconciliation purposes. All these sub-units are

headed by Supervisors.

2. Assessment Unit:

This unit is responsible for the identification and registration of Tax

payers (including VAT-payers). It also attends to Tax-payers’ complaints with

respect to their assessments and other services required by Tax payers. The

8
finance and general administrative functions of the State Office is also under

this unit. The unit is headed by an Assessment officer, who is of the rank of an

Inspector.

3. Monitoring Unit:

Another very important unit in the FIRS Office is the Monitoring unit. The

unit is responsible for ensuring compliance to tax laws by Tax-payers. Where

the Authority is in doubt as to the claims made by a Tax payer, it is the

monitoring unit that will be assigned to carry out tax audit in such organization

or on such person making the claims. It is this unit that will report on Tax

defaulters and recommend appropriate action to be taken on such defaulters.

The head of this unit must also be of the rank of a tax Inspector.

4. Sub-Offices (Senatorial District Offices)

There is a separate unit for each of the two senatorial districts, namely

Eket and Ikot Ekpene, except Uyo which is under the jurisdiction of the Area

Tax Controller. Each of the two units is headed by tax officers who is

responsible for matters relating to tax collection and administration in their

respective districts.

5. Central Registry

This unit is created for ease of administration. It is the unit responsible for

movement and custody of tax files. It is only officers in the rank of tax

Inspectors that are authorized to sign for tax files from the Central Registry.

9
1.9 Organisation of the Study

This study is organised into five chapters. Chapter one introduces the

subject, giving a brief background to the concept of taxation and the problems

necessitating this study. The statement of research problem, research

objectives, significance, scope and limitation of the study and the relevant

hypotheses will all be covered in this chapter. The chapter will also define

certain terminologies as used in this study. Chapter two reviews relevant

literature and presents the theoretical framework for the study. Such literature

consist of textbooks, journals, magazines, as well as related research works in

the field of taxation in general and VAT in particular.

In chapter three the research methodology presented. Under this the

research design, population description, sampling procedures, method of data

analysis and decision criteria are discussed. In chapter four the data collected

are presented, analysed and interpreted. The fifth and final chapter carries the

summary of the research findings, conclusions, and recommendations

1.10 Definition of Terms Used in the Study

In this section, attempt is made to define certain terms according to the

context in which they are used in this study. The aim is to avoid ambiguity and

misunderstanding of words used which could confer different meaning to that

intended by the researcher.

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 TAX: A tax is a compulsory payment levied by the government of a

country on the citizen of that country including corporate citizens for the

purpose of raising money for public purposes.

 CONSUMPTION: The purchase and utilization of goods and services for

the gratification of the desires of an individual, a business organization, a

political or economic entity.

 Tax AVOIDANCE: Tax avoidance is a situation whereby a tax pay

organizes his/her financial activities in such a way as to enable him pay

less tax, taking advantage of the loopholes in the tax laws. It is a

legitimate way of reducing tax burden as a result of effective tax

planning.

 Sales Tax: This is a tax levied on the purchase and sales of designated

goods or services. Usually, the burden of this type of tax falls on the final

consumer of the goods services.

 TAX EVASION: TAX EVASION connotes all those activities that

culminate in the tax payer not paying the tax imposed on him by the

existing law, through fraudulent practices such as making incorrect

returns, or neglect to make any returns or fail to pay the due tax

assessed on him/her. It is an illegal way of paying les tax than what one

ought to pay.

 TAX INCIDENCE: By the incidence of a tax it means the burden of the

tax by reference to who suffers from its imposition.

 TAX IMPACT: By the impact of a tax it means the immediate shock

suffered as a result of the imposition of a tax. It is possible to suffer a tax

11
 impact but pass on the burden to another person; especially in indirect

taxes, including sales and Value Added taxes.

 TAX BURDEN: This refers to the final effect of tax imposition by

reference to who suffers the full weight of the tax

 VAT-ABLE PERSON: VAT-able person refers to any person who trades

in goods and services which are subject to tax under the VAT. Every such

person (individual or Corporate person is required to register for VAT

payment or as a VAT-agent (FIRS, 9304:6).

 VAT-ABLE GOODS AND SERVICE: These are goods and Services

which are subject to tax under the VAT system. Any good or service

which is not expressly exempted by the enabling Decree or law, is

deemed to be a VAT-able good or Service.

 OUTPUT-VAT: This refers to the Naira amount of the VAT that is due on

VAT-able supplies of goods and services. It is derived by multiplying the

taxable value of the aggregate supply by the tax (VAT) rate. (FIRS

9304:1) .

 INPUT VAT: In a multi-stage tax system, such as VAT, input VAT refers to

the tax already paid by the tax payer at the earlier stage which is to be

deducted from his output tax (VAT) to arrive at the VAT payable at the

present stage in the chain. This means that the output VAT at the first

stage becomes input at the second stage, soon.

 VALUE ADDED: This is the incremental value of goods and services as

they pass from one hand to another in the chain of production and

distribution.

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 FISCAL POLICY: The word ‘fiscal’ in taxation has to do with finances.

Thus fiscal policy is a plan of action proposed or adopted by government

with regards to its finances.

 TAX INVOICE: This means any document issued as an evidence of

payment made for the supply of goods and services.

 CASCADING: Cascading is a situation whereby goods or services,

which have already been taxed is further subjected to tax as they pass to

the other stages in the production and distribution chain. Put simply, it

means tax on taxed items.

 REGISTERED PERSON: This refers to the individual or organisation

who has registered for VAT in accordance with the provisions of the VAT
Decree No.102 of 1993. A registered person serves as an agent for VAT
collections on behalf of the Tax authorities.

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CHAPTER 2

REVIEW OF RELATED LITERATURE

2.0 INTRODUCTION:

In order to provide a framework for analyzing the Value Added Tax (VAT)

system, this chapter will carry out a review of related literatures on the subject

matter.

This will be done with the aim of analyzing the various concepts

associated with VAT and also to examine its implementation strategies in other

climes, as a basis for assessing the one adopting in Nigeria, and the extent to

which the Nigeria VAT meets what is commonly referred to as the Best

Practice” in Taxation.

Accordingly, this chapter will be discussed under the following headings:

 The general overview of Taxation

 Consumption as Tax Base

 Historical perspectives of VAT

 Implementation processes of VAT

 The Nature and concept of VAT

 Why Nations of the world opt for the VAT system

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2.1 GENERAL OVERVIEW OF TAXATION

2.1.1 What is tax?

The New Website Dictionary of English Language defines tax as a

charge imposed by governmental authority upon property, individuals or

transactions to raise money for public purposes. The Black’s Law dictionary on

its own chooses a rather appealing language when it describes tax as

a rate-able portion of the produce of the property and labour of

the individual citizens, taken by the nation in the exercise of its

sovereign rights, for the support of government, for the

administration of laws and as the means for continuing in

operation the various legitimate functions of the state. (CITN,

2002:3).

According to Rabiu, S.A (2003:1), tax can be defined as an annual

compulsory levy imposed on taxable entities by the government.

Whittam R. H (2003:23) views tax differently. He defines tax as ‘the demand

made by the government of a country for a compulsory payment of

money by the citizens of the country’.

However, the Chartered Institute Of Taxation of Nigeria (CITN) in her

Handbook defines tax as an enforced contribution of money, exacted

pursuant to legislative authority.

Tax could also be defined simply as a compulsory payment levied on the

citizens by the government for the purpose of achieving its goal (Naiyeju,

1996:9)

15
 The central issue in the above definitions is that taxes are charged for the

various legitimate functions of the state. It also indicates that tax is compulsory

payment and is based on a given rate.

2.1.2 The Nature of Tax

Before probing further the characteristics of taxation, it is needful to state

that it is not all compulsory payments that should be regarded as tax. Fines or

penalties are not a tax. Not even when the fine is imposed by a tax statute. For

this reason, penalties for wrong parking, or such other defaults do not belong to

the realm of taxes (CITN, 2002:3). Also, a charge imposed for a particular

service rendered, property hired or goods sold, is not a tax. Accordingly, fees

payable for parking vehicles, public toilets usage, sewage clearing, and water

rates are therefore nothing but payment for services (Ipaye: 2003).

Consequently, certain charges such as marriage, birth and death registration

certainly do not qualify to be described as a tax or levy. Furthermore, it must be

noted that a tax is not the same as a debt, although an undischarged tax

liability may be statutorily converted into a debt due to government. (IPAYE,

2003:2).

Essentially, a tax is an enforced contribution of money, exacted

pursuant to legislative authority. It follows therefore that if there

is no valid statue by which it is imposed, a charge is not a tax,

But once it is backed up by written law and has other identified

characteristics of a tax, it remains a tax even if it is called other

16
 names like toll, tribute, tollage, gabble, import duty, custom,

excise, subsidy, aid, supply or other name (Black’s Law

Dictionary, 1979:309, cited in Ipaye, (2003:4).

Akande (2001:1) tutored that

In detecting a tax, it is better to look at the essential

characteristics rather than its name. One useful indicia, he

argued, is in the fact that revenue generated from taxes normally

goes into the general purse, and may be used for the common

good of all. Though tax is assessed in accordance with some

reasonable rule of opportunity on persons or property within the

tax jurisdiction, however, the benefits of the contribution are not

necessarily to be enjoyed contemporaneously or proportionately

to contributions by individuals.

In support of Akande’s position Akpakpan (2003) argued that

you cannot sue government for not spending enough tax money

in your locality, even when you pay more tax than others. He

maintained “that government’s power of imposition is not

dependent on the conferment of benefit, but is essentially on

exercise of sovereign power”.

2.1.2 Reasons for Taxation

Raising of funds for government expenditure has always been the central

reason for imposition of taxes. Other purposes of tax include the achievement

of fiscal balance, stimulation of investment, influencing the direction of

17
investment and reduction of or taming the consumption pattern of certain goods

and services. But Ipaye (2003:5) is not in total support of this as the only

reason for taxation. He argue that:

“the functions of tax in modern times go beyond the traditional one of

generating income for government. He maintained that the striking

paradox of the modern tax system is that even the goal of income

generation is not necessarily to be achieved just by raising taxes. He

reasoned that, more often than not, taxes and other government

resources hardly met the cost of capital investment required for the

overall development of the economy.”

Naiyeju (1996:12), in support of these went further to identify four

major sources of public finance available for government generally.

These are:

i returns on investment of sale assets and natural resources by

government, agencies or financial institutions .

ii borrowing money from domestic or foreign financial institutions or

governments;

iii printing currency (in line with the Keynesian prescription of ,monetary

expansion to cure fiscal disequilibrium); and

iv imposition of taxes on the citizens, their incomes, business profits,

assets, or consumption.

Of all these sources, imposition of tax (iv above) is the most commonly

used.

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 Historically, taxation constitutes the oldest instrument for financing the

public sector. The Bible records that Jesus Christ (himself) paid tax and

enjoined his disciples to do so. (Matthew 22:17).

Naiyeju (1996) argued that of all the potential sources of government

revenue, it is taxation (and in some cases, returns on investments) that can be

most benign in financing public goods and services.

It will be valid to posit that, apart from the provision of money for public

sector expenditure, taxation serves as a veritable tool for fiscal policy

regulation. According to Naiyeju.

Tax is commonly used to pursue the realization of the objectives of

fiscal policy, which of course, is the mobilization and allocation of

resources to desired productive sectors of the macro economy;

(re)distribution of income and wealth among different groups of

citizens and stabilization of the effects of market forces on prices,

employment, balance of payments, among others.

The need to mobilize savings to support capital formation, which, in turn,

is expected to smoothen business and industrial growth, reason behind the

imposition of taxes. The logic here is that,

if the taxation of consumption of certain goods/services would

reduce consumers demand for them, then the unutilized

disposable income could be saved. Nicholas Kaldor (1975:29)

(cited in Naiyeju, 1996).

19
 Kaldor argued that by providing a surplus over recurrent expenditure,

they make it possible to devote a higher proportion of resources to building up

capital base.

Furthermore, as the wealth-poverty gap widens, arguments for economic

reforms become stronger. Thus, governments are compelled to continue to

explore all means of redistribution of resources and improving the welfare of

citizens. This, according to Naiyeju, (1996),

will result in a look-inward approach, which will in turn explore the

form of taxes capable of achieving this objective – one of which is

VAT.

2.1.3 Forms of Taxes

Taxes have been classified in various ways, according to who pays them,

who bears the ultimate burden of it, the extent to which its burden can be

shifted, and the tax base. Thus, we have direct and indirect taxes. Also, taxes

are traditionally based on income of individuals or profits of an economic entity.

Other bases of tax include wealth, capital, property and consumption.

Direct Taxation

Direct taxation is a situation where the tax is imposed directly upon or on

the property of the person paying the tax. All forms of income tax and those

based on capital profit and wealth fall within the realm of direct taxation.

Direct taxes are said to be equitable, economical; flexible, certain,

enhances income (re)distribution and promote a sense of civic consciousness.

However, it is argued that direct taxation is a dis-incentive for hardwork;

20
encourages tax evasion; is a disincentive for foreign investment and could be

very painful, since the impact and the burden fall on the tax payer. The Federal

Inland Revenue service “General tax Guide”, (2002:5-6) listed the following as

example of direct taxes:

These are:

- Personal income tax

- Capital gain tax

- Petroleum profit tax

- Companies income tax

- Capital transfer tax (abrogated in Nigeria with effect from 1/1996)

- Certain categories of property tax (depending on usage of property).

- Certain types of stamp duties (depending on type of instrument and

the legal status of the parties.

- Some aspects of road taxes (depending on the usage of the vehicle).

- Entertainment Tax )depending on who is paying)

Indirect Taxation: In the case of indirect taxation the tax payer is different

from the person who bears the burden of the tax. The tax is generally

collected from the importer, exporter, manufacturer, wholesalers, retailers

and consumer of the taxable commodity or service. Here, the burden of the

tax is born by the ultimate consumer or user of the commodity of service,

usually reflected in the form of higher prices. All forms of consumption tax

fall under the purview of indirect taxation, Examples of indirect taxes are:

21
  Sales Tax,

 Expenditure tax,

 Import duties,

 Export duties,
 Excise duties, and
 Value added tax
Tax experts are in consensus that indirect taxes are easy to pay, difficult to

evade, highly productive, promote capital formation, could be an

instrument for protecting domestic industries and discouraging the

consumption of non-essential foreign goods, undesirable commodities and

harmful commodities such as drugs and alcohol. (Tait (1988), Ogundele

(1999) Naiyeju (1996)

But the critiques of indirect taxation argued that indirect taxes could be

regressive, in-equitable and could lead to resource allocations as well as

difficult in predicting yield and high cost of collection/enforcement.

2.1.4 Canons of Taxation

By canon of taxation, we mean those principles or qualities which a good

tax system should posses. It is the benchmark for assessing a tax system.

Classical economists such as Adam Smith and others have enunciated eight

principles or canons which tax system of a country should be based on. These

are as follows:

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 Canon of Equity:

The canon of equity suggests that income earners in the same income

level and with the same responsibilities should pay the same amount of

tax. The idea espoused here is the ability to pay. It is only when a tax is

based on the taxpayer’s ability to pay can it be considered equitable and

just. It must be emphasized that equity does not mean equality or equal

amount. Equity may be ensured by a proportion, just as in a progressive

system of taxation.

 The Canon of Convenience:

This canon/principle maintains that taxes should be conceived and

collected in such a way that the manner and time of payment should be

suitable to the taxpayers. According to Okeke (1994:254), the

arrangement whereby taxes are deducted from salaries or withheld from

other type of income before the net figure is given to its earner is

considered convenient.

 The Canon of Certainty:

The canon of certainty requires that tax should be clear, precise and

devoid of arbitrariness. The taxpayer ought to be aware of the exact

amount of tax he is expected to pay as well as the time and method of

payment .

 The Canon of Economy:

This canon demands that the administrative cost should not be higher

than the revenue to be realized. The principle requires that tax should not

be imposed if their cost of correction was excessive. A tax can be

23
 considered economical if the cost collection is not excessive. On the

other hand, if the cost of collection takes a large part of the tax collected,

the tax is not economical.

 The canon of simplicity

A good tax system should be coherent, simple and straight forwarded.

The tax should be clear to the tax payers and must be accepted by the

public. Ambiguities should be avoided. A properly understood tax system

eliminates the chance of corruption and fraudulent operations by tax

officials.

 The Canon of Flexibility

This canon states that a tax system that is responsive to changing

realities is preferred to a rigid one.

 The canon of impartiality:

This principle or canon requires that a tax should not discriminate

between tax payers under similar circumstances.

 The canon of Fiscal Adequacy:

This canon advocates that the yield from a tax should be adequate to

cover government’s expenditure.

2.1.5 Features of a Good Tax System:

A good tax system for a developing country should satisfy most of the

following salient features;

 Economic Growth Facilitator;

24
 The taxes should be an effective instrument of economic growth. The long

term objectives of a good public finance system is economic growth rather than

short-run economic stability, so, a good tax system should encourage savings

and capital formation and should be suitable for the mobilization of resources

for accelerated economic growth.

 Tolerable Tax Burden

A good tax system should ensure that the tax burden on a community

does not exceed its taxation capacity. Tax burden can be minimized by

introducing tax reforms that improve the nature of the tax levied, the time

and mode of payment.

 Minimum Sacrifice:

Taxes are levied on incomes and wealth and their payment involves

sacrifice on the part of the tax payers. A good tax system, nevertheless,

will always aim at minimizing this sacrifice.

 Common Good and Maximum Social Advantage:

A good tax system should adhere to the principle of maximum social

advantage. It should ensure maximum benefits to this community as a

whole.

 Highly Canonical:

A good tax system should be highly canonical, (canons of taxation

discussed under section ii above). A good tax system should be simple to

administer as this will minimize the chances of tax evasion and tax

avoidance. A good tax system should avoid multiplicity of taxes. However

to ensure adequate public revenue, the tax system should be broad-

25
 based. Taxes should be convenient to the taxpayers in terms of the time

and mode of payment. A tax system which enables the government to

easily predict with sufficient accuracy the tax revenue yield is considered

a good one. Also a tax system which is able to narrow the disparities in

income and wealth between the haves and the have-nots in the society is

a good one.

 Employment Stimulator:

A good tax system for a developing economy should aim at creating an

enabling environment for raising the level of employment and for raising

the standard of living of the people.

2.2 Consumption As Tax Base

Traditionally, taxes are based on income of individuals or profits of an

economic entity. Other based of tax are wealth, capital, property and

consumption. As against income taxes which are based on the incomes and

profits of corporate and individual person, consumption taxes are paid based on

the purchase and sales of goods and services.

The use of consumption as a base for tax is gaining wider acceptance

globally. According to Tait (1988:2) the attraction of consumption based tax,

especially the VAT, appears irresistible. Besides the fact that consumption

based taxes are seen as “revenue spinner” by government, it is also seen as a

veritable tool for fiscal regulation of the economy. Consumption based taxes

such as import duties, export duties, excise duties, expenditure tax, sales tax

26
and value added tax, has been effectively used by government to tilt the

economy to a desired direction.

Nicholas Kaldor (1975:29), argued that taxation of consumption of certain

goods and services would reduce consumers’ demand for them, then the

unutilized disposable income could be saved; which in turn, is expected to

smoothen business and industrial growth.

In support of this position Buari etal (1994:2) maintained that the yield

from consumption based tax (such as VAT) is a fairly accurate measurement of

the growth of an economy, since purchasing power (which determines yield)

increases with economic growth. However, Akinpelu (2003) prefers tax relief

that encourages consumption. According to him, when consumption is

stimulated, demand for products will increase; the manufacturers will increase

their production to meet the demand. The increase turnover will lead to

increase profit and consequently, increase income tax. The (manufacturers)

will also employ more people who will pay more taxes (PAYE), and thus

stimulate growth. This position is very much supported by imminent scholars

notably Akpakpan (1999:273); Uwatt (1998); etc. With regards to revenue

generation, it has been argued that where realization of higher revenue is the

objective of taxation, the consumption base tax is the most attractive option.

(Bird and Coldman, 198:152; Dued, & Fried Laender (1981:419); Tanzi

(1991:103).

2.2.1 Consumption Based Taxes

27
 Consumption may be defined as the purchase and utilization of goods

and services for the gratification of the desires of an individual, a business

organization, a political entity or any other body.

This definition connotes two important things: Number one, the

good/service is purchased, during which time a tax is paid on it. The second is

the utilization of the good or service. When what is purchased is utilized by the

buyer, he bears the tax and the burden thereof, but where what is purchased is

sold to another person, the buyer merely bears the impact of the tax but the

burden is transferred to the final consumer.

Macroeconomic experts have gone ahead to group consumption under

two headings, namely; public and private consumption.

Public consumption relates to all expenditure for the purchase of goods

and services including defense, road, justice, security, healthcare, law and

order etc. Private consumption on the other hand has to do with all expenditure

by non-government consumers including the purchase of goods and services

by non profit organizations. (World Bank; 1994:235). Thus, a tax on private or

public consumption is at the mercy of the consumer, since this depends on the

exercise of his/her purchasing power. In other words, if a consumer has the

power but refuses to exercise it, he can avoid paying the tax.

Generally, there are six classes of consumption taxes these are:

(a) Import Duties: These are taxes imposed on goods brought into the

country from other countries. They come in form of tariffs levied either ad

valorem or at different rates. They are regarded as a form of indirect

28
 taxes, because, it is common for the importer to pass on the tax burden

to the next consumer in the form of increased prices. The principal

attractions of import duties are:

(i) They can be utilized by economic planners to stimulate domestic

production. This is so because there is implicit subsidy in the

imposition of import duties and taxes;

(ii) Import duties can influence the pattern of consumption and arrest

balance of payments problem; and

(iii) They can be utilized to boost government revenue significantly,

especially in developing countries, characterized by high import

dependence.

(b) Export Duties: This is tax levied on goods exported to other countries,

usually paid by producers or exporters of such goods in the exporting

countries. The objectives of export taxes are, usually, to bring down

domestic prices of such goods by discouraging their exportation; and to

reallocate production factors from areas that are more beneficial (or in

surplus) to those that are neglected (or in deficit).

(c) Excise Duties: These are taxes levied on locally manufactured goods.

Classes of goods that easily suffer excise tax include cigarettes, beer,

and other alcoholic drinks. Apart from being a source of revenue to

government, its imposition can also be a fiscal weapon which can be

manipulated in pre-determined directions to achieve intended economic

aspiration. Often, excise taxes are imposed on goods to discourage

consumption of such goods which production or consumption has some

29
 socio-economic effect that must be discouraged, (or encouraged)

through taxation. Naiyeju, 1996); Uwatt (1998) and Samuelson (1999)

are in agreement that excise taxes have both income allocation as well

as income substitution effect.

(d) Expenditure Tax

This is a type of tax that is based on the direct personal

expenditure of the household goods and services. Under this system,

attempt is made to distinguish between domestic family expenditure and

the balance of income for other outlays. Assessment of a tax payer is at

the end of the period after his total personal consumption has been

known. The major difference between expenditure tax and other

consumption taxes is that while the other ones, such as VAT and retail

sales tax are taxed indirectly on personal consumption, expenditure tax is

a direct tax on personal consumptions. Its burden falls on the tax payer

who in all cases is the final consumer. This type of tax is not very

popular. Srilanka and India were the only two countrys known to be

operating expenditure tax. It has since been discontinued in both

counties because of technical and administrative difficulties arising from

its implementation. (Naiyeju, 1996)

(e) Sales Tax

Under this type of tax, the rate of the tax is simply applied to the

selling price when the goods or service passes into the hands of the

consumer. It is a single-stage tax levied at one of the stages of sale

30
 outlets to a customers. Sales tax is also known for its ease of

administration, especially the retail sales tax.

It is also argued that of all forms of Consumption Taxes, Sales Tax

(especially Retail Sales Tax) is closest to VAT (Tait: 1988). Ogundele,

(1996:126) has identified various forms of sales tax, namely:

Manufacturers (or Producers) Sales tax, wholesales sales tax; business

turn over tax; capital goods tax; sales tax on luxury; retail sales tax. Of all

sales taxes, the retail sales tax (RST) is known to be the best in terms of

base coverage, revenue generating potential, fiscal utility and equity.

2.3 Historical Perspectives of VAT

Tax history has it that Value Added Tax (VAT) was first advocated in

Germany in 1919. (Ogundele, 1996:3). According to Ogundele, the form

advocated then was the “addition type” in which the tax base would be the sum

of wages and capital income. The annals of taxation also records that as far

back as 1930 and 1948 Professor Carl- Shoup et’al had prescribed VAT for

Cuba and Japan respectively. But none of these countries were willing to

implement the scheme then (Naiyeju, 1996:15). However, tax scholars agree in

unison that the origin of VAT in its modern form is France (Ogundele, 1996:3;

Tait, 1988:9; Ogundele, 1999:110;).

France first introduced “Production Tax” in 1937, but in 1948, it was

transformed into a “producers income based” tax, and changed to full blown

VAT in 1954. Spurred by the success of French VAT, the tax soon became very

31
popular and continued to gain a prominent place in the fiscal armory of many

countries across the globe. Germany, who first contemplated the idea as far

back as 1919, came back to it in 1968; while Japan dusted up its VAT

recommendations in 1989. But Cuba has remained adamant on VAT to date.

The prominent role and fiscal influence of France in the European

Economic Community (EEC) persuaded the other original five member states

of the European community EC) namely: Belgium, Germany, Italy, Luxembourg

and the Netherlands to adopt VAT earlier than other countries. These were in

the year 1971, 1968, 1973, 1970 and 1969 respectively. Great Britain,

Denmark and the Republic of Ireland, who later joined the EEC in 1973, also

wholly embraced the VAT as a tax policy. The adoption of VAT policy later

became obligatory and a condition for membership of the EEC. (Ogundele,

1996:3). In USA, the State of Michigan was the first to have experimented the

implementation of what looked like a VAT (modified VAT) In 1953. But the policy

was thrown over-board four years later. (Peachman, 1997); cited in Naiyeju,

1996:5.

In Africa, due to the fiscal influence and economic ties with France, the

Francophone countries were the first to adopt the VAT system with Cote d’voire

(then Ivory Coast) leading the way in 1960; followed by Guinea in late 1960 and

Senegal in 1961. Nigeria embraced the VAT system only in 1993.

The table below shows the list of countries and the date VAT was
introduced or proposed in each of them.

32
33
Table 1: Countries and Dates VAT was Introduced
Country Date VAT Country Date VAT
Was Introduced Was Introduced
or Proposed or Proposed

Algeria Jan. 1992 Italy Jan. 1973

Argentina Jan. 1975 Luxembourg Jan. 1970
Austria Jan. 1973 Madagascar Jan. 1969
Belgium Jan. 1971 Malawi May 1989
Bolivia Oct. 1973 Mali Jan. 1991
Brazil Jan. 1967 Mexico Jan. 1980
Brazil Jan.1967 Morocco Apr. 1986
Canada Jan. 1991 Netherlands Jan 1969
Chile Jan. 1975 New Zealand May 1986
Colombia Jan. 1975 Nicaragua Jan 1975
Costa Rica Jan. 1975 Niger Jan. 1986
Cote d’lvoire Jan. 1960 Norway Jan. 1970
Denmark July 1967 Pakistan July 1990
Dominican rep. Jan. 1983 Panama Mar. 1977
Ecuador July 1970 Paraguay Jan. 1991
Finland Oct. 1990 Peru July 1976
France Jan. 1968 Philippines Jan. 1988
Germany Jan. 1968 Portugal Jan. 1986
Greece Jan. 1987 Senegal Mar. 1961-1980
Guatemala Aug. 1983 South Africa Oct. 1991
Haiti Nov. 1982 Spain Jan. 1986
Honduras Jan. 1976 Sweden Jan 1969
Hungary Jan 1988 Tobago Jan. 1990
Iceland Jan. 1990 Tunisia July 1988
Indonesia Apr. 1985 Turkey Jan. 1985
Ireland Nov. 1972 United kingdom Apr. 1973
Israel July 1976 Uruguay Jan. 1968
Venezuela Jan.1991

34
Japan Apr. 1989
Kenya Jan. 1990
Korea May 1989

SOURCE: Tait, (1988) Value Added Tax: International Practice and Problems,
International Monetary Fund Washington D.C.

2.4 The Implementation Processes of VAT

The imposition of tax, according to Adesola (1988:1), usually

involves three groups of activities namely:

 Formulation of tax policy

 Translation of policy into legal instrument; and

 Tax administration

In agreement to these processes, Carl Shoup (1991); cited in

Naiyeju (1996:98), chooses a rather technical language, describing the

three processes as tax architecture, tax engineering and tax

administration. In his treaties on Designing Tax Systems”(1991) he

declares that

“The chemistry of the tax (Value Added Tax)

can be decomposed into three elements

Namely: tax architecture; tax engineering; and

tax administration.”

35
 He went further to describe that: that first relates to the choice of the tax

(VAT), the second to packaging the decisions; and the third to policy

implementation (administration).

2.4.1 Formation of VAT Policy

This has to do with selling the idea (proposed tax) to the public before it

is implemented. Tax, as we know, is a product of fiscal policy of government. By

fiscal policy, we mean, a plan of action proposed or adopted by government

with regards to its finances. Thus, the starting point of any form of tax is the

choice of the tax itself, usually expressed in a policy document.

Tax is a very sensitive issue because it touches the purses and lives of

the people. And so, any policy framework on tax is usually preceded by

effective study, research, and enlightenment and (even) lobbying as the case

may be. Aluko (1996), cautioned that:

VAT is not an easy tax to understand, much so to implement.

If not deftly introduced and implemented, it can cause

economic, social and political upheavals.

In support of this Goode (1993:319) declares that

the successful execution of fiscal policies depends not only on

the quality of administration but also on the formulation of

policies that are realistically adapted to the available

resources.

It is important therefore that before a new tax, such as this, is introduced,

the tax must first obtain the acceptance of the tax paying public. This is usually

achieved through massive education and enlightenment campaign. As

36
reported by Naiyeju (1996:19) the introduction of VAT in the United Kingdom

was preceded by a massive enlightenment campaign in which about 4.5 million

information leaflets were dispatched to the public to sensitize it for the

acceptance of the VAT.

However, in the case of Nigeria, opinions are divided on the issue of

publicity. Layade (2003) argued that the implementation of VAT was not well

publicized in Nigeria. But in sharp disagreement Neiyeju (1996: 48) maintained

that along with training of the internal staff, there was mass education of

members of the public to stimulate their awareness and explain the concept of

the new tax to them. In doing this, the news media both (print and electronic)

were extensively used as well as seminars, lectures and talks organized for

various interest groups.

The international bodies such as the World Bank and the International

Monetary Fund (IMF) also made inputs into the policy development of the

Nigerian VAT. Although their prescriptions, especially as it relates to the rate of

the VAT, take off date and what they termed “international best practices” for

VAT implementation, were turned down by the Nigerian government, their

contributions were not insignificant, all the same.

2.4.2 The Legal Framework of VAT

The translation of policy into legal instrument is the second stage of activities of

the process of tax implementation. Tax law, is legal instrument which derives

from an accepted tax policy. Tax laws as we know, are notoriously complex, not

only because the terms involve are incapable of any precise definition, but also

because tax itself is a dynamic social phenomenon, due to its many uses as an

37
instrument of fiscal engineering. Tax Law, like other laws are drafted by

lawyers. In doing this, they are guided by the policy of the government; so that

such laws are drafted to reflect the government policy on the subject, as

already formulated. Under the democratic governance (as we have in Nigeria

today) such draft laws are sent to the National Assembly in form of a Bill. The

National Assembly will deliberate on it and if passed, the Bill is sent to the

President for “assent” after which it becomes a law (an Act of Parliament) But

under the Military rule the draft law is enacted as a decree by the Ruling

Authority. The legal framework of the Nigerian VAT is VAT Degree No 102 of

1993, enacted by the administration of General Ibrahim Babangida (Rtd)

2.4.3 VAT Administration:

Tax administration involves practical interpretation and application of tax

laws. In this regard tax administration seeks to ensure that

each and every tax payer covered by the tax law pays the

correct amount of tax, no more and no less, that he ought

to pay in accordance with the provisions of the

law.Adesola:1998:1

The functions of tax administration, according to Adesola, (1998) include

identification of tax payers, computation of tax payable, communication of tax

assessment to the taxable persons, processing of objective and appeals,

collection and recovery of tax, accounting for tax collected as well as research

and statistics. These functions are performed by tax administrators who assist

the tax payers in preparing accounts for tax purposes and in computing tax

liabilities.

38
 It has been argued that the success or failure of any tax depends largely

on the extent of how it is properly managed. The extent of how the tax law is

interpreted and implemented, as well as the publicity brought into it, will

determine how a particular tax is able to meet its objectives. Hence, one of the

acid tests in the determination of the success of a tax, as posited by Naiyeju

(1996) is the management of the tax policy. It is also important to specify who

(that is the relevant agency of government) manages the policy.

2.4.3.1 Who Should Run a VAT?

One of the most important decision that has to be made with regards to

VAT administrate is to determine which branch of tax authority shall be

responsible for the VAT. In Nigeria, the first problem was with respect to which

tier of government should run the VAT. The contest was between states and

the federal government.

The state governments maintained that since VAT replaces Sales Tax

which was administered by them, the States Internal Revenue outfits have the

skills in handling similar tax such as VAT. They also pressed for the full claim of

the revenue derivable from VAT. The federal government on the other hand

argued that VAT is not merely a replacement of sales tax but an improvement of

it. And, since , the scope of the tax has been widened to address the

shortcomings of sales tax in all its ramifications of structure, techniques,

39
principles and coverage it becomes imperative that the Federal Government to

come into its administration in order to perfect the system.

Arguments such as this are not peculiar to Nigeria. It is reported that for

years, it was hotly debated in the United States of America whether VAT should

be federally administered or left to the states. (Naiyeju, (1996:19).

The issue of which agency of government is most suitable to administer

the tax (VAT) is another fundamental problem in tax administration.

There are many possibilities in taking the crucial decision of where to

place the administration of VAT. Alan Tait (1988:234) has identified four options

as follows:

(a) The existing Sales Tax Authority;

(b) The organization that administers Customs and Excise

(c) The Income Tax administration agency; or

(d) A completely new outfit established for that purpose.

Each of these options have its merits and demerits. For instance, as Tait

(1988) argued, since the existing sales taxes being replaced by the VAT are

likely to be simpler, they are also likely to rely on a less sophisticated

administration and on a hot so highly trained staff. Moving to a VAT is bound to

involve extensive retraining and, probably, recruitment and upgrading of staff.

It would be a lot easier to utilize the existing sales, tax authority to

administer the VAT (as demanded by state governments), but to some extent,

the administration of VAT has some relevance to custom duties because VAT

will be applied on imports and paid on imports in a manner similar to custom

40
duties. It is on this premise that countries like Britain chose to pitch the VAT

administration in the Board of Customs and Excise. According to Tait (1988)

the U.Ks’ case was unusual and need not be used as a classic for others to

emulate. He maintained that “the custom and excise had been responsible for

the former purchase tax (a tax charged at the manufacturing and wholesale

stages on wholesale values) introduced in wartime, when the income tax

organization was understaffed and overburdened and when customs and

excise was less busy than usual. Because of this “accident of timing” the

Customs and Excise gained experience in dealing with the wholesale trade in

goods and when the time came to introduce VAT, its experience in warehouse

control, inventories, verification of customs import values and factory visits for

excise purposes was taken as a deciding factor in allocating the responsibility

for VAT.

In support of this Naiyeju (1996:36) argued that the expertise and training

of Customs Officials are tailored towards establishing the value of goods across

the borders. The personnel are not trained and experienced in such intricacies

as examination of tax payer’s records, auditing, crosschecking, information

matching, checking inventory and the likes, which are essential ingredients in

efficient VAT administration. Both authors also agree that when it comes to

taxing services, Customs and Excise is highly defective and inexperienced.

In most cases, where the income tax is efficiently collected, there may be

some advantages in associating the administration of VAT with the income tax.

Under this arrangement, information obtained or obtainable from VAT returns

could be very relevant and useful to enforce income tax, and vice versa. Such

cross-matching of information is only possible when the two taxes are under the

41
administration of the same organization. Lent etal (1973); cited in Naiyeju

(1996:37) maintained that this arrangement tend to favour most developing

countries embracing the VAT. However, Tait (1988:235) cautioned against

expanding the scope of the income tax by adding such a large and important

tax as VAT to what is already the biggest branch of taxation.

Sometimes, the tug of war between the Customs and Excise and the

Income Tax Authorities can be such that to avoid antagonizing either, it is

deemed more appropriate to allot the VAT project to an entirely new

organisation. This was the position canvassed by the MVAT Committee led by

ljewere, which was set up to undertake preliminary work for the introduction of

the new tax.

While it is argued that thisapproach could enhance division of labour and

injection of fresh blood into tax administration, Naiyeju (1996) vehemently

opposed to this arrangement. According to him,

“the alternative of a separate administrative outfit different

from the existing direct and indirect tax apparatus is usually

borne out of ignorance as well as political, parochial, and

other extraneous reasons”. The consequencies, to him, are

grave. Tait (1988) confirmed these dangers and list them to

include the following:

(i) Staff may be reluctant to be transferred from Income Tax or Customs and

Excise to the new tax outfit.

(ii) The staff in the existing agencies may unnecessarily resent the new

organization ; thus;

(iii) There may be problems of cooperation among staff, and

42
 (iv) The accumulated taxation experience of the existing tax

administrators will not be placed at the disposal of the new tax

especially during it teething period when problems are bound to

arise. Portugal is example of a country that favour this

arrangement of a separate apparatus for VAT administration.

Nigeria has chosen the option of merging it with the agency in

charge of Income Tax. Hence the administration and

management of VAT in Nigeria is vested in the Federal Board of

inland Revenue (FBIR).

2.5 The Nature and concept of VAT

Value Added Tax, is a consumption tax. It is a tax on the value added. By

value added, we mean

the incremental value which a producer, using labour,

contributes to his raw materials or purchases before selling

the processed products or services. Here the producer can

be a manufacturer, a distributor, advertising agent,

hairdresser, farmer, or supplier of goods or services, simply

called VATable person. That is, the original items purchased

(inputs) or stock of materials must have undergone some

processes of improvement to warrant any value being added

to the original form or shape. The inputs are processed by

labour to produce the final goods and services which are sold.

43
 The tax is applied at several points in the production and distribution

chain until the item reaches the final consumer. VAT has a wide coverage as it

applies to all goods and services, including imports but excluding items

specifically exempted from the tax.

VAT has a built – in self assessment mechanism that allows a tax payer

to claim credit for the tax paid on its inputs , while calculating his tax liability on

its outputs. This credit mechanism eliminates the cascading effect which is a

common feature of the Sales Tax. The input-output tax mechanism in VAT also

makes it self-policing.

2.5.1 The VAT Rate

The rate of VAT is the percentage by which the price of the good or

service is to be multiplied in arriving at the tax payable. Thus, if the VAT rate is

10% and the price of the good or service is N1000, the VAT payable will be:

10 x 1000
100 1 = N100.00

Different countries of the world adopt various rates for VAT based on their

peculiar circumstances, and the targeted revenue to be generated from VAT.

Nigeria adopts a 5% rate on all VAT-able goods and services. One striking

issue about VAT rate is that in VAT administration, there are various types of

rate models that could be adopted. Ogundele (1996:115) has identified six of

them as follows:

44
(i) Single Rate: A single rate VAT is a situation where an origin-based

VAT system adopts one tax for all taxable (VAT-able) goods and services.

Under this rate model, the burden of tax falls more or the poor

proportionally to their income than on the rich. Single rate tax is much

easier to administer than other models. This is mainly so because under

this model, there will be no refund due to zero-rating. Another advantage

of a singly rate VAT is that it minimize tax disputes, tax avoidance and

evasion. This also makes it cheaper to administer than double or

multiple rates

(ii) Double Rate: This is a situation where a destination based VAT

system adopts a single tax rate for all VATable items and a zero rate for

exports. Ogundele (1996:115) tutored that:

Because it is destination based, the system will zero-rate all

exports while taxing all imports thereby making the system a

double rated one.

Usually this model attracts a lot of refund cases because of the need to

make refund on all input taxes paid on exported goods without a

corresponding output taxes to match them against. Because of this

reason, this system could be very expensive. This is moreso because of

the need to engage tax audit on a regular basis in order to prevent

evasion which is very rampant under this system.

(iii) Multiple Rates: The multiple rates system arises when a destination

based VAT system adopts two or more rates for various categories of

VATable items. Under this system, luxury goods or good usually

45
 patronized by the rich attract higher rate while the ones enjoyed by the

poor carries a lower tax rate.

By making goods of obnoxious appeal costlier than essential

goods through tax differentials, the system attempts to bridge the gap

between the rich and the poor and also discourages the use of certain

goods. However, the system is more difficult to operate than the single

rate system. It can also result in refund cases thus creating the need to

audit many firms that are making refund claims. This makes this system

more expensive.

(iv) Standard Rates: Standard rates are the “main rates” applicable in a

system with multiple rates structure. In this system, we may have high or

primitive rate for a few items of luxury, a low or concessionary rate for a

few items of basic and essential goods, while standard (average) rate is

used for a broad spectrum of goods and services that are neither basic

nor luxuries.

This system is advantageous in that it made provision for all

categories of goods and services as well as the rich and the not-so-rich.

However, it could result in confusion or deliberate error in categorizing

the goods and services. It may also result in refund claims in certain

instances, thus the need for regular tax audit to prevent evasion.

(v) Concessionary rates: These are rates designed deliberately to

alleviate the problems of the poor in the society. It is usually very low-

sometimes ridiculously very low. It lies between exemption and the

standard rate.

46
(vi) Punitive Rates: These are rates that are deliberately fixed in order to

discourage the consumption of certain luxury items, or to take more

money from the rich than from the poor thus making tax more equitable it

is usually higher than all other rates.

2.5.2 The Concept of Zero-Rating and Exemption

There are two principal forms of exclusion of goods and services from VAT.

These are exemption and Zero-Rating.

(a) Exemptions:

When goods and services are exempted from VAT, it means that

they are outside the tax net altogether. No output tax is to be collected

on such items since they are not in the VAT system. Indeed

organizations dealing exclusively in such items do not need to register for

VAT at all. A typical example of such organisation are pharmaceutical

companies and companies dealing in babies products. The implication

here is that input taxes paid by such firms cannot be rebated, since there

is no output tax to use in rebating them. Such input taxes can only be

taken as their cost of operation or attract a refund from the tax

authorities. Charging them against cost of operation, it has been argued,

makes such goods more costly, thus refund is the better option – from

the point of view of the tax payer. However, in Nigeria, tax authorities

have been very reluctant on the issue of VAT – refund.

(b) Zero-Rating

47
 Zero-rating, like exemption is also a form of exclusion from VAT

payment. Zero-rating items are in the tax net though, but for specific

reasons no output tax is collected on them. In essence, they are taxed

but at zero-rate. Since input taxes will have to be rebated, they attract a

100% refund of input taxes paid on them by the earlier handlers of the

goods/services. This makes zero-rated items cheaper than exempted

items.

The striking difference between VAT exemption and zero-rated VAT

is that, under exemption the consideration (i.e price plus tax) is always

more than under zero – rating.

It is characteristics of the Value Added Tax to zero-rate exports.

That is, exports are taxable, but at zero-rate. The taxpayer is

consequently entitled to a refund of whatever amount he must have paid

as input VAT.

Some tax experts have argued that zero – rating is an incentive to

export business. This claim has been dismissed on the argument that

the basic philosophy for this practice is to enhance a nation’s competitive

advantage in international trade (Naiyeju, 1996:27).

The examples below demonstrate the concept of exemption and

zero-rating more clearly.

48
 Table 2:EXEMPTED SUPPLY
Cost Input Output VAT
Item price VAT@ 5% VAT@ 5% payable
Manufacturer: N N N N
Cost
50
10,000 N/A 500 0
Sales 40
18,000 500 900 0
Value added 8,000
OR VAT = 5% of 8000 = N400

Wholesaler :
Cost 18,000
Sales 26,500 900 1325 425
Value added 8,500
OR VAT = 5% of 8500 = N425

Retailer
(Non Registered):
Cost 26,500
Sales 34,650 N/A N/A 0
Value added 8150
Price + Tax N35, Nil
975
Source: Generated by the researcher for illustration purposes.

Table 3: ZERO RATED SUPPLY

49
 Input Output VAT
ITEM Cost price
VAT VAT payable
Manufacturer: N N N N
Cost 10000 N/A 500 500
Sales 18000 500 900 400

Value added 8000

Wholesale:
Cost 18,000
Sales 26,500 900 1325 425

Value added
8,500

Exporter (Export Rate = 0)

Cost 26,500
Sales 34,650 1325 0 -1325
Value added 8150
Price + Tax 33325 0
SOURCE: Data generated by the researcher.

From the two tables above, the manufacturer purchased the raw materials at

N10,000 and paid 5% VAT thereon, amounting to N500. In the absence of any

VAT input to set it against, this becomes VAT payable to the tax authorities.

He sold the completed product to the wholesaler at N18,000 and charged VAT

at 5% which accounted to N900.

This becomes his output VAT. He thus set his input VAT of N500 against this

figure, thus the tax (VAT) he has to remit to the tax Authorities is N400. The

whole saler who purchased the products at N18,000 and paid a VAT of N900,

now sold the goods to the retailer at N26,500 and charged a VAT of 5%

amounting to N1325. He thus set his input VAT against this figure, thus the tax

payable to government is N425 which is equivalent of (5% x 8500 value

Added).
50
 At the third stage, the retailer is non-VATable person (non – registered).

Thus he pay no VAT on the goods bought from the whole saler and valued at

N26,500. On selling this goods at N34650, we equally charged no VAT thereon.

Thus his VAT payable is nil.

In the case of zero-rated supply however, the scenario remained the

same. That is, the manufacturer pays VAT on the raw materials purchased and

also charged VAT when he sold the finished goods to the wholesaler.

But at the export stage, the products are enjoying a zero rated status.

Thus, the exporter off – set the tax liability of zero against an input VAT credit of

N1325, resulting in 100% refund.

Under the normal circumstances, that are given the same scenarios and

the absence of exemption or zero–rated, the position of VAT payable will be as

follows:

Table 4: VALUE ADDED TAX (VAT) COMPUTATIONS

Value Added Tax(VAT) Computations

Items cost price input VAT output VAT VAT payable
@5% @5% N

Manufacturer:

Cost 10,000 N/A 500 500

Sales 18,000 500 900 400

51
Value Added 8000

Wholesaler:

Cost 18,000

Sales 26500 900 1325 425

Value Added 8500

Retailer:

Cost 26500

Sales 34000 1325 1700 375

Value Added 7500 1700

Source: Data generated by the researcher

Price + Tax = 37,400

2.5.3 VAT as a Multi-Stage Tax

One basic characteristic of VAT is that it is a multi-stage tax which applies

whenever VATable goods and services change hands for a consideration. The

tax is levied on the value gained by the product or service before being sold. It

is therefore applied at several points in the production and distribution chain

until the item reaches the final consumer.

Although VAT is charged at multi stages, its effect is the same.

This can be illustrated as below:

Table 5: ILLUSTRATION OF THE MULTI-STAGES VAT SYSTEM:

VATable Sales price VAT Input VAT

Person (Before VAT output VAT paid to
Collected) Govt.

52
 Stage: N N N N

A = Supplier of R/m 1000 50 - 50

B = Manufacturer 1500 75 50 25

C = Wholesaler 2000 100 75 25

D = Retailer 2600 130 100 30

355 225 130

Source: Data generated by the researcher

Table 6

GRAPHICAL ILLUSTRATION OF MULTI-STAGE VAT SYSTEM:

Multi-Stages of VAT

Stages Transaction VAT

payable At each stage

A
53
 Supplier of Raw Sales value: N1000
Materials Gross VAT: 5%= N50
Net VAT: = N50 50
B
Manufacturer
Sales value: N1500
Gross VAT: 5%= N75.0
Net VAT: N75.0- N50= N2.50 25
C
Wholesaler
Sales value: N200
Gross VAT: 5%= N100
Net VAT: N100-N75.0= N2.50 25
D
Retailer
Sales value: N2600
Retailer Gross VAT: 5%= N15
Net VAT: N130- N100 30
N130

SOURCE: Data generated by the researcher.

At stage A, the supplier sold the materials to the manufacturer at

N1000 and charge VAT @ 5% which amounts to N50. This output VAT is

paid to the revenue authority.

At stage B, the manufacturer, after processing the raw materials

and turn them to finished goods decide to sell the goods at N1500. The

value added here is N500. But he charges VAT of 5% on 1500 to have a

total VAT output of N75. He deducts the N50 VAT input he already paid

to the supplier of raw materials. Hence tax due in his hand is N25 which

is equivalent of 5% on 500 (value added).

At stage C the wholesaler sold the goods at N2000, adding

another 500 value. VAT at 5% on 2000 gives him a VAT output of N100.

From here he deduct the VAT input of N75 which he paid to the

manufacturer, leaving with a net of N25 payable to the tax authority.

54
 At stage D, the retailer sold the goods at N2600 adding a total

value of N600. His VAT output is calculated as N130. From this he

deducts the a tax credit of N 100, already paid. He is thus left with a net

VAT payable of N30. Thus the total VAT payable to government from the

four transactions is: 50 + 25 + 25 + 30 = N130 = which is equivalent of

5% on N2600 (final consumer price.)

2.5.4 Methods of Calculating VAT

There are four basic methods of levying value added. Buari and

Abdulrazag 1994:3; Trait, 1988:4; Orgundele, 1998:111; Naiyeju,

1996:20); all consented to these four methods:

(i) The direct additive method;

(ii) The indirect additive method;

(iii) The direct subtractive method; and

(iv) The indirect subtractive method

(a) Direct Additive Method:

The direct additive method is defined by the formular VAT = (factor

payments + Profits). Tait (1988) called this accounts method. This

method makes it possible for value added to be calculated before

applying the tax rate. Tait, (1988) argued that this method is only suitable

in a single rate VAT model. But in a multiple rate VAT regime this method

falls flat.

(b) Indirect additive method:

55
 This method also uses the accounting method and is defined by

the formula VAT = t (wages) +t (profits). The indirect additive method is

so called because ‘value added’ itself is not calculated, but only the tax

liability on the components of value added.

(c) Direct subtractive method:

Is also based on accounts methods and is sometimes called the

business transfer tax. Under this method, input is deducted from output

before applying the tax rate. It is defined by the formula VAT = t (output

– input).

(d) Indirect subtractive method:

Under this method, tax on input is computed as well as that of

output. This is also called invoice or credit method. It is the original EC

model and many countries have come to embrace this model. Nigerian

VAT also adopt this method. It is calculated with the formula

VAT=t(output)-t(input).

Invoice method has the following advantages;

(i) The method attaches the tax liability to the transaction. This makes it

legally and technically far superior to other forms, since the invoice

becomes the crucial evidence for the transaction and for the tax liability.

(ii) The invoice method creates a good audit trail for all transactions.

Without the invoice for each transaction, problems are bound to emerge,

first, in ensuring that inputs are deducted only when tax is paid and,

second, when inputs exceed taxable sales (output) which calls for tax

credit or refund.

56
(iii) The additive methods which are accounts based require that profits, first,

need be determined, as a basis for calculating the VAT. As company

accounts do not usually divide sales by different product categories

coinciding with different sales tax rates, and as they certainly never

divide inputs by different tax liabilities, it is clear at once that this method

is completely ruled out in a multiple rate VAT situation. Problem also

arise where some products that make-up the company sales are VAT

exempt or zero-rated.

(v) The credit mechanism inherent in this method makes it necessary

for the tax payer to insist on an invoice as a basis of claiming his tax

credit thus check mating evasion. By this method tax liability can be

calculated week by week, monthly, quarterly, or annually. It also allows

the most up-to-date assessments and is more convenient where more

than a single rate is used.

2.5.5.1 Illustrations of the Various Methods of VAT Calculations:

The various methods of VAT calculation can be illustrated using the

following examples:

Suppose a wholesaler made a total purchases of N300,000.00 during the

month of August, 2004. His sales for the month amounts to N500,000.00. His

Net profit amounted to N20,000.00, after making the following payment.

N90,000.00, N60,000.00 and N30,000.00 for wages, rent and interest

payments respectively.

His VAT payable under the various methods is calculated as follows:

57
Table 7: Direct Additive method:

VAT = t (Factor payment + profit)

= 5% (90,000 + 60,000 + 30,000 + 20,000)

= .05 x 200,000 = N10,000.00

Calculation of VAT;

Wages Expenses - 90,000.00

Rent Expenses - 60,000.00

Interest payment - 30,000.00

Total Factor Payment - 180,000.00

Profit - 20,000.00

Total untaxed input - 200,000.00

VAT @ 5% - 5 X 200,000
100
= N10,000.00
Source: Data generated by the researcher

(ii) Indirect Additive Method

Table 8: Illustration of Indirect Additive Method

58
 VAT =t (factor payment) + t (profit)

From the illustration above, this becomes

5% (180,000) + 5% (20,000)

= 9000 + 1000

= N10,000

Source: Data generated by the researcher

(iii) The Subtractive Method

Table 9: The Subtractive Method

Sales 500,000.00

Purchases 300,000.00

Value added 200,000.00

Tax @ 5% x .05

N10,000

Source: Data generated by the researcher

(iv) The Credit Method:

Under this method VAT payable is calculated using the following three

steps:

(1) Multiply purchases by the tax rate to determine the tax. This is called

input VAT.

59
(2) Multiply the sales by the tax rate to determine the output VAT

(3) Deduct the input VAT from the output VAT to arrive at VAT payable.

Table 10: Calculation of VAT by Credit Method

Output VAT is 500,000 x 5% = 25,000.00

Input VAT is 300,000 x 5% = 15,000.00

VAT payable = 10,000.00

Source: Data generated by the researcher

It would be seen from this illustrations above that the value added was

not even determined. We merely calculate the output and input taxes and

deducted the input from the output to know the VAT payable. This is the

method adopted in Nigeria. It is the original EC model, and many countries

have come to embrace it. But, Buari and Abdulraraz (1994) are not in total

support of this method. According to the duo: “VAT, as the name implies, is a

tax on value added. But, this method tends to obscure this fact because

tax liabilities for an accounting period are calculated without ascertaining

the underlying value added. The relationship between tax liabilities and

value added is further obscured by the fact that changes in stock levels

are disregarded; and also the fact that no distinction is made between

capital and revenue expenditure.

Most taxes are levied by first calculating the tax base (income, sales,

wealth, property values and so on) and then applying a tax rate to that value.

To advance the argument of Buari etal (1994) it might be thought reasonable

that the same method ought to be applied for a VAT, hence methods 1-3 above
60
become ideal. Tait (1988:5) has advanced four principal reasons why this

method (subtractive method, also called credit or invoice method) have gained

wider acceptance than all others.

These reasons are as follows:

i. Availability of audit trail,

ii. devoid of problems associated with accounting calculations;

iii. allows for up-to-date assessment of VAT and most importantly,

iv. attach tax liability to transaction as the invoice becomes the

crucial evidence for transaction and for tax liability

2.5.5 Pricing Systems In VAT

There are basically two pricing systems that a VAT administration can

adopt. These are tax inclusive and tax exclusive pricing systems.

(a) Tax Inclusive pricing: under this system the tax paid is subsumed in the

price on the tax invoice. That is to say, that the tax is built into the cost

price of the product or service. There is complete silence on the tax paid

and the percentage rate of tax may not be known to the buyer.

(b) Tax Exclusive Pricing: This is where the price of the product, the tax

rate and the tax paid are stated separately on the tax invoice. Then the

consideration is the price plus the tax.

Example: Price 100 pkts @ N20 = 2000

VAT @ 5% 100

Consideration 2100

SOURCE: Data generated by the researcher

61
 This implies that the purchaser is let to know both the price before VAT is

applied and the amount/rate of tax that must be paid.

Critiques of VAT often claim that the VAT system especially method (a)

above, conceals the tax burden from the consumer. But, Tait (1988) regards

this is an erroneous claim. According to this Public Finance expert, it makes no

difference which method is use, whether price—inclusive or exclusive of tax.

Consumers can see goods priced with or without VAT. If without, they are then

exposed to the shock of VAT added at the cash register (point of payment). He

therefore argued that if anything, this is a much better “tax shock” than the high

excise usually imposed on tobacco, gasoline, or liquor excise and other related

products that suffers arbitrary tax rates.

He argued further that, “any sales tax can be “concealed” from the tax

payer; and this is not a criticism restricted only to VAT (Tait, 1988:8).

2.5.6 The Concept of VAT-able Persons

This means persons subject to tax under the VAT system. The VAT

Decree 102 of 1993, S.42 defines a VAT-able person to mean a person (other

than a public authority acting in that capacity) who independently carries out in

any place an economic activity as a producer, wholesale, trader, supplier of

services or person exploiting tangible or intangible property for the purpose of

obtaining income there from by way of trade or business.

FIRS Information Circular No 9304 in clause 9 also described a VATable

person as “one who trades in VATable goods and services for a consideration.”

Every VATable person has an obligation to register for VAT payment.

Such registration is to cover all the business activities of the VATable person.

62
The person can be a sole proprietor (e.g a trader); a professional (e.g public

accountant) a partnership (e.g. Erasmus, Ndulue & Co. Chartered

Accountants), a limited liability company (e.g DSB Ventures Ltd); a club or

association or a charity.

A resident of Nigeria who performs services outside the country needs to

register with the local VAT office for VAT payment. Also, a non-resident who

had a business, trade, profession or vocation in Nigeria, still needs to register

for VAT purposes.

VATable persons play a very important role in the administration of VAT.

They act as agents for the collection of VAT on behalf of the FBIR.

2.5.7 Record Requirements, Books and Accounts

Every registered person (VATagent) must create and keep sufficient

books and records to allow the authorities to ascertain their tax liability and

claims for tax credit. They are expected to keep such records and books of all

transactions, operations, imports and other activities relating to the purchases

and supply of taxable goods and services made in a manner that are sufficient

to determine the correct amount of VAT due. (Naiyeju, 1996:56). These books

which must be readily available for VAT inspection include.

 Cash book,

 Sales and Purchases Daybooks

 Ledger Accounts,

 Trail balances,

 Profits and Loss Account,

 Balance Sheet

63
 Ledger Accounts, Trail balances, Profits and Loss Account, and the

Balance Sheet. Especially for VAT purposes Tax Invoice must be kept for all

supplies and purchases while VAT account must also be kept.

Tait (1988:317) tutored that in Italy a trader must have his record books

stamped and the pages numbered by a VAT official or a notary public. Also, in

addition to the usual records, the Italian trader must submit an Annual Return of

customers with their transactions, which is to form the basis for the cross-

checking audit. He however opined that

the more onerous such requirements, the more the trader is

tempted to conceal the transaction and hence save himself

the trouble and cost of compliance.

2.5.8 The Concept of Generally Accepted Accounting principles:

Accounting Principles, according to Dapree and Morder (1984)

encompasses all the concepts, conventions, doctrines, and methods of

accounting that are commonly found in use in the preparation of financial

statement. It refers to the guiding rules and basic procedures used in the

preparation of financial statements.

Unlike concepts and conventions, accounting principles are not to be varied

under any circumstances, once they have been accepted by a body of

practicing accountants known as Financial Accounting Standard Board. The

principle by this Board, which has been tested and practiced overtime, is

referred to as Generally Accepted Accounting Principles.

2.5.9 The Concept of Supplies:

64
 The definition of what constitute supply is very significant in VAT

administration since, according VATD (1993:2);

“VAT is charged on the supply of goods and service”. The Decree indicates that

a number of hurdles must be surmounted before a charge to tax arise.

According to Section 5 (42) of the enabling decree,

“it is necessary first, to establish that a transaction amounts to

a supply in order to quality for taxation under VAT. Second,

the supply must be made for a consideration. Third, it must

amount to either a supply of goods or a supply of services,

and fourth, it must amount to a taxable supply.”

The legislation is singularly unhelpful in pinpointing those events which

amount to a supply and goes no further than to state that

“Supplies means any transaction whether it is the

sale of goods or the performance of a service for

a consideration, that is money or money’s worth”

(VATD, 1993:42).

Since VAT is “charged on anything treated as a supply of goods or

services”, it is imperative to note that there are events falling within this charge

which could not be regarded as a supply within the ordinary meaning of that

word, and those supplies which would otherwise escape the VAT net, either

because they are made outside Nigeria; or made otherwise than in the course

or furtherance of business; or otherwise than for a consideration on which value

can be place.

65
 The Decree (VATD ‘935.5) seems to provide a clue to these defects by

deeming events to be “taxable; meaning that they are supplies that are not

taxable regardless of whether they are made for a consideration, or not.

For instance, as held in Re: Wimpey Group Service Ltd (1984, VATR 66),

cited in Buari et’al (1994), “where goods forming part of the assets of a

business are transferred or disposed of by or under the directions of the person

carrying on a business, and the goods cease to form part of those assets, the

goods are supplied regardless of the fact that there is no consideration”. The

goods are also deemed supplied where an individual who carries on a business

makes the transfer or disposition in favour of himself personally. However, a

supply is not deemed as one, if it comprises food or beverages supplied to

employees in the course of providing catering services. (VATD, ’93 sch 3 part

1). Supplies made for a consideration can be classified as follows:

(a) Supplies of goods

(b) Supplies of services and

(c) Supplies which are neither supply of goods nor a supply of service

(VATD ’93,S.2).

Since, according to VATD’93,5, VAT is charged on supplies of goods and

services, it follows that supplies classified under the third head are outside the

scope of VAT; but merely included to take care of goods and services that are

VAT exempted or zero-rated.

(a) Supplies of Goods:

VATD’93, S.42, sch.1, stipulates that

“any transfer of the whole property in goods is a supply of

goods. The term “whole property” appears to indicate that all

66
 rights of ownership existing in the goods must be transferred

without retaining any reversionary right.

But, according to Buari etal (1994),

“a transfer of the whole property is goods may amount to a

contract for sale, in which case it amounts to a composite

supply of goods, or contract for work and materials, in which

case only the materials element comprises a supply of goods

under this heading.

Secondly although the transfer of possession in goods is normally a

supply of services, it amount to a supply of goods where possession is

transferred either:

(a) Under an agreement for the sale of goods; or

(b) Under an agreement which expressly contemplates that the

property in goods will pass at a future time specified in the

agreement, example, as in a hire Purchase agreement (VATD’93,

5.42) whether this is treated as a transfer of goods or services, it is

still subject to tax under VAT.

Also, the supply of any form of power, heat, refrigeration or ventilation is

a supply of goods (VATD’93, sch.1 (A), para 16).

Furthermore, a transfer or disposal of business assets is a supply of

goods. VATD’93 5.42 describes this to include any transfer or disposal in

favour of the owner or owners of the business.

(b) Supply of Services

Any service provided for a consideration which is not a supply of goods is

a supply of services, unless it is specifically treated as neither a supply of

67
goods nor a supply of services (exempted). The enabling law, (VATD ’93 5.42),

Schedule 2 also describes any service provided” to include, among other

things, the grants, assignment or surrender of any right. Buari etal (1994) list

examples of supplies of services to include:

(i) Procuring a gathering at which goods are sold.

(ii) Procuring a group of relief payment,

(iii) Agreeing to act as agent,

(iv) Making payments under a credit card scheme,

(v) Redeeming vouchers at a discount

(vi) Granting a commodity option,

(vii) Covenanting to refurbish premises,

(viii) Accepting a lease,

(ix) Procuring discounts for members of a buying group,

(x) Relinquishing a trade name and providing publicity benefits for a

sponsor

The Decree (VATD’93) however listed the following specific activities as

amounting to a supply of services. These are:

1. All service rendered by financial institutions to their customers

(excluding people’s bank, community banks and mortgage institutions.
2. Accountancy service, 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 consultancy
services
(b) Recruitment, staffing and training:
(c) Market research;
(d) Public relations; and
68
 (e) Advertising.
4. Legal services, including services supplied in connection therewith.
5. Computer services, including the provision of bureau facilities, system
analysis design software, site development and training.
6. Services supplied by architects (including landscape architects) and
draughtsman.
7. Services supplied by land and building surveyors, quantity surveyors,
insurance companies and assessors, fire and marine insurers, loss
adjusters or similar services.
8. Services supplied by consulting engineers.
9. Services supplied by auctioneers, estate agent and valuers.
10. Services supplied by agents, including insurance agents, and person
who act for or represent someone else in arranging or conducting a
transaction or other activities.
11. Services supplied by brokers.
12. Services supplied by secretarial agencies, including the supply of
typing, photography telex, facsimile and typesetting facilities and other
related activities.
13. Services supplied by securities companies and enterprises.
14. Courier service.
15. Repairs, alteration, processing or any other service provided in
connection with designated goods by designated dealers.
16. Services supplied in the course of altering, processing, assembling,
packing, packaging, bottling or manufacturing goods owned by
another person.
17. Telecommunication service, including rental of telecommunication
equipments, installation and maintenance services.
18. Letting of videotapes or any other audiovisual records or hiring,
copying and rewriting of tapes and similar services.
19. Entertainment services including plays and performances, cinemas
shows and music concerts, excluding plays and performance
conducted by educational institutions as part of learning.

69
 20. Accommodation and all other service provided by a hotel owner or
operator including bars, conference and business services.
21. Restaurant services supplied by a restaurant owner or operator.
22. All goods and services for repairs and maintenance (including
accessories of vehicles, plants and machineries and equipments,
aircraft related services.
23. Air travels and company car hires.
24. Any other services as may be prescribed by the Board from time to
time as taxable services.

2.5.10 The Concept of Consideration

In VAT administration, consideration is the element that determines the

VAT payable. In principles, a supply is outside the scope of VAT unless it is

made for a consideration (VATD’93 5.42), Thus, it is imperative to take a critical

look at the concept of consideration in the context of VAT.

Consideration may be defined as the amount or something given in

return for something else.

From the foregoing, consideration may comprise either money (ie cash),

something other than money (e.g. barter deal), or partly money and partly

something else. (e.g. trade-in for a new car). A consideration in something

other than money can arise from the terms of a contract or from a general

promise.

It is necessary to identify the reason why a payment is made in order to

discover whether or not it is linked to a supply of goods or services. As held in

Re: Naturally Yours Cosmetics Ltd (1988, STC: 879)

70
 “there must be a direct link between what has been provided

and the consideration received”.

The mere fact that a sum of money has been received does not

necessarily mean that there is a corresponding supply.

As held in the case of Apple and Pear Development Council V. Customs

and Excise Comr (1988, STC 221), a charge imposed under a statutory rather

than a contractual obligation is not consideration where the payee receives no

more than an indirect benefit from services supplied by the statutory body

concerned.

2.5.11The Concept of Consideration And Profit

Consideration and Profit are by no means equivalent terms, especially in

the context of VAT. The fact that a trader does not make a profit on a supply

does not mean that there is no consideration for it. (Re: Heart of Variety Ltd, v.

Customs and Excise comrs 1975 VATTR 103). Cited in Buari etal (1994:14)

Also, transaction should not be artificially dissected so as to demonstrate

that the consideration is something less, or something different, from what is

given. This was the import of the ruling in the case of Re: Pippa-Dee Parties Ltd

(1981,STC, 495). Thus, the fact that a trader does not obtain the best possible

bargain does not mean that his/her forbearance to charge a higher price

amounts to consideration. This position has been confirmed in the case of Re:

Exeter Golf and Country Club Ltd (1979) VATTR 70. The determining factor is

whether a consideration is due, not whether it has been received. Thus, cash

received for a retail sale amounts to consideration whether it is placed in the till

71
or diverted by an employee before getting to he till Re: Benton v. Custom &

Excise Commr (1975) VATTR, 13B)

Also, whether or not consideration is due is determined at the time when

the supply is treated as taking place for the purpose of charging a tax. Thus, if

goods or services are supplied gratuitously, they can not be turned into a

supply made for consideration by a subsequent voluntary payment (Re:

Warwick Masonic Rooms Ltd,) (cited in Buari etal, 1994:15). Similarly, a supply

made for a consideration (abinitio) and evidenced by a tax invoice cannot be

turned into a supply for no consideration merely by issuing a credit note (Re:

British United Shoe Machinery Co Ltd (1977) VATTR; 187.)

The law, based on judicial precedents, also allows both the supplier and

the customer to adjust their VAT account if an increase or decrease in

consideration is agreed after the transaction has been concluded. Once the

amount of the consideration for a supply has been agreed, it is fixed for VAT

purposes. It thus follows that an agreed consideration for a supply cannot be

varied by way of a credit (or credit note) in relation to bad debts. (Re: Peter

Capwell & Associates, CAR/78/131,102).s 2.5.12

2.5.12 The Concept of Value Added:

The determination of the value added is very central to the calculation of

VAT. In the computations of VAT, the value added is the base on which the rate

72
of the tax is applied to arrive at the tax payable. This is especially so under the

“subtraction method”

Aluko (1996) defined value added as the increase in the value of goods

and services in the process of their production or delivery”.

According to this renowned Professor of Economics,

“value added is calculated by deducting from the value of

goods and services the cost of the input of the other goods or

services that were used in the process of the production of the

goods or in the delivery of the services”.

However, Tait (1988:4) sees value added as the “value that a

producer (whether a manufacturer, distributor, advertising agents, farmer,

etc) adds to his raw materials or purchases (other than labour) before

selling the new or improved product or services. “ He thus defined value

added mathematically as wages profit or input – output.

In support to Tait and Nlaiyeju, Ogundele (1996:14) maintained that “the

value added of a firm is the difference between the firm’s sales of its output

and its purchases of inputs from other firms. It is the amount of value a firm

contributes to good or service by applying its own factors of production namely:

Land, labour, capital and entrepreneurial ability.

According to this tax expert, value can be added to a product or service

in the following ways:

(i) By altering its form (improving on it)

(ii) By moving it to an area of higher need (transportation)and

(iii) By passage of time (storage).

73
Ogundele (1998:4) tutored that In all these, the most important thing is that it

appreciates in value or is given to a party whose need for it is more pronounced

or more urgent.

From the foregoing, it is safe to posit that it is impossible for goods to pas from

one hand to another without attracting an added value either by improvement,

or transporting to area of higher need or by the efflux of time via storage. It is

this element, value added that attracts the tax, and not on the transaction itself.

In total consensus with the above authors, Naiyeju (1996:29) insisted that

the original items must have undergone some processing or improvement to

warrant any value being added to the original form or shape.

2.5.13 VAT-able and Non-VAT-able Services Rendered

by Banks and Other Financial Institutions

(a) Services of Banks and other Financial Institutions

that are Liable to VAT include the following
 Commission fees charge on Foreign Exchange trading and remittance;

 Bank Charges, Commission on Turnover (COT), Ledger Fees etc.

 Arrangements, Legal and other Fees chargeable on Lease activities;

 Fees charged for Advisory Services e.g. Mergers and Acquisition,

Financial Strategy; Counseling etc.;

 Fees chargeable on public/private issues of shares;

 Debt conversion fees;

 Fees/ commission on Asset Trading;

 Fees earned on Fund Management;

74
  Fees and commission earned on Letters of Credit/documentary

Collection to finance import/export;

 Commission on sale of Bank Drafts/Certified Cheques;

 Fees chargeable on Stock-Broker and Trustees’ Services;

 Commission paid to Brokers, Re-insurers, Underwriters and other

Insurance Agents by an Insurer.

(b) Services of Banks and other Financial Institutions

that are Not Liable to VAT.
 Premium on Insurance Policies;

 Interest on Loan/Advances and Overdraft Facilities;

 Interest on Savings Accounts;

 Interest on Bank Deposits;

 Dividends;

 Interest on Placements;

 Profit/Gains on disposal of government property; and

any services rendered by People’s Bank, Community Banks

and Mortgage Institutions

2.6 Why Nations Opt for VAT

In this section, we shall attempt to look at the reasons why nations of the

world opt for the Value Added Tax (VAT). Generally, countries introduce a VAT

because they are dissatisfied with their existing tax structure. According to Tait

(1988:9), this dissatisfaction falls broadly into one or possibly all of the following

categories:

(i) Existing sales taxes are unsatisfactory;

75
 (ii) A reduction in other taxation is sought;

(iii) The evolution of the tax system has not kept pace with the

development of the economy.

In support of these possible reasons, Naiyeju (1996:12) added that

agitation for VAT is often triggered of by fiscal crises, need for tax reforms,

increase in government revenue, and fiscal management. Juxtaposing the

arguments of the duo and other tax experts, the reasons why nations opt for

Value Added Tax can be summarized under the following headings:

2.6.1 Fiscal Crisis Remedy

VAT is often seen as a fiscal remedy in situations of fiscal crises. It is on

record that the prescription of VAT by Carl Shoup to Japan in the 1915 was in

response to the macro-economic problem – situation of the second world war

era. Tax historical records have it that, following the economic dislocation of

Japan in the second world war, the Supreme Commander of the occupying

Allied Powers sought to reform the Japanese tax system to shore up the

economy. The commander therefore commissioned a team of tax experts to

study the tax system and prescribe reforms. The team which was directed by

professor Carl Shoup, proposed to Japan the introduction of a Value Added

Tax. (Nayeju, 1996:15).

It is also on record that Guatemale, in the 1980’s had to introduce a VAT

system as part of the reforms required to redeem the Country from a grave

economic recession worsened by political problems. Naiyeju (1996) tutored that

Jamaica was in similar economic distress following the collapse of her bauxitie

and tourism business; balance of payment problems; high unemployment and

76
fiscal deficits when it launched the 1986/87 tax policy which contained VAT. In

support of this arguments, Alade (1994) maintained that Nigerian government

adopted VAT as a result of decline in her revenue following fluctuations on the

price of oil in the international market. (CBN Bullion, Jun 1999: 33).

From the foregoing, it is obvious that one major reason why nations of

the world opt for VAT system is to provide remedy to fiscal dislocation /

disequilibrium.

2.6.2 Tax Reforms

Another reason why nations of the world opt for the VAT system, it has

been argued, is the need for tax reforms. That is to say, when an existing tax

system is found to be defective in achieving its set objectives and there is need

to modify it or introduce a new system; such modification almost always saw

the birth of VAT. Most nations of the world that attempted to modify their tax

systems either to achieve increase in revenue or address certain imbalances in

the tax system, always find solace under the VAT system. Naiyeju (1996)

argued that it was the ineffectiveness of the then existing Japanese taxes (such

as the agricultural tax, which was collected in laid) that motivated the reform of

the tax system.

Also, the need to shift emphasis from one source of tax revenue often

time saw the coming on stage of the VAT system. Nigeria, for instance has tried

over the years to diversify the revenue base of taxation and indirect taxes in

particular, and reduce her over dependence on oil as the major source of

revenue. This led to attempts to introduce purchase and sales taxes at some

point in time.

77
 Unfortunately, these efforts couldn’t bring about the needed reform and

shift of emphasis from oil as the major source of revenue, until the VAT system

was introduced.

The introduction of the VAT system often makes it possible for the

untaxed sector of the economy to be properly taxed. Thus, where the reforms is

to ensure that all sectors of the economy are effectively taxed, the VAT system

appears the ideal option. Sales tax as operated in Nigeria prior to the advent of

VAT was very selective, leaving a very wide gap of the un-taxed sector of the

economy and thus creating an unfulfilled hunger for tax reforms in the fiscal

system, that gave rise to the birth of the VAT system in Nigeria

2.6.3 Unsatisfactory Sales Taxes

Records around the world show that most countries that run VAT switch

over from one form of consumption tax, especially Sales Tax. Ogundele

(1996:5-7) listed 50 countries operating VAT out of which 44 switched over from

Sales Tax. This mass movement from Sales Tax to Value Added Tax is an

indication of the superiority of the later over the former. It is argued that of all

consumption taxes, better still, of all forms of Sales Taxes, the Retail Sales Tax

is the most similar to Value Added Tax and competes most effectively with VAT

in all ramifications. This suggests why some countries such as USA, Canada,

Australia and Japan, which operate the Retail Sales Tax (RST) find it difficult to

move over to the Value Added Tax.

However, in spite of the similarities of Sales Tax, especially the RST to

VAT and their competitiveness in terms of base coverage, revenue generation

potential, etc, most countries prefer VAT to Sales Tax and switch over

78
accordingly. Tait (1988:9) has identified the following factors as unsatisfactory

about Sales Taxes:

(a) The Cascading Effect of Sales Tax:

Cascading simply mean “tax on tax”. Sales tax is usually computed by

taking a straight forward percentage of all business turnover straight. Under this

system, ‘tax on tax’ occurs as a taxed product passes from manufacturer to

whole saler and to retailer.

The argument here is that the manufacturer has paid tax on the materials

used in producing the goods of which he has not receive any rebate. Upon

completion the goods are taxed at the appropriate sales tax rate. The

wholesaler who buys these goods is also expected to pay sales tax at the

appropriate rate. Thus, the wholesaler is regarded as paying tax on already

taxed products. It was this defect in this type of tax that caused most countries

using it to switch over to VAT. Tait (1988) argued further that it was the

disadvantages of the cascade element that persuaded the French to allow a

credit for the tax content of purchases of raw materials and capital purchases.

(b) Single–Stage Manufacturer And Wholesale Taxes:

A single–stage tax levied on manufacturers, wholesaler, or retailer is also

fraud with distortions that are akin to the cascade. As stated above, cascading

occurs whenever taxable goods are produced using taxed inputs, and those

goods are again subjected to tax.

79
 The problem is more frequently found when the point of impact of the tax

is far from the retail stage. By taxing certain kinds of producer goods that can

be used as consumer goods, cascading is bound to occur. According to Shoup

(1973:220-20) (cited in Tait, 1988:15):

“Since in a manufacturers sales tax the tax liability can differ

sharply according to the source of the inputs and the amount of

integration between the manufacturing, wholesale, and retail

stages, tax liability can be reduced by setting up related but

separate distribution companies. This means that the mark up of

the distribution company did not enter the tax base.”

To combat the resultant loss of revenue, the tendency is for the

administration to devise a set of rules (as in Canada, effective July 1988),

which often turn out to create complex uncertainties for the traders (Tait,

1988:15). The author dismisses this as ‘treating the symptoms rather than the

disease” and this has often lead countries away from Sales Taxes to the VAT.

Cascading also do occur when a variety of different sales taxes are used.

Some countries become dissatisfied not only with the complexity of

administration but also with the complex and multiple relationship between

traders and government when many taxes are used; and this often ginger the

need to switch over to the VAT system. In Korea, for instance, eight indirect

taxes (namely: a business turnover tax, a commodity tax, taxes on textiles,

petroleum, gas and electricity, travel, admissions and entertainment fast food)

where replaced by the VAT and a supplementary “special consumption Tax”

(Tait, 1988:160)

80
 One way to avoid the cascading (effect) is to allow credit for some

purchases. However, this has often turn out to be a journey towards the VAT

system.

Also, it is obvious that services cannot be included under the wholesale

tax. This and other obvious limitations make countries to find the single – stage

tax quite unsatisfactory. The solution to this is almost always a resort to VAT.

2.6.4 Fiscal Policy Management

It is generally believed that tax is a potent weapon of fiscal management

in an economy. In other word, beside the provision of money for defence and

social infrastructure, taxation also serves as a veritable tool of fiscal policy

management. That is to say, tax could be used to pursue the realization of what

has overwhelmingly been accepted as the objectives of fiscal policy, which

include: the mobilization and allocation of resources to desired productive

sectors of the economy, distribution or redistribution of income and wealth

among different groups of the citizenry; and stabilization of the effects of market

forces on prices, employment, and balance of payment. The pursuit of this

fiscal policy objective has been espoused as one of the reasons why nations of

the world opt for the VAT (Naiyeju, 1996:13). It is also argued in favour of this

position that,

Where there is need to mobilize savings to support capital

formation which, in turn would smoothen business and

industrial growth, taxation technique is often employed… and

if the taxation of consumption of certain goods and services

would reduce consumers’ demand for them, then the

81
 unutilized disposable income could be saved. (Kaldor,

1975:32) cited in Nayeju 1988:14)

By providing a surplus over recurrent expenditure, they make it possible

to devote a higher proportion of resources to build up capital formation.

2.6.5 Need For Increase Revenue:

Putting all pretence aside, the quest for increased revenue to pursue the

objectives of government has been the major reason why countries opt for the

VAT system. Due et al (1981:419) (cited in Nayeju, 1996:15) has admonished

that

where the goal of taxation is to realize a large amount of

revenue the Value Added tax is most attractive.

It was perhaps in religious response to this admonition that made

Schwartzman to counsel President Reagan in 1990 to use VAT to correct US

deficit, as reported in Naiyeju (1996). The revenue potentials of VAT is very

high, because of its expanded base. This expanded based is realized because

services such as Accountancy Legal, Architecture, Survey consultancy etc are

automatically taxed under VAT without regard to the taxpayer’s eligibility for

refund (Ogundele, 1996: 128). Also, organizations/Persons; such as charity,

ecclesiastical organizations, under aged person etc, that may enjoy exemption

under the conventional tax system are not so exempted under the VAT system.

In support of this Tait (1988:21) cited examples of Chile and Denmark,

where the countries moved to VAT, not just to replace the existing sales tax but

also to increase revenue. He argued further that

VAT as a buoyant revenue source, closely

linked to increases in consumption, has become

82
 a crucial part of overall revenue for all countries

using it. Indeed, many countries find that their

initial revenue from the first year of VAT turns

substantially higher than forecasts.

In confirmation of this possibility of surpassing forecasted revenue,

Naiyeju (1996) in his treaties: Value Added Tax: Impacts of a Positive Tax, cited

example in Nigerian where VAT was able to realize N8.1 billion and N20 billion

in the first and second year of operation respectively, against the estimated

figure of N6.0 billion and N9.0 for those two years.

83
 CHAPTER 3

3.0 RESEARCH METHOD

3.1 INTRODUCTION

In this chapter, the procedures employed in collecting, analyzing and

interpreting data used in this study is presented in an orderly manner.

The study was undertaken with the aim of attaining a set of objectives.

These were the appraisal of Value Added Tax as a revenue source of Akwa

Ibom State Government; to find out how the scheme is being implemented; how

the states revenue has been improved by the resources generated through

VAT; the problems associated with the administration of VAT and proffer

suggestions on how to overcome such problems.

The chapter is discussed in ten distinct headings namely: the study

design, population of the study, sample and sampling procedures, sources of

data used for the study, data collection instruments, administration of the

instrument, validity of the instrument, model specification, and method of data

presentation and analysis as well as the decision rule.

3.2 THE RESEARCH DESIGN:

This study adopted a cross-sectional study design, using descriptive and

analytical methods. A descriptive approach was adopted in this study because it

requires describing the working dynamics of lthis novel tax system.

3.2 THE STUDY POPULATION

The population of this study consisted of VAT registered Persons (VAT

payers) from six Local Government Area (LGAs) in Akwa Ibom State. Two

84
LGAs were selected from, each of the three senatorial Zones of the state. The

selection was based on the volume of commercial activities, according to the

judgment of the researcher, and they were , Ikot Abasi and Eket for Eket

senatorial zones; Ikot Ekpene and Abak for Ikot Ekpene senatorial zone; and

Uyo and Etinan for Uyo senatorial zones. Fifty (50) respondents where selected

from each LGA giving a total of one hundred and fifty (150) per strata and three

hundred (300) respondents in general.

3.4 Sample Size and Sampling Procedures:

This study adopted a stratified random sampling in selecting the

respondents. This procedure was necessary because the population consisted

of sub-groups, which needed to be represented in the study. Danga etal

(1983:64) has tutored that when the population consist of number of sub-

groups, which need to be represented in the sample, stratified sampling is most

appropriate. Accordingly, the population was further stratified under the

following sub-groups:

 Manufacturing, construction and Oil Servicing Companies.

 Hotel, Catering and Restaurant Servicing

 Banks, Insurance and other financial services

 Commercial and Allied businesses, and

 Government Ministries and Parastatals

A list of VAT registered persons was collected from the FISS (Local VAT

office, Uyo) and grouped according to sectors and per Local Government Area

(LGA). For each of the six LGAs selected and five sector of the economy

stratified, the first fifty names on the list were taken and folded into a container

85
from where three pieces were selected to represent respondents in that sector.

This gives us a sample frame of three hundred (300) VAT-registered persons.

3.5 Sources of Data used for the Study:

The data used for this work were from both primary and secondary

sources. The primary data consisted of information relating to VAT

implementation, how VAT revenue are collected and accounted for, the nature

and type of records maintained by the VAT payers to ensure accurate

computation, collection and remittance of VAT as well as information about the

problems associated with VAT administration.

The secondary data on the other hand consisted of information relation to

VAT collections in the state, VAT proceeds received form lthe federal

government and information relating to VAT policy requirements.

Secondly, data were obtained from published and unpublished works of

other authors. This includes textbooks, journals, magazines, the VAT Decree,

circulars, News letters, and Conference/Seminar papers.

3.6 Instrument used for Data Collection:

The primary data were collected using questionnaires. The study made

use of two sets of questionnaire. The first set was administered on the VAT

registered persons within the sample frame while the second set went to staff of

the implementing agency –the Federal Inland Revenue Service (VAT

Directorate).

3.7 Administration of the Questionnaires:

86
 The questionnaires were administered in person on the respondents in

all the six local government areas selected and the Federal Inland Revenue

Service. The researcher however employed the services of three field staff for

the retrieval of the questionnaires. The field assistants, who incidentally are

undergraduate students of University of Uyo, were properly instructed on how

to conduct themselves before the respondents while retrieving the

questionnaires. This approach was very useful as it saved a great deal of the

researchers time to concentrate on other aspects of the work.

3.8 Pilot Study

In order to ensure the validity of the survey instrument, a pilot study was

conducted in a few selected organizations within Uyo metropolis.

A pre-test was carried out in which few specimen copies of the

questionnaires were given to Accountants, Managers and Sales persons in five

selected organizations. They were required to assess and express their minds

on the acceptability of the questionnaire as being fit for the study. These

“respondent” were also asked to freely comment on the questions raised to

show their relevance to the subject under investigation. The comments, inputs

and criticism of these pilot respondents were very useful in making the final

copies of the questionnaires which were administered on the (real) respondent.

It is not likely that any of the few people with whom the researcher had

this pilot study will fall among the randomly selected VAT agents to be sampled.

This is because a sample of five (5) persons is by far too small numerically

compared to the total number of VAT persons in Uyo senatorial district

3.9 Model Specification

87
 The study adopted a simple statistical approach in treating its data. The

chi-square test statistic technique was used in this study. This technique is

useful when the final instruments used in analysis are made up of observed

frequencies and expected frequencies. According to Spiegel (1972:201), Chi-

square is defined as the measure of the discrepancy existing between the

observed and expected frequencies, supplied by the statistic x2.

The mathematics model for Chisquare is given as:

∑(Fo –Fe)
Fe

Given the relationship specified in the hypothesis, a simple regression

model was considered adequate to establish the existence of a relationship.

Correlation model was also employed to further check the degree or impact of

such relationship.

Regression, according to Mills (1977:391), is a powerful tool that

provides quantitative expressions of the manner or extent to which events are

related mathematically. Often expressed as a functional relationship between

dependent and independent variables, this model (regression analysis) is highly

useful for prediction purposes. The Mathematical model for a simple linear

regression is given as follows:

Y= f(x)…………………………..1

Y= a+b+k……………………….2

Y= a+bc………………………...3

Where; Y= dependent variables

88
 X=in dependent variables

a= estimated intercept of regression line;

b= estimated slope of regression line;

c=intercept of true regression.

Correlation, on the other hand, tests the degree of relationship between

variable. According to Spiegel (1972:241) correlation seeks to determine how

well a linear or other equation describes or explains the relationship between

variables.

He went on to tutor that

“if all the values of the variables satisfy

an equation exactly, such variables are

said to be perfectly correlated’

In agreement to this, Soyibo (2002) maintained that looking at the relationship

between X and Y is rarely a useful precise operation in the social sciences or

humanities. Rather, examining the correlation between X and Y is better.

The population coefficient of correlation is denoted by P, which is estimated by

the simple correlation coefficient r. The test of significance or hypotheses

concerning various values of p requires the knowledge of the sapling

distribution of r. The sampling distribution of r. the mathematical model for

correlation is given as follows:

N-2 89
1-r
 t=r=

For: N-2 degree of freedom.

Benson, (1979:480) has identified three different types of associations

namely: Perfect-negative correlation, perfect-positive correlation and no

correlation. The values for correlation range from-1, for perfect-negative

correlation up to +1 for perfect positive correlation.

3.11 Data Presentation and Analysis:

The data relating to revenue generated from VAT in the state over the

review period and the share of VAT revenue to the state by the federal

government were presented in the form of charts, tables, and percentages.

3.12 Decision Rule

The stated hypotheses are either accepted or rejected on the basis of the

result obtained from the computations as follows;

(i) Accept the null hypothesis (Ho) if the computed X 2 value is less

than the table value.

(ii) Rejected the null hypotheses if the computed X 2 value is

greater than the table value of X2

90
CHAPTER 4
4.0 PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA

4.1 INTRODUCTION
This chapter is concerned with the presentation, analysis and
interpretation of data, based on responses to the questionnaires. In this
chapter, hypotheses are statistically tested, using models specified in chapter
three. The study on “Value Added Tax as a Revenue Source for Government”
was focused on Akwa Ibom State. The objectives of the study were:
(i) To examine the procedures for the implementation of the Value Added
Tax (VAT) in Akwa Ibom State;
(ii) To assess the amount of revenue generated from VAT in Akwa Ibom
State and the allocation of this revenue to the State by the Federal
Government;
(iii) To examine the contributions of Value Added Tax revenue to the
economic development of Akwa Ibom State.
(iv) To identify the problems of VAT administration and suggest possible
ways of improvement.
To achieve these objectives, four research questions and five hypotheses
were formulated. In order to facilitate the gathering of data on this topic,
questionnaires were designed and distributed to VAT payers within the sample
frame. The questionnaires were organized into four main sections in
accordance with the specific objectives of the study.
Two sets of questionnaires were formulated as described above. The
respondents for the first set of questionnaire were VAT–registered persons
(VAT–payers), while the second set was for the officials of the implementing
agency that is the Federal Inland Revenue Service (FIRS-VAT Office). In each
case the questionnaires contained twenty related statements in which the
respondents were asked to indicate their degree of agreement or
disagreement. These responses were scored to facilitate the computation of
their actual and expected scores.
Statements 1-5, 6-10, 11-15 and 16-20 in the main body of the
questionnaire were raised to address the first, second, fourth and fifth research

91
hypotheses respectively. The third hypothesis was analysed based on data of
VAT generated in the state and allocation of VAT revenue by the Federal
Government.
Each local government area in the strata was assigned twenty five (25)
copies of the questionnaires, whereby five (5) copies were allocated to each of
the sectors. This gives a total of 150 copies of the questionnaires. Out of the
150 respondents sampled, 128 respondents, representing 85% were able to
complete and return the questionnaires. Another set of questionnaire was
designed and distributed to the officials of the implementing agency (VAT
office–Uyo). Twenty respondents were sampled and they all completed and
returned the questionnaires accurately. The details of the questionnaires
distribution and collection are presented on the table IIA and IIB.

Table IIA:

92
Sectoral Distribution and Collection of Questionnaire s
Number of Number of Percentage
S/N Organization Questionnaires Questionnaires Per Category
Distributed Returned Returned
1. Manufacturing, 30 26 87%
(including Oil Servicing
and Cons- truction
Companies)
2. Hotel, Catering and 30 28 93%
Restaurant Services

3. Banking, Insurance and 30 25 83%

other Financial
Institutions
4. Government Ministries, 30 25 93%
Departments and
Parastatals
5. Commercial and Allied 30 21 70%
Businesses

Sub-Total 150 128 85%

6. Implementing Agency 20 20 100%
(FIRS-VAT Office)

Total 170 148 87%

Source: Survey data generated by the Researcher.

Table IIB: Zonal Distribution and Collection of Questionnaires

93
 Percentage
Number of Number of Overall
S/N Zone LGA Questionnaires Questionnaires per LGA
Distributed Returned Percentage
Returned
1. Uyo Uyo 25 24 96%
2. Itu 25 20 80%
Sub Total 44 88%
3. Ik. Ekpene Ikot Ekpene 25 22 88%
4. Abak 25 19 76%
Sub Total 41 82%
5. Eket Eket 25 20 80%
6. Ikot Abasi 25 23 92%
Sub Total 43 86%

Grand Total 150 128 85%

Source: Survey data generated by the researcher.

4.2. Analysis of Questionnaires Distribution and Collection

(a) Sectoral Analysis:
The study population was divided into five sectors, namely Manufacturing

(including Oil Servicing and Construction companies); Hotel and Catering

Services; Banking and Finance; Government Ministries and Parastatals and

Commercial/Allied businesses.

From table IIA above, it can be observed that each of the sectors was

given thirty (30) copies of the questionnaire. This gives the total number of

questionnaires distributed as one hundred and fifty (150) copies. Out of this

number, a total of one hundred and twenty eight (128) copies were correctly

completed and retrieved. Manufacturing sector returned 26 copies, Hotel and

Catering Services 28 copies, Banking and Finance 25 copies, Government

Ministries and Parastatals 25 copies and Commercial/Allied businesses 21

copies .The percentages returned per sector were: 87%,93%,83% 83% and

70% respectively.
94
 The Implementing Agency (VAT Office-Uyo) was given another set of

twenty questionnaires. These were all correctly completed and returned.

(a) Zonal Distribution and Collection of Questionnaires:

From table 1B above, it is also observed that each zone was represented

by two Local Government Areas (LGAs). Fifty (50) copies of the questionnaire

were distributed in each zone, whereby one LGA was assigned twenty five (25)

copies. Uyo zone returned a total of forty four (44) copies, while Ikot Ekpene

and Eket zones returned forty one (41) and forty three (43) copies respectively.

Accordingly, the percentage returned per zone are 88%,82% and 86%

respectively

4.3 Test of Hypotheses:

This study was based on the three senatorial zones of the state, namely
Uyo, Ikot Ekpene and Eket. In each of the zones, two Local Government Areas
were selected for the study. These are:
(i) Uyo senatorial zone: Uyo and Itu LGAs
(ii) Ikot Ekpene senatorial zone: Ikot Ekpene and Abak LGAs
(iii) Eket senatorial zone: Eket and Ikot Abasi LGAs
The following abbreviations will be used to represent each local
government area and the implementation Agency in the table of analysis.

UY …. Uyo
TU …. Itu
IK .… IKot Ekpene
AB .… Abak
KET … Eket
KTS … Ikot Abasi
1A ... Implementing Agency (FIRS)

Hypothesis 1:
Testing the Hypotheses to Determine the Actual Implementation of VAT
Policy in Akwa Ibom State.

95
Ho: There is no significant difference between the actual implementation
and the theoretical set-up of VAT in Akwa Ibom State.

Table 12: Comparism of Actual Implementation and the Theoretical Set-up of VAT

Local Gov’t
UY TU IK AB KET KTS IA
Area

Observed
Frequency
288 240 264 228 240 276 334
Expected
Frequency 600 500 550 475 500 575 500
Source: Survey data generated by the researcher.
Using the table of 5% level of significant and the formulae:

X2 = Σ (O-E);
E
Where, E = Expected Frequency; and
O = Observed Frequency
X2 = Chi-square
Table 13:
Calculation of X2 for Values on Table 12 above
Observed Expected (O-E)2
O-E (O-E)2
Frequency Frequency E
288 600 -312 97344 162.24
240 500 -260 67600 135.20
264 550 -286 81796 148.72
228 475 -247 61009 128.44
240 500 -260 67600 135.20
276 575 -299 89401 155.48
334 500 -166 27556 55.11
X2 = 920.39
Source: Data generated by the researcher.

The degree of freedom (df) is determined as follows:

df = (R – 1) (C – 1); where
R = Number of rows
C = Number of columns
df = (2 -) (7 -1) = 6

96
At 5% significant level with 6 degrees of freedom, the critical value (table
value) of X2 is 12.592.

Decision Rule: Reject the null hypothesis if the computed value is greater than
the critical value (table value).
Decision: Since the computed value (920.39) is greater than the table value
(12.59) the null hypothesis is rejected in favour of the Research Hypothesis.

Conclusion: From the above analysis, the calculated value of X 2 is greater

than the table value. Accordingly, the null hypothesis has been rejected in
favour of the alternative hypothesis, which states that there is a significant
difference between the actual implementation and the theoretical set-up of VAT.
The theoretical setup of VAT required every VAT-able person to keep proper
records of all transactions, operations, imports and other activities sufficient
enough to calculate the correct amount of VAT payable. These books/records
include cash book, sales and purchases day book, ledger accounts, balance
sheet and Tax Invoices. Also, the administration of VAT was to ensure that
operations (VAT-able persons) be guided through the keeping of these
books/records through effective supervision. Furthermore, it is a cardinal
requirement in Tax practice that imposition of a new tax must be followed by the
formulation of a tax policy, a legal framework and administrative machinery and
that such tax is well published before its introduction.
From the forgoing, it is observed that the actual implementation of Value
Added Tax in Akwa Ibom state is at variance with the theoretical set up of VAT
and the generally accepted procedures for the introduction of a new tax.

Hypothesis II:
Testing of Hypothesis to Determine the Compliance of VAT Collections
and Accounting in accordance with the Generally Accepted Accounting
Principles

97
Ho: The collection and accounting for VAT revenue does not comply with the
generally accepted accounting principles.

Table 14: Comparing the Compliance of VAT Collections and Accounting with the Generally
Accepted Accounting Principles.
Local UY TU IK AB KET KTS IA
Govt Area
Observed 312 260 286 247 260 299 340
Frequency
Expected 600 500 550 475 500 575 500
Frequency
Source: The survey data obtained by the researcher.

Table 15

Testing the Hypothesis II above

Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe) 2

Fe
312 600 -188 82944 138.24
260 500 -240 57600 115.20
286 550 -264 69696 126.72
247 475 -228 51984 109.44
260 500 -240 57600 115.20
299 575 -276 76176 132.48
340 500 -160 25600 51.20

Calculated X2 788.48

Degree of freedom (df) is determined as follows:

Df = (R-1) (C-1)
=(2-1) (7-1)
= 1 X 6 =6
At 5% significant level with 6 degrees of freedom, the critical value of X 2 is
12.59.
98
Decision Rule: Reject the null hypothesis (Ho) if the computed value is greater
than the critical value; Accept it if the computed value of x 2 is lesser than the
table value.

Decision: Since computed value is greater that the table value, that is, 788.48
> 12.592, the null hypothesis is rejected, and the alternative hypothesis has
been accepted.

Conclusion: From the above analysis, the calculated value of X 2 (788.48) is

greater than the critical (table) value (12.592). The null hypothesis has
therefore been rejected in favour of the alternative hypothesis which states that
the collection and accounting for VAT revenue is in compliance with the
generally accepted accounting principles. It is generally agreed that in order to
ensure accurate computation of VAT payable, the accounting books/records
must be kept in line with the General Accepted Accounting Principles (GAAP).
This encompassed broad principles and conventions of general application
together with rules and procedures that determine accepted accounting
practices at a particular time.
In order to ensure that this is achieved, the implementation agency of
VAT in Nigeria (FIRS) undertook to introduce what they called Simplified
Accounting System for VAT purposes. This was aimed at making these
principles and conventions simple enough for an average VATable person to
follow.
It is therefore concluded that the collection and accounting for Value
Added Tax in Akwa Ibom State, to a large extent, complies with the generally
accepted accounting principles. This conclusion supports the claims by the
implementing agency that the introduction of the Simplified Accounting System
to VAT-Payers has led to accurate record keeping for VAT purposes and
accurate computation of VAT revenue.

Hypothesis III :
Testing the Relationship between the Collection and Allocation of VAT
Revenue

99
Ho: There is no significant relationship between VAT Collection and
Allocation of VAT Revenue to the State.
Table 16:
Collection and Allocation of VAT Revenue to Akwa Ibom State for the
period 1994 – 2003.
Year VAT Collections VAT Revenue Allocated to
Akwa Ibom State
1994 5,608,737.24 165,098,809
1995 18,022,938.88 117,495,013
1996 31,392,258.85 210,062,180
1997 35,970,288.46 314,592,720
1998 71,239,673.28 380,692,819
1999 73,145,553.92 534,000,000
2000 125,718,166.28 635,500,000
2001 180,225,513.38 997,200,000
2002 217,529,328.39 1,489,200,000
2003 274,834,141.41 1,843,400,000
Source: FIRS (VAT Office) and computations from State Budgets (several
years).

From table 16 above the correlation between VAT Collection and VAT Revenue
allocated to the State can be analysed, using regression approach.

Table 17:
Regression Result using Collection and Allocation of VAT Revenue to
Akwa Ibom State for Ten Year Period, 1994 – 2003(in millions of naira)

Year X Y X2 Y2 XY
1994 5.6 165.1 31.36 27258.01 924.56
1995 18.0 117.5 324.00 13806.25 2115.00
1996 31.4 210.1 985.96 44142.10 6597.14
1997 36.0 314.6 1296.00 98973.16 11325.60
1998 71.2 380.7 5069.44 144932.49 27105.84
1999 73.2 534.0 5358.24 285156.00 29088.80
2000 125.7 635.5 15800.99 403860.25 79882.35
100
2001 180.2 997.2 32472.04 994407.84 179695.44
2002 217.5 1489.2 47306.25 2217716.64 323901.00
2003 274.8 1843.4 75514.04 3398123.56 506566.32
Σ=1033.6 Σ=6687.30 Σ=184,157.82 Σ=7,628,376.21 Σ=1,177,202.05
ΣX ΣY ΣX2 ΣY2 ΣXY
Source: Data generated by the researcher

The degree of correlation between VAT revenue collection and allocation can
be measured by computing their moment co-efficient of correlation, donated by
r. That becomes:
r= n Σxy - Σx Σy
n ΣX2 – (Σx)2 x n ΣY2 – (ΣY)2
= 10 x 1177202.05 - 1033.6x6687.30
10x184158.82 – (1033.6) 2 x 10 x 7628,376.21 – (6687.30)2
= 11772020.05 – 6911993.28
1841580.82 – 1068328.96 x 76283760 – 44719981029
4860026.77
879.35 x 5618017

4860026.77
4940337.79 = 0.98

r = 0.98

The correlation co-efficient r, at 0.98 indicates a strong linear relationship

between VAT collections and allocation of VAT revenue to Akwa Ibom state by
the Federal Government. The high value of the correlation coefficient (above
+0.9) will give the impression that there is causal relationship between the two
variables.
That is, a change in one variable, say VAT collection, will cause changes in
allocation of VAT revenue to the state. However, Lucey (1996) has argued that
“it is possible to find two variables which
produce a high calculated r value yet
have no causal relationship. This she
referred to as spurious correlation”.

Conclusion:
In the light of Lucey’s argument above it would be save to conclude in
this case that the high value of r does not necessarily mean that there is such a

101
strong relationship between X and Y (that is, VAT collections and allocation of
VAT revenue to Akwa Ibom state). Even though it would appear that as total
VAT collections (nationwide) increases, there is a corresponding increase in
VAT allocation to the states, including Akwa Ibom state and vice versa. This
does not necessarily depend on the increase in the collection of one state. For
instance, an increase in VAT collections from N5.6 million in 1994 to N18.0
million in 1995 did not translate to a corresponding increase in VAT allocation to
Akwa Ibom state. Instead, the allocation dropped from N165.10 Million in 1994
to N117.5 Million in 1995. It is therefore, concluded that there is a significant
difference between VAT collection by States (collection centers) and the
allocation of VAT revenue to the states. This conclusion supports the findings of
Tinubu (2002) and Layode (2003).

Hypothesis iv
Testing of Hypothesis to Determine the Contributions of Value Added Tax
to the Economic Development of Akwa Ibom State.

Ho: Value Added Tax revenue has not made any significant contribution
to the economic development of Akwa Ibom State.

Table 18:
The Contributions of Value Added Tax to the Economic Development of Akwa Ibom State.
Local UY TU IK AB KET KTS IA
Govt.
Observed 336 280 308 266 280 322 270
Frequency
Expected 600 500 550 475 500 575 500
Frequency
Source: Survey data obtained by the researcher

Table 19

Testing the Hypothesis Iv above

Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe) 2

Fe

102
336 600 -264 69696 116.16
280 500 -220 48400 96.80
308 550 -242 58564 106.48
266 475 -209 43681 91.96
280 500 -220 48400 96.80
322 575 -253 64009 111.32
270 500 -230 52900 105.80

Calculated X2 725.32

At 5% significant level with 6 degree of freedom, the critical value of X 2 is

12.592
Decision Rule: Reject the null hypothesis if the computed value of X2 is
greater than the table value.

Decision: Since the computed value of X2 is greater than the table value, that
is 725.32 > 12.592, the null hypothesis has been rejected in favour of the
alternative hypothesis which states that Value Added Tax has made a
significant contribution to the economic development of Akwa ibom State.

Conclusion: From the above analysis, the calculated value of X 2 which is

725.32 is greater than the critical value at 5% significant level for 6 degrees of
freedom (12.592). The null hypothesis has accordingly been rejected and the
alternative hypothesis has been accepted. Therefore it is concluded that VAT
revenue has contributed to the economic development of Akwa Ibom State in
various ways. From research findings, some of these include:
expansion/repairs of facilities in primary and Secondary schools such as Group
School, Usuk Nkwot, Primary School, Ifa Nkan, Primary School, Atan Ubom,
Secondary School, Ikot Essien, Secondary, Ikot Obong Edon; development of
State College of Education, Afaha Nsit; College of Agriculture Obio Akpa and
State Polytechnics, Ikot Osurua. The state also undertook the construction and
equipping of Hospitals in the State, such as General hospitals Ikot Okoro, Iquita
Oron, Etinan, Ikot Abasi, Ituk Mbang, Cottage hospital Akai Ubium among

103
others as well as completion of some urban/rural water schemes at Ikpanyna,
Ikot Udo, Etim Ekpo, Itu-mbonuso, among others.
From available records and empirical studies, these projects were carried
out at a very minimal scale prior to the advent of VAT in 1994. But the post VAT
fiscal years (1994 upward), have seen these projects been executed at a very
large scale. It is therefore concluded that VAT revenue has contributed
immensely to the economic development of Akwa Ibom State. This conclusion
is in agreement with Naiyeju (1996); Udoh (1997) and Okon (2000).

Hypothesis V
Testing of Hypothesis to determine the problems of VAT administration in Akwa
Ibom State.

HO: There is no significant relationship between the inherent defects in VAT

administration and the amount of revenue generated from VAT in Akwa
Ibom State.

Table 20:
The problems of VAT administration as it affects VAT revenue generated in
Akwa Ibom State.
Local Govt. UY TU IK AB KET KTS IA
Observed 246 210 236 199 209 243 165
Frequency
Expected 360 300 330 285 300 345 300
Frequency
Source: Survey Data generated by the Researcher

Table 21
Testing the Hypothesis v above

Fo Fe Fo-Fe (Fo-Fe)2 (Fo-Fe) 2

Fe

104
246 360 -114 12996 36.10
210 300 -90 8100 27.00
236 330 -94 8836 26.78
199 285 -86 7396 25.95
209 300 -91 8281 27.60
243 345 -102 10404 30.16
165 300 -135 18225 60.75

Calculated X2 234.34

At 5% significant level with 6 degree of freedom the critical value of X2=12.592.

DECISION RULE: Reject the null hypothesis if the computed value of X 2 is

greater than the table value.

Decision: Since the computed value of X2 is greater than the table value, that
is 234.34 > 12.59, the null hypothesis has been rejected in favour of the
alternative hypothesis which states that there is a significant relationship
between the inherent defects in VAT administration and the amount of revenue
generated from VAT in Akwa Ibom State.

Conclusion: From the above analysis, the calculated value of X 2 which is

234.34 is greater than the table value of X2 (12.50) The null hypothesis has
accordingly been rejected and the alternative accepted. It is therefore
concluded that the inherent defects in VAT administration has greatly affected
the amount of revenue generated from VAT in Akwa Ibom State. Some of these
defects, from research findings include: inadequate infrastructural facilities, lack
of staff training, lack of staff motivation and illiteracy among the tax paying
public.

DISCUSSION OF FINDINGS
The findings of this study are presented based on the results of the
various statistical analysis carried out as well as the responses to questionnaire
and interviews.
The first issue was on the procedures for the implementation of the Value
Added Tax. The findings showed that the implementation of Value Added Tax is
105
at variance with the VAT Policy and the procedures for introducing a new tax.
Some of these policies and procedures as already discussed in chapter 2
include the following:-
(i) that introduction of a new tax should be preceded by a well formulated
tax policy.
(ii) that such tax should be backed by a legislation.
(iii) that the new tax should be well publicized before implementation.
This conclusion supports the position held by Layode (2003) and Okere (2003).
However, Naiyeju (1996) and the findings of the researcher during personal
interview with officials of the implementing agency do not totally support this
position.
With respect to the procedures adopted during the introduction of VAT,
the researcher learnt that the introduction of VAT in Nigeria was preceded by a
VAT policy, which itself was a product of the work of a Study Group set up to
that effect. The Study Group which was set up in 1991 had Professor Edozien
as the chairman. The Group identified the need to transform the out-modeled
Sales Tax, which was by then administered by the State Governments. Based
on the recommendations of Prof Edozien committee, Another Study Group was
set up with the responsibility to look into the feasibility of introducing the Value
Added Tax in the country, as an improvement of the existing sales tax. The
group was led by Dr. Sylvester Ugoh. After a series of empirical studies and
research tours, the Ugoh Study Group came up with a firm recommendation
that VAT should be introduced in Nigeria. The report also recommended a two –
year period for preparatory work before full implementation. Accordingly, the
VAT policy was launched in 1991 and was followed by the VAT Decree in 1993.
The decree was signed into law by the Military President, General Ibrahim
Badamosi Babangida and is gazetted as Value Added Tax Decree No. 102 of
1993.
Another crucial matter at the introduction of VAT in Nigeria, the
researcher learnt, was the issue of what would be the roles of the Federal,
States and Local Governments in the administration of VAT. The states argued
that since they were they were responsible for the administration of the Sale
Tax which VAT came to replace, they would be in a better position to administer

106
the VAT. The Federal Government however insisted that VAT is not merely a
replacement of sales tax but an improvement of it. Thus, in order to overcome
the short comings of sales tax, it would be proper to allow the administration of
VAT into the hands of the Federal Government, since the latter has a better
structure in place and a wider coverage for effective administration of the new
tax.
Having taken a decision to implement VAT and to place it within the
Federal Government structures, the government was again faced with the need
to answer yet another administrative question. That is, which organization
within the federal structure was most suitable to administer the new tax. There
are many possibilities in taking the crucial decision of where to place the
administration of VAT. The main possibilities, according to Naiyeju, (1996:36)
include:
(a) The organization that administers Customs and Excise Duties;
(b) The organization that administers internal/ indirect taxes;
(c) A separate outfit.
Nigeria has to adopt a mixture of (a) and (b) whereby the Federal Inland
Revenue Service (FIRS) and the Nigeria Customs Service work together in
close cooperation for effective administration of VAT.
The researcher further learnt that the issue of appropriate rate for VAT
was also hotly debated at the policy formulation stage of VAT. Several rates
were proposed. The World Bank and the IMF team, for instance, advocated a
double-digit rate of between 15% and 17%, arguing that the lower rate of 5%
proposed by the VAT Implementation Committee would produce a paltry value.
The Federal Government decided to adopt the 5% rate propose by the MVAT
Committee. More so, to make it the same rate as Sales Tax which VAT was to
replace. This was so reflected in the VAT Decree. However, the issue of wide
publicity of VAT, prior to its introduction is still a subject of controversy.
Responses to the questionnaire on the issue also show a great disparity.

II. The Collection and Accounting for VAT Revenues:

Based on the premise that a good system of record keeping and
accounting is the basis for accurate computation of tax due or tax collectable,

107
the researcher first sort to examine the accounting/record keeping system of
the VAT-paying organizations. The implementing agency claimed that to
facilitate accurate records keeping, the “Simplified Accounting System” was
introduced to VAT payers (or VAT registered persons). The system also
recommends the basic books to be kept by VAT payers for VAT purposes.
Examples of these books/records are: Cash book, Sales and purchases day
book, Ledger Account, Profit and Loss account, Balance Sheet, and VAT
Invoice.
The pattern of responses to the questionnaire by VAT payers indicated
that most of them are not conversant with the so- called Simplified Accounting
System. They are not introduced to nor trained on it. They also claimed that
VAT officials hardly visit them to direct on the keeping of accounting records for
VAT purposes.
The actual collection of the VAT is another kettle of fish altogether. It was
discovered that whilst VAT payers religiously deduct VAT from their
transactions, most of them do not remit these deductions to the VAT authorities
on time. The VAT officials claimed that many organizations are in arrears of VAT
remittance which runs to several millions of naira, and admit quite frankly that
enforcement has been very weak and slow. The respondents agreed almost in
unison, that more revenue would have accrued to the state government if more
revenue were generated from VAT.

iii. The Contributions of VAT towards Economic Development of

Akwa Ibom State.
It is also the belief of this researcher that effective utilization of VAT revenue
would enhance compliance and consequently, increase in VAT collection.
Accordingly, there was need to formulate hypothesis to find out the
contributions of VAT to the economic development of Akwa Ibom State.
The findings revealed that Value Added Tax has contributed significantly to the
economic development of the state. Most of the respondents to question
number 13 in the questionnaire were between “undecided and Agree” which
carry 3 and 4 points respectively.

108
 The officials of the Office of the State Accountant General, in response to
personal interview maintained that revenue from VAT are not segregated from
other revenues from the Federation Account and can not be traced to specific
project . Instead, it forms part of the state budgeted revenue from where
various projects are carried out.
Although VAT revenue allocated to the state could not be traced to
specific projects, the study revealed that there have been a tremendous
increase in revenue to the state, since the introduction of the Value Added Tax.
For instance, the total receipt from the Federation Account in 1993 was N970,
536,130.00 and Sales Tax contributed a paltry sum of N5, 537,000.00 to the
State revenue budget. But in 1994, the total receipt from the Federation
Accounts increased to N1,051,172,000, with VAT accounting for N165,098,809
or 16% of this amount. Thus, VAT’s contribution to the revenue profile of the
States shows an increase of about N159, 561,809 over that of Sales Tax in the
previous years. This figure (VAT’s revenue) has been on a tremendous
increase since then and as at 2003 a whooping sum of N1,8b (One Billion,
Eight Hundred Million Naira) was contributed to the state’s covers through VAT.

Although the Federal Government instructed the State Governments to

expend VAT revenues on capitals projects only, it is difficult to identify specific
capital project or public goods financed with VAT proceeds.
However, it was discovered that some more capital projects were provided for
in the budgets during the VAT era than was the case in the period prior to the
introduction of VAT. Some of these projects include the following:
1. Expansion/repairs of facilities in Secondary schools, such as
Secondary School Ndon Ebom, Secondary School Ikara Obio,
Secondary School Ikot Esetan, Ikot Ekpene, among others.
2. Development of Primary education, Primary School Ikot Abasi I,
Primary School Ayadehe, Primary School Nung Udoe, among others.
3. Development projects in the State College of Education, Afaha Nsit.
4. Construction and equipping of General Hospitals, such asGeneal
Hospital Equita Oron, Cottage hospital Ason, Comprehensive Health
Center Nto Edino, Obot Akara, among others.

109
 5. Housing development, such as low –cost houses in the thirty-one
Local Government Areas of the State.
6. Grading/Repairs/maintenance of rural Feeder and urban roads, such
as, Ikot Umo Essien – Urua Akpan Road, Iwukem - Urua Inyang road,
Ekpenukim road, among others.
7. Maintenance and completion of some urban and rural water schemes
in the thirty-one Local Government Areas of the State.

From available records, it is clear that these projects were carried out at a very
limited scale before the introduction of VAT in 1994. But the post VAT fiscal
years (1994 upward) have seen the execution of many of these projects in a
larger scale. More so, the fact that these projects were financed without
recourse to external borrowing is an indication that they must have been
substantially financed with the VAT proceeds.

iv. Problems of VAT Administration:

The findings also revealed that there are several problems confronting effective
administration of VAT in Akwa Ibom State. Some of these problems according
to research findings include: inadequate infrastructural facilities, lack of
motivation and staff training, poor record keeping, multiple taxes, administrative
complexity, public resistance and high level illiteracy among the tax paying
public. The study revealed that these inherent problems (or defects) have
significantly affected the amount of revenue generated from VAT in Akwa Ibom
State.
As a way forward, the respondents proffered the following recommendations:

i. Infrastructural facilities in Tax offices should be

upgraded
ii. VAT policies and strategies should be wholly
implemented in
a way as to discourage evasion.

110
 iii. VAT officers should be trained and retrained on the
workings
of this new tax.
iv. A good motivation system is needed to boost the morale
of
VAT officers.
v. VAT education and enlightenment campaign should be
Intensified.

CHAPTER 5

5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS:

5.1 INTRODUCTION:
In this chapter, the research findings are summarized, Conclusion drawn
and the way forward for effective administration of the VAT policy
recommended.

5.2 SUMMARY OF MAJOR FINDINGS:

This study was predicated on the observed fact that consumption based
taxes such as Value Added Tax (VAT), has become a major source of

111
revenue in most economies of the world. The Nigerian government
undertook some tax reforms in 1993 which gave rise to the introduction
of the Value Added Tax. The tax (VAT) has been in operation throughout
the country since then. The Federal Government through Central Bank of
Nigeria’s Annual Report and also Annual Budget Analysis has been
providing information about the performance of this new tax (VAT). This
information, although very Illuminating and useful, does not disclose the
peculiar features of each state and the specific contributions of the VAT
to the revenue profile of the states. This study was designed to fill the
gap by providing Comprehensive information on the contributions of VAT
to the revenue profile of Akwa Ibom State. Thus, the title of study was
“Value Added Tax as A Revenue Source for Government: The Akwa Ibom
State Experience. 1993 to 2003” and the specific objectives of the study
are:

(i) To examine the procedures for the implementation of the Value

Added tax in Akwa Ibom State.

(ii) To asses the amount of revenue generated from VAT in Akwa Ibom
State and the allocation of this revenue to the State by the Federal
Government.

(iii) To identify the problems for VAT administration and examine

possible ways of improvement.

The Statement of problem, research hypotheses and major research

questions provided the needed foundation for the study. Relevant
literatures were also reviewed to establish the theoretical framework of
the study. The review centered on the general overview of taxation,
consumption as tax base, historical perspective of VAT, implementation
processes of VAT, the nature of concept of VAT and why nations of the
world opt for VAT.

112
In order to achieve the study’s objectives, data were collected using
structured questionnaires. The state was grouped under three zones and
the state economy was structured under five sectors. The population of
this study consisted of VAT- Registered persons (VAT Payers). In all, one
Hundred and fifty (150) respondents were sampled, out of which 128
Valid questionnaire, representing 85% percent of the total were used for
the analysis. The relevant data were extracted from these
questionnaires, coded, analysed and interpreted. From the analysis,
some findings were made and they include the following:

(i) The introduction of Value Added Tax in Akwa Ibom State follows
the generally accepted procedures for the introducing a new tax.

(ii) Value Added Tax has been a major source of revenue for Akwa
Ibom State Government for the past ten Years.

(iii) The amount of revenue generated form VAT during the period
under review, is in excess of the amount budgeted.

(iv) More revenue would have accrued to the state if the state was able
to generate more collections from VAT.

(v) VAT revenue has been efficiently utilized for the economic
development of Akwa Ibom State.

(vi) The level of awareness of the workings of VAT amoung VAT payers
is very low.

(vii) Most VAT payers do not keep proper books of account, hence
unable to assess the correct amount payable as VAT.

(viii) The implementation agency of the VAT (FIRS) is poorly staffed and
also lack basic infrastructures.

113
 (ix) Non enforcement of sanction on VAT defaulters is a
discouragement to those who complied.

(x) The study further reveals that the implementation Agency is not
willing to make refunds to VAT Payers when need arises.

(xi) The inherent defects in the administration of the VAT Policies has
impacted negatively on the realization of the full potentials of VAT
in revenue generation.

(xii) The low rate of VAT at 5% has enhanced voluntary compliance by

VAT Payers

5.3 CONCLUSION:
Value Added Tax has generally been seen as a money-spinner for most
economies. This study has revealed that Value Added Tax has provided a
major source of revenue for Akwa Ibom State government for the past
ten years of its operation. This revenue has been used for the economic
development of the state.

The study further revealed that the tax has great potentials for grater
yield if it is effectively administered. Accordingly, recommendations have
been made on how to improve the administration of Value Added Tax in
the State in order to achieve optimum yield. It is believed that if these
recommendations are carefully implemented, the problems inherent in
VAT administration would be overcome and Value Added Tax would yield
more revenue to the State government.

5.4 RECOMMENDATIONS:

Arising from the above findings, it is obvious that more revenue could be
generated from VAT in Akwa Ibom State and this would mean more
revenue to the State Government. In this regard the following
recommendations are made for improved VAT administration.

114
(i) The Federal Government should intensify VAT education and
public enlightenment.

(ii) The implementing agency (FIRS) should be well staffed and

funded by the Federal Government to ensure effective VAT
administration.

(iii) The Federal Government should ensure that VAT officers are
motivated and well trained to boost their morale and ensure
effective performance.

(iv) There is urgent need to employ professionals such as Chartered

Accountants and Tax Practitioners in the audit of the Books of VAT
– Payers.

(v) Regular Training and retraining of VAT personnel is very essential

in order to ensure proper understanding and operation of VAT
administration. This will lead to optimum performance and
increased VAT collections.

(vi) The Simplified Accounting System introduced in 1994 for VAT

purposes should be made available to all VAT – Payers. Also, VAT
drive/visits should be intensified in order to guide VAT-Payers on
record keeping and ensure accurate computation of VAT
payments.

(vii) Government, through the implementing agency, should implement

VAT policies in accordance with the letter and spirit of VAT Decree
102 of 1993. Where there is need to make VAT refunds,
government should be willing to do so and VAT defaulters should
be sanctioned appropriately.

115
 (viii) VAT revenue should be utilized on specific projects such as
electricity, pipe-borne water, roads, education and other
infrastructural developments. This will encourage Voluntary
Compliance.

(ix) The present VAT rate of 5% should be maintained in order to

encourage voluntary compliance and reduce VAT avoidance.

BIBLIOGRAPHY
1. Adesola, S. M. (1998) Tax Law and Administration in Nigeria,, College
Press Limited, Ife.

2. Akao, S. (1998) “Noose Tightening on VAT Defaulters” Business Times,

Lagos.

3. Akpakpan, B. A (2003) Guideline on Project Writing-Introducing Students

to Research Through Practical Approach, Abaam Publishing Co, Uyo.

116
4. Anao, A. R. and Uche, C. U. (2002), Research Design and
Implementation in Accounting and Finance, University of Benin Press
and ICAN, Lagos.

5. Buari, B. and Abdulrazaq T. (1994) Introduction to Value Added Tax in

Nigeria (with worked Examples) Maples & Temples, Illorin.

6. CBN (1998) “Statistical Bulletins, Central Bank of Nigeria, Lagos

7. CITN (2002) Tax Guide & Statutes CITN, Lagos

8. Emmanuel S. (1997) “Reducing Complications in VAT Implementation”,

Business Times, Lagos

9. Ijewere, E. (9193) “Modified Value Added Tax” The Nigerian Accountant,

Lagos.

10. Naiyeju, J.K. (1996) Value Added Tax: The Facts of a Positive Tax in
Nigeria, Kupag Public Affairs, Lagos.

11. Ofo, J. E. (2001) Research Methods and Statistics in Education and

Social Sciences, Joja Press Limited, Lagos

12. Ogundele, E. A. (1996) Value Added Tax, Theory and Practice, University
of Lagos Press, Lagos.

13 Rabiu, S. A (2003) Essays on Nigerian Taxation, Sar Tax Publications,

Lagos.

14. Rosen, H.S. (1999) Public Finance, MCGraw Hill, New York

15. Tait, A. A. (1998) Value Added Tax: International Practice and Problems,
IMF.

117
16. Udoh, D. G. (1997) The Gains and Prospect of VAT: A case study of
Akwa Ibom State – University of Uyo, Uyo.

17. Uremadu, S.O. (2000) Modern Public Finance (Theory and Practice),
Mindex Publishing Co. Benin City.

INTERVIEW SCHEDULE

Introduction:

Please Sir/ Madam,

I am a post graduate student in the Faculty of Business Administration, University of

Uyo. I am undertaking a research on the topic “Value Added Tax As a Revenue
Source of Government: The experience of Akwa Ibom State 1994 – 2003”.

I will be grateful if you could please oblige me with answers to few questions on Value
Added Tax so as to facilitate my research effort.

It is needful to emphasize that the exercise is purely academic and information obtain
will be treated with utmost confidentiality.

Q1. VAT was introduced in 1993, but becomes effective from Jan 1994, when did the
Akwa Ibom State government register with VAT?

Response: Akwa Ibom State Government joined VAT in the year 1994

Q2. The opinion of most members of the public is that the office of the Accountant
General is responsible for the deduction of VAT on behalf of all other ministries/
parastatals of the state. How correct is this view?

Response: The Various Ministries /Parastatals prepared their Vouchers for payment.
The office of the Accountant General only insist that such Vouchers take
care of VAT before they are paid.

Q3. What is the average monthly collection from VAT by the State?

Response: VAT is collected by the FIRS. The average collection range from N20m to
N23m per month.

Q4. What is the average monthly revenue of VAT from the Federation Account?

118
Response: VAT revenue fluctuates from time to time. However, this can be
extrapolated from the annual budgets (Actual collection). Presently, is
about N1.4billion

Q5. The Federal Government Specified that revenue from VAT should be expended
on specific capital projects only. Can you please specify some of the capital
projects into which VAT revenue have been utilized?

Response: VAT revenue usually comes together with other allocations from the
Federation Account, and are disbursed for various projects/Programmes.

RESPONDENT: The Senior Account in the office of the State Accountant General.

TIME: The interview took place between the hours of 12noon to 2pm.

DURATION: The interview lasted about two hours. However, there were
intermittent distractions, as the officer has to attend to other issues
in the course of the interview, since it was on a working day.

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