• Background of the Study

A country seeking to improve its revenue generation would opt for a concept enabling it to best realize its objectives with due regards to its peculiar socio-economic make up (Olaoye, 2009). Okaura, (2012) stated that government need money. Modern government needs lots of money. How they get and whom they take it from are the two of the most difficult political issues faced in any modern political economy.One of the ways of getting this money is by taxation. There are quite a number of definitions of tax or taxation depending on the qualities it possesses. In that vein, taxation is the process or machinery by which communities or group of persons are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society (Igbonyi, 2008). It is also defined as a means by which, a Government appropriate part of the private sector’s income (Olaoye, 2012). Tabansi (2001) defines Taxation as a levy imposed by the Government against the income, profit or wealth of the individual, partnership and corporation. Reid (2003) defines taxation as the process whereby charges are imposed on individuals or property by the legislative branch of the federal government and by many state governments to raise funds for public purposes. While The National Tax Policy defines tax as a financial charge or levy imposed upon an individual or legal entity by a state or a legal entity of the state; it is a pecuniary burden laid upon individual or property to support government expenditure (Okauru, 2012). The accumulated revenue is used in meeting recurrent expenditure. Tax occupies a unique position, because it is an important part of government policies. The ability of a government to generate revenue from this sector affects services offered by such a government. A means of improving internally generated revenue is through Value Added Tax (Olaoye, 2009).


Tax system in Nigeria has therefore undergone several reforms geared at enhancing tax collection and administration with minimal enforcement cost. The recent reforms include the introduction of unique Taxpayer’s Identification Number (TIN) which became effective  since February 2000, Automated Tax system that facilitates tracking of tax positions and issues by individual tax payer, E-payment system which enhances smooth payment procedure and reduces  the incidence of tax touts, enforcement scheme (Special Purpose Tax officers), this is a special tax officers scheme in collaboration with other security agencies to ensure strict compliance in payment of taxes. The integrated tax offices and authority now have autonomy to assess, collect and record tax (Asuquo, 2012). This enabling environment which came into being on the basis of (Section 8(q) of Federal Inland Revenue Services (FIRS) Establishment (Act 2007) has led to an improvement in the tax administration in the country (Asuquo, 2012).


Further still, the Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are consistently being reviewed with the aim of repealing obsolete provisions and simplifying the main ones. Under current Nigerian law, taxation is enforced by the 3 tiers of Government, that is Federal, State, and Local Government with each having its sphere clearly spelt out in the Taxes and Levies (See approved list for collection on pages 27) Decree, 1998 (Owolabi and Okwu, 2011; Is-haq, 2010 and Asuquo, 2012).


Despite this improvement, there are still a number of contentious issues that require urgent attention and among them is the issue of appropriate tax authority to administer several taxes. The recent crisis between Lagos State and Federal Government on the tax jurisdiction of VAT in the state is still a contentious issue in the court. Other states like Ogun, Oyo and Benue have joined Lagos state, while states like Abia and others have gone against this.


Each country has different reasons for adopting Value Added Tax (VAT) but the principal motive is the same: a properly designed VAT system raises more revenue with less administrative and economiccost than any other more broadly based tax. The Value Added Tax (VAT) was introduced in Nigeria in 1993 by the then Military administration which implementation commenced in 1994. Before then, Sales tax was under the jurisdiction of the States and generally poorly administered with marginal contribution in terms of revenue (Abiola, 2011). The idea of introducing VAT was recommended by the Study Group set up by the Federal Government in 1991 to review the tax system of the Federation as a replacement of Sales Tax. After extensive deliberation and consultation, VAT was introduced on 24th August 1993 as a federal tax by the Value Added Tax Decree.

Nevertheless, VAT has become a major source of revenue in many developing countries.

In sub- Saharan Africa. For example, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo and Nigeria (Owolabi and Okwu, 2011).



Table 1.1 African countries with rate of Value Added Tax
Source: Olaoye, (2009) (Sic)


Evidence suggests that in these countries, VAT has become an important contributor to total government tax revenue (Owolabi and Okwu, 2011; Is-haq, 2010; Ajakaiye, 2000). Shalizi and Squire (2008) found out that VAT accounted for about 30% of total tax revenue in Cote d’Ivoire, Kenya and Senegal in 1982. The oil producing countries are not excluded from the list of countries introducing this tax hurdle.


Tait (1989) shows that VAT has been in existence in Ecuador and Mexico since 1973 and by 1983 accounted for 12.35% and 19.71% of total government revenuerespectively.Indonesia introduced VAT in 1983 and by 1988; the ratio of VAT revenue to GDP had risen to 4.5% (Bogetic and Hassan, 1993). This impressive performance of VAT in virtually all countries where it has been introduced, according to Adereti, Sanni, and Adesina, (2011) clearly influenced the decision to introduce VAT in Nigeria in January 1994. Consequently, Sanni, (2012) affirms that the Value Added Tax (VAT) was introduced in Nigeria in 1993 by the then Military Government. Since then, the Value Added Tax Decree, had been amended more than half a dozen times, the latest being the Value Added Tax (Amendment) Act of 2007. Some of the amendments have introduced significant changes which are yet to be reflected in the body of existing literature.


1.2       Statement of Problem

Every knowledge creation activity is an inquiry into a problem (Akpa, 2011). The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion. This problem has been lingering for so long which urgent attention and solution is overdue. The cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that, if left unchecked, the cost may soon outweigh the benefit or value derived from such operation and that will not be appropriate for the system. Government spends more to realize a miserable pittance (Okoye and Gbegi, 2013).


Since the introduction of VAT in 1993 by the then military government which implementation commenced in 1994, the laws relating to VAT have regularly been amended by government to strengthen its administration. However, the VAT law still have some loopholes such as exempted goods /services and others which need to be addressed. A gap which the researcher seeks to fill by researching on the topic: Appraisal of Value Added Tax Law and Administration in Nigeria to ascertain if the VAT laws are adequate for efficient administration of VAT in Nigeria. Effort is being made by government to encourage voluntary payment of VAT yet government is still battling with the issue of non-payment of VAT by some organisations.


Nigeria is depending so much on oil revenue which is fast depleting. The question is, are there no other sources of revenue that can burst the revenue generation of the nation? Can Nigerian government source for other sources of revenue to enhance her Gross Domestic Product? Can Nigerian government improve on her VAT collections to increase her revenue generation substantially? Can Nigerian government look inwards on the administration of VAT to find out if these factors like inadequate trained personnel, access to remote areas, low level of literacy as well as poor social or political climate affects VAT administration. Many of such questions needs to be answered, which the researcher intends to address.


The rate of corruption on the part of tax officials is alarming as most of them connive and collude with supposed-tax- payer to evade and avoid tax. Sometimes, the tax officials are not properly trained on the modern ways of tax administration. The inadequate social infrastructure in Nigeria call for attention as to how tax revenue generation is to be expanded and accounted for, especially where those in authority continue to spend these hard-earned resources with reckless abandon.This study therefore attempts to address the issues of Value Added Tax (VAT) law and its administration in Nigeria with the view to enhance revenue generation.


1.3       Objectives of the Study

The primary aim of this study is to appraiseValue Added Tax Law and administration in Nigeria. Other specific objectives include to:

  1. ascertain whether the VATable items stipulated in the VAT laws are sufficient to substantially increase the revenue base of government.
  2. ascertain the challenges inherent in the law relating to assessment and administration of VAT in Nigeria.
  • ascertain the effect of VAT on Total Tax Revenue.
  1. determine the effect of VAT on GDP.
  2. compare VAT performance in Nigeria with what is obtainable in other African countries.

1.4       Research Questions

To conduct a successful research, some questions were asked based on the statement of the problem. This aspect of the study has form the basis for making enquiries into the subject-matter by asking the following questions:

  1. To what extent are the VATable items in the VAT law sufficient to substantially boost the revenue base of government?
  2. What are the challenges inherent in the law relating to assessment and administration of VAT in Nigeria?
  • What are the effects of VAT on Nigerian Total Tax Revenue?
  1. What are the effects of VAT on GDP in Nigerian economy?
  2. What is the performance of VAT to Nigerian Economy when compared to selected African Country like South Africa?


 1.5      Statement of Research Hypotheses

The following propositions were used as working hypotheses for the research study.

Hypothesis One

                The VATable items in the VAT law are insufficient to substantially increase the revenue base of government.

Hypothesis Two

There are no significant challenges inherent in the law relating to assessment and administration of VAT in Nigeria

Hypothesis Three

Revenue generated through VAT has no significant effect    on the overall tax revenue in Nigeria.


Hypothesis Four

Revenue generated through VAT has no significant effect on Nigerian GDP

Hypothesis Five

The contribution of VAT to Nigerian economy is significantly inadequate when compared to selected African countries.


1.6       Significance of the Study.

The study will assist the government in policy formulation as it relates to Value Added Tax and monetary policies. The findings from this study will help government to adjust her VAT policies to meet the present economic realities. It will help to strengthen the operation of the relevant government agencies such as Federal Board of Inland Revenue, Central Bank of Nigeria, Joint Tax Board and others. Findings on administration of VAT will help FIRS to take decisions that will strengthen her administration. Other stake holders like CBN and Joint Tax Board will equally benefit from the findings of this study. It will also acquaint readers of this work with VAT Laws and its administration in Nigeria. Another benefit that can be derived from this research work will be the light thrown on improved methods of administering VAT. This will improve the efficiency of Staff of FIRS. It will also be a source of literature review to other future researchers or fact-finders.

1.7       Scope of the Study

The study was restricted to Value Added Tax for the period 2003-2012. The choice for this period is toknow the recent happenings in VAT administration. The study is centred on Federal Board of Inland Revenue Services which is the relevance tax authority saddled with the responsibility of Value Added Tax administration. Issues of VAT law, administration and implementation in Nigeria were discussedwith the aid of publications of the Federal Inland Revenue Services,Bureau of Statistics and Central Bank of Nigeria.


  • Limitation of the Study.

There are a lot of impediments against the conduct of research in Nigeria just as in any developing country. Accessibility to certain information required for this study was not easily arrived at because of the uncooperative attitude of the respondents. Such records are that of the FIRS and CBN which were regarded as strict confidential.Inadequate access to information and communication technology facilities is another limitation to this study. Despite the challenges, the researcher was able to laisse with one of the staff who is my postgraduate students to obtain the necessary data needed for the study.



1.9       Operational Definition of Terms

The purpose of the following terms is to facilitate an explanation so that the reader can fully understand the context in which such words have been operationally used in the study:

VAT: This is a consumption tax levied at each stage of the consumption chain and borne by the final consumer of the product or service. It can also be called the Goods and Services Tax (GST) which is levied on the value added that results from each exchange.

Consumption: is simply defined as the total demand for all consumer goods and services. Anyanwu (1995) defined consumption as the spending by households on goods and services such as clothing, food items, entertainment, health services and acquisition of assets among others.

Output VAT: This is simply the VAT due on VATable supplies. It is obtained by multiplying the value of the aggregate supply by tax rate.

Input VAT: The input VAT is what is charged on business purchases and expenses. These include goods and services supplied in Nigeria or imported. In this connection, it is to be emphasized that only input taxes paid on raw materials meant for production of goods meant for resale will qualify for set-off. For avoidance of doubt, input VAT incurred on capital items or other items not directly related to the goods and services meant for sale, will not qualify for set-off.

VAT Liability: Liability of VAT arises when the output VAT is more than the input VAT. The net VAT in a tax period is the amount to be remitted to the Local VAT Office.

VAT Account: The VAT account is the summary of the output and input tax in a normal ledger account form. That is, VAT on purchases, VAT on services, bad debt relief etc. are debited to the account while VAT charged on sales for the month or VAT charged on services etc. are credited.

VATable Person: This is one who trades in VATable goods and services for a consideration. Every VATable person has an obligation to register for VAT operation. The registration is to cover all the business activities of the VATable person. The person can be a sole proprietor (e.g. a trader); a professional (e.g. a lawyer); a partnership (e.g. Zayol & Co.); a Limited Liability Company (e.g. Zayol and Zayol Ltd or Zayol Z. Plc); a Club or Association or a Charity.

Tax Compliance Behaviour: Tax compliance is operationally considered as complying with tax laws in the act of true reporting of the tax base, correct computation of the tax liabilities, timely filing of tax returns and timely payment of the amount due as tax.

Taxpayer’s Risk Preference: Taxpayer’s risk preference is a moderating variable and it is operationally defined as risk-laden opportunities which a taxpayer considers are more desirable than other possible available choices.

Financial Condition: Personal financial condition is a moderating variable and it is defined as the extent to which the taxpayer is satisfied with his/her financial condition and that of his/her household.

Tax heaven: a place where taxes are low and where people choose to live or officially register their companies because taxes are higher in their own countries.

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