Full Project-THE EFFECT OF VALUE ADDED TAX (VAT) ON THE PROFITABILITY OF MANUFACTURING FIRMS

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THE EFFECT OF VALUE ADDED TAX (VAT) ON THE PROFITABILITY OF MANUFACTURING FIRMS

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

There are quite a number of definitions of tax or taxation depending on the qualities it poses. 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 (Adedeji, 2010). Taxation is the system of imposing levy by the government against the income, profit or wealth of the individual, partnership and corporate organization (Aluko, 2009).

In the present dispensation of Nigerian economy, taxation has always been a means by which communities are provided with common facilities such as access roads, security, amongst others from time immemorial.

In Nigeria, sales tax came into being in 1986. VAT introduction in 1993 heralded the abolition of sales tax. According to Anyafor, (2006), the rationale behind replacing sales tax with VAT is informed by the following reasons;

1. The base of the sales tax in Nigeria is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments,

2. The sales tax act targeted only locally manufactured goods,

VAT is a consumption tax and is based on the general consumption behavior of the people, thus the base is large.

Igbonyi, (2008) citing the Act (then decree) section 7 (2) which states that VAT shall be administered and managed by the Federal Board of Inland Revenue Service (FIRS) but shared by the three tiers of government in Nigeria from 1999 to date as follows;

Federal Government: 15%

State Government: 50%

Local Government: 35%

Value added tax (VAT) according to Isah (2011) is a consumption tax, levied at each stage of the consumption chain and borne by the final consumer of the product or service. The administration of VAT is relatively easy, unselective and difficult to evade. Countries all over the world, look for ways to boost their revenue, this facilitated many nations to introduce value added tax on goods and services. For instance in Africa, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, Nigeria. Evidence suggests that in these countries VAT has become an important contributor to government revenue (Oyebanji, 2010).

Value added tax (VAT) according to Tabansi (2005) is a tax introduced in Nigeria in 1993 and implemented in 1994. It is imposed on goods and services at the rate of 5%. The main aim of this tax is to raise revenue to government and its incidence is borne by the final consumer. VAT is collectible from both imported and locally manufactured goods and services. Adedeji, (2010) defined VAT as a consumption tax, charged at 5% on all vatable goods and services. He went further to state the attributes of VAT as:

1. VAT is a consumption tax;

2. VAT is a multi-stage tax, and

3. The incidence of VAT is on the final consumer.

Anyafor, (2006) asserted that VAT has tremendously increased the revenue earnings of government as opposed to the normal system before the advent of the (VAT), it has reduced the incidence of tax invasion as many people who hitherto used to avoid VAT has been paying as it is indirect form of tax system. Many goods that people purchase these days has tax tag sometimes unknowingly by them. VAT paid by a business on purchases is known as input tax, which is recovered from VAT charged on company’s sales, known as output tax (Anyafor, 2006). If output exceeds input in any particular month the excess is remitted to the Federal Board of Inland Revenue (FBIR) but where input exceeds output the taxpayer is entitled to a refund of the excess from FBIR though in practice this is not always possible. A Taxpayer however has the option of recovering excess input from excess output of a subsequent period. Isah, (2011) stated that recoverable input is limited to VAT on goods imported directly for resale and goods that form the stock-in-trade used for the direct production of any new product on which the output VAT is charged.

1.2 Statement of Problem

The attitude of Nigerians towards Value Added Taxation is worrisome as many prefer not to pay tax if given the opportunity. This is due to the fact that most people consider tax as loss in profit. The economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is overdue.

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