THE IMPACT OF VALUE ADDED TAX (VAT)

ON CONSUMABLE GOODS ON THE TAX

PAYERS IN NIGERIA

BY

SAMUEL JULIUS
 THE IMPACT OF VALUE ADDED TAX ON CONSUMABLE
GOODS ON THE PAYERS IN NIGERIA
BY
SAMUEL JULIUS
TABLE OF CONTENTS

Title page
Declaration
Approval page
Dedication
Acknowledgement
Table of contents
List of tables
Abstract
CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objective of the Study

1.4 Research Questions

1.5 Research Hypotheses

1.6 Significance of the Study

1.7 Scope of the Study

1.8 Definition of Terms

1.9 Organization of the Study

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Introduction

2.2 Conceptual framework

2.2.1 Value Added Tax

2.2.2 The Nature of VAT

2.3 Types of Value Added Tax

2.4 General structure of VAT in Nigeria

2.5 Administration of Value Added Tax

2.6 Tax Compliance of Tax Payers

2.7 Tax Culture

2.8 Review of empirical studies

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction
3.2 Research Design
3.3 Population of the Study
3.4 Sample and Sampling Technique
3.5 Sources and Nature of Data
3.6 Instrumentation
3.7 Validity and Reliability of Research Instruments
3.8 Techniques of Data Analysis
3.9 Limitation of the Methodology
CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND
INTERPRETATION
4.1 Introduction
4.2 Data Validity Test
4.3 Data Presentation and Analysis
4.4 Test of Research hypothesis
4.5 Interpretation of Result
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
5.2 Summary of Findings
5.3 Conclusion
5.4 Recommendations
5.5 Limitations of Research Work
5.6 Suggestions for further Study
Bibliography
Appendix
 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is the central part of modern economic

development. Its significance arises not only from the fact that it

is by far the most important of all revenues sources but also

because of the gravity of the problems created by the present day

heavy tax burden (Greene, 2011). The main objective of taxation

is raising revenue. A high level of taxation is necessary in a

welfare state to fulfil its obligations.

According to Musgrave (2008), taxation is used as an

instrument of attaining certain social objectives i.e. as a means of

redistribution of wealth and thereby reducing inequalities.

Taxation in a modern Government is thus needed not

merely to raise the revenue required to meet its ever-growing

expenditure on administration and social services but also to

reduce the inequalities of income and wealth. Taxation is also

needed to draw away money that would otherwise go into

consumption and cause inflation to rise Olaoye (2009).

 The pre-occupation of most countries in the world is to

strive to achieve rapid overall development through optimum tax

collection and expanded revenue base. An effective tax system is

essential for any country, the benefit of which can never be

overemphasized.

However, due to the changing tendencies in the global

market environment, income tax bases are continually thinning

as government’s ability to tax capital flows deteriorate. It is

therefore imperative that tax strategies and policies are designed

appropriately and monitored continuously in other for revenue

authorities to optimize revenue collection and ultimately support

their strategies, Gcabo (2007).

In order to see that this very objective is accomplished,

many countries in the world, especially developing countries,

selectively introduced new forms of taxes to boost their revenue

capacity with the aim of improving the socio-economic conditions

of their citizens and achieving rapid economic development of the

countries (Iorun, 2012).

One of such forms of taxation is the Value Added Tax (VAT),

this impressive performance of VAT virtually in all countries

where it has been introduced, according to Ajakaiye (2000)

clearly influenced the decision to introduce VAT in Nigeria in 1 st

September, 1993 although actual operation did not begin until 1 st

January 1994.

VAT is a consumption tax that is relatively easy to

administer and difficult to evade and it has been embraced by

many countries of the world, (FIRS circular, 1999). Evidence so

far support the view that VAT revenue is already a significant

source of revenue in Nigeria and that the yield from VAT is a

fairly accurate measurement of growth of an economy, since

purchasing power which determine yield increases with the

economy development Olaoye (2009).

The idea of introducing VAT in Nigeria came from the Report

of the study group set up by the Federal Government in 1991 to

review the entire tax system. VAT was proposed and a committee

was set up to carry out feasibility studies on the implementation.

In January 1993, government agreed to introduce VAT by

the middle of the year. It was later shifted to 1 st September 1993

by which time the relevant legislation would have been made and

proper groundwork done.

 VAT is a replacement of the existing sales tax, which has

been in operation under Federal Government Legislated Decree

N0. 7 of 1986 but is operated on the basis of residence.

The rationale behind replacing sales Tax with the Value Added

Tax is informed by a number of factors and considerations,

notable. The base of the sales tax in Nigeria as operated under

Decree N0.7 of 1986 is narrow. It covers only nine categories of

goods plus sales and services in registered hotels, motels, and

similar establishments. The narrow base of the tax negates the

fundamental principle of consumption tax, which by nature is

expected to cut across all consumable goods and services. VAT

base however is broader since it does not only cut across

consumable goods but other professional services as well. It is

this aspect of the Value added tax that poses a lot of problem to

the ordinary consumer today since it impacted directly on their

livelihood. It has been asserted by (Iorun, 2012) that the burden

of VAT rate on the consumption of goods and services has

significant unfavourable influence on the payers of such goods

and services causing high purchase prices of such products on

the final consumer. It against this background that this study

seeks to investigate the impact of value added tax on consumable

goods and services on the payers in Nigeria.

1.2 Statement of the Problem

Value Added Tax (VAT) has become an important source of

revenue to the Nigerian Government (both Federal and state level)

Olaoye (2009). The Federal government of Nigeria intends

increasing percentage of VAT imposed on goods and services, not

only because of its relevance to income base and economic

growth and development through a shift from direct tax regime to

indirect tax regime anchored on consumption, in accordance with

best global practice, to achieve stable non-oil revenue flow and to

lower company’s income and personal income tax, but also

because it has been a major tool used by the government to

discourage the consumption of certain commodities considered to

be harmful to the health of the general public Olaoye (2009).

The instruments that introduce VAT clearly spell out the

goods and services that attract the tax. It shows for instance,

that food items do not attract VAT besides, sellers of goods on

which VAT is paid must first be registered with the Federal

Inland Revenue Services. The aim is to ensure that the 5% VAT is

paid on such goods. But this is different from the case now.

Market women are now charging VAT on food items based on the

obvious fact that this tax simply increases their profit margin.

Landlords and hotels are not left out of this. All these are

contrary to the regulation governing the system (Iorun, 2012).

The fear now is that very soon, Nigerians will be paying VAT on

virtually everything, Olaoye, (2009). The resultant effect of all

these is that it has changed the citizens’ perceptions on the

system causing them to doubt the goodwill of the government

with regards to their well being. This resolve is not far from the

truth since the afore mentioned problems impact directly on the

livelihood of the ordinary citizens in terms of too much burden on

the final consumers, inflation, and a rise in fuel pump price just

to mention but a few. This opinion by the citizenry had become a

great cause for concern since the success of any public policy is

judge in terms of its effect on the public (Iorun, 2012). It is

against this backdrop that this study seeks to empirically

investigate the impact of VAT on consumable goods & services on

the payers in Nigeria.

1.3 Objective of the Study

 The main objective of this research work is to examine the

impact of Value Added Tax (VAT) on consumable goods on the

payers in Nigeria. The specific objectives, however, are as follows;

1. To ascertain the effect of VAT on the disposable income of

consumers.

2. To examine the extent to which VAT had impacted on

consumption in Nigeria.

1.4 Research Questions

For the purpose of this study, the following research questions

have been developed to be answered in the course of this

research.

1. What effect does VAT have on the disposable income of the

Nigerian consumers?

2. To what extent had VAT impacted on consumption in

Nigeria?

1.5 Research Hypothesis

Hypothesis is a tentative answer to a research question

often stated in form of a relationship between a dependent and

an independent variable. The following research hypothesis will

be stated in its null form.

HO1: Vat has no significant effect on the disposable income of tax

payers in Nigeria.

HO2: VAT had no significant impact on the level of consumption

in Nigeria.

1.6 Significance of the Study

Taxation in every economy is an intricate aspect in that it

affects span across all sector of the economy as such, any study

on it impact is of great significance. That being said, this study is

of great significance to the government in that it stand to give an

insight on the impact VAT on consumable goods has on the

payers which in turn can be serve as a representation of the

feedback from the implementation of the policy.

This study is also of significance to the consumers since

they suffer most from VAT. This is because the study is designed

to broaden their understanding of the necessity of VAT and how

it work. It will also help them to understand their consumption

pattern and in separating their actual expenditure on

consumables.
 To the ordinary businessmen, this study is designed to

provide them with all necessary information with regards to the

computation of VAT. Finally, since no knowledge is waste, this

study is a contribution to the bank of knowledge as it stands to

shift the frontier of knowledge further.

1.7 Scope of the Study

The impact of VAT on consumable goods on the payers is a

very broad field of study as it cut across the whole citizenry

which span every sector in the economy. However, for the

purpose of this study, the scope of this research work will be

limited to examining the impact of VAT on consumable goods on

payers in Enugu state of Nigeria. The aim is so that the result

from this research can be generalized to represent what is

obtainable in the entire country.

1.8 Definition of Terms

i) VAT: This is a tax of the supply of goods and services

which is eventually borne by the final consumer, both

 collected at each stages of production and distribution

chain.

ii) VARIABLE GOODS\SREVICES: These are goods or

services that subject to VAT. There are list of these goods

and services in the appendix

iii) VARIABLE PERSON: These are business organization

that are registered for VAT purpose , the firms collect VAT

from the customers and rant to the Vat secretarial.

iv) TAXABLE PERIOD: This is the period covered by any

particular return. In Nigeria the taxable period is one

month, in other words the returns and payment are

normally made monthly to the local VAT office on or

before the 14th day of the month next following that in

which the supply was made.

v) TAX INVOICE: This is the key to any credit claim on

VAT. Whenever a person supplies a variable tax invoice in

support of the transaction and take a copy for himself

vi) OUTPUT TAX: These are taxes paid by variable persons

on the supplies he made.

vii) INPUT TAX: These are those VAT paid by the customers

and collected by the variable persons.

 viii) ZERO RATED GOODS: These are goods that attracts a

VAT rate of 0% while the normal rate of VAT in Nigeria is

5% for all goods and services variable

ix) TAX INCIDENCE: This is the final person(s) who bear the

tax burden.

x) TAX SYSTEM: This is the way tax is being regulated and

administered.

xi) SALES TAX: This is the tax imposed on the sales of a

commendation usually collected at whole sales or retail

stages.

1.8 Organization of the Study

Chapter one comprises of the introduction of the research

work which includes the background of the study, statement of

the problem, objective of the study, research question,

hypothesis, significance of the study, scope of the study,

definition of terms and structure of the study.

Chapter two critically reviews related literature. This

encompasses the introduction, the conceptual framework, the

nature, types, structure and administration of value added tax in

Nigeria and Empirical review of past literature.

 Chapter three examines the research methodology in terms

of the introduction, the research design, the population, the

sample size, the nature and source of data, the method of data

collection, the techniques of data analysis, the decision rule and

limitation of the study.

Chapter four focuses on data presentation and analysis as

follows: the introduction, data presentation, test of hypothesis

and the summary of findings.

Chapter five presents the summary and conclusion of the

research work. It looks at the recommendations, limitations of

the study, suggestion for further research.

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