THE IMPACT OF VALUE ADDED TAX ON THE PRODUCTIVITY OF MANUFACTURING ORGANISATIONS IN THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

Background to the Study: The federal government in 1991 set up a study group to look into and give recommendation of the administration and reform of indirect taxation. This was as a result of the inadequate revenue yield from non-oil taxes in Nigeria and the overdependence of the government on oil revenue. This group was to review the indirect taxation system in Nigeria, study the feasibility of the introduction of Value Added Tax and make recommendation.

According to Ajakaiye (2000) the recommendation accepted by the government included the following:

Detailed action programme for the preparatory work on VAT When introduced, VAT should:

Pay special attention to the government’s fiscal relationship because it will replace sales tax which is a stage tax.

Have a single rate.

Cover manufacturing industry importers in form of goods.

Cover professional services excluding doctors and pharmacists.

Sales tax was the basic consumption tax by many countries. At the dawn of the 20th century, many countries embrace VAT as a replacement sales tax. The substitute of VAT for sales tax paid off tremendously though at varying degrees to various countries. The adoption of VAT was so pervasive that the adoption of it by European Economic Community (EEC) was made obligatory under the treaty of Rome signed in 1957. In spite of the wide acceptance, some countries like Japan, Australia and Canada have been reluctant of introducing the VAT.

The Standard Statement of Accounting Practice (SSAP) NO 5 (1993) defined VAT as a tax on the supply of goods and services which is eventually borne by the final consumer but collected at each stage of production and distribution.

Professor Aluko (1993) in his paper ‘Classical Value Added Tax (CVAT)’ defined VAT as a tax on the increase in the value of goods and services in the process of production and distribution.

Ayodele (2007) argued that VAT has become a major source of revenue for most developing countries like Nigeria. In view of this, there is penchant to increase the tax rate to get higher revenue.

First Tax Guide (2005) stated that the revenue from VAT was shared 20-80 percent between the state and federal government. Currently, it is shared 15:50:35 among the federal, state and local government. The state collection was to be earmarked as 30% for state of origin, 30% for consumption/destination and 40% for equality of the state. VAT is levied at a single tax rate of 5% which makes it easier to administer. When paid by business on purchase, it becomes an input tax which is recoverable from VAT charge on company’s sales known as output tax.

In Nigeria, all goods and service are vatable with limited aid specific exemptions. All imports are vatable with imported raw materials or finished goods and VAT on imports are calculated on total revenue value at the total cost, insurance and freight. Exports are zero rated, implying that exporters do not impose VAT on exports, but they can claim credit for VAT paid on their inputs.

According to Ajaikaiye (2002) Nigerian VAT has a very wide base with relatively few exemptions, moreover VAT does not replace any of the usual indirect or income taxes. Sales tax revenue accrues exclusively to the state government, but shared by all levels of government. Thus, it can be assumed that VAT revenue is shared by all the levels of government. Though VAT revenue is not sterilized, it is injected into the economy through government final consumption expenditures.

1.2 Statement of Problem

Resistance to VAT in Nigeria at the early stage was very intensive and prolonged, in the sense that some manufacturing organizations do not want the tax, they felt that its implementation should not be given to any revenue agency. In the thrust of this it was argued that the VAT implementation would almost certainly be based on bureaucratic red-tapism (Ogundele, 1996).

Naiyeju (1996) identified a spectrum of fear inherent in the introduction of VAT in Nigerian economy; Anticipated high administration cost, especially the cost of monitoring the VAT implementation bearing in mind the Nigerian factor. The established culture of tax evasion by some manufacturing organizations.

Effects on prices of commodities.

Fear of inability to administer VAT efficiently.

Compliance cost.

1.3 Objectives of the Study

The following are the objectives of the study;

1. To examine how VAT has influence the productivity of manufacturing organizations in the Nigerian economy.

2. To analyze the effects of VAT revenue in the GDP of the Nigerian economy.

3. To determine how the productivity of manufacturing organizations in Nigeria has enhance the GDP of the Nigerian economy.

4. To enumerate goods and services covered by VAT and those exempted from VAT..

1.4 Research Questions

The following research questions are stated for this study:

1. How has VAT influence the productivity of manufacturing organizations in the Nigerian economy ?

2. Is there any significant relationship between VAT revenue and the GDP of the Nigerian economy?

3. Does the productivity of manufacturing organizations in Nigerian enhance the GDP of the Nigerian economy??

1.5 Research Hypotheses

The following hypotheses are formulated for this study:

Hypothesis One

HO: Value Added Tax (VAT) has not contributed to economic growth of Gross Domestic Product of Nigeria.

HI: Value Added Tax (VAT) has contributed to Gross Domestic Product of Nigeria to a great extent.

Hypothesis Two

HO: Money supply does not have significant effect on VAT payment in Nigeria.

HI: Money supply has significant effect on VAT payment in Nigeria.

Hypothesis Three

HO: A significant relationship does not exist between the cost of collecting VAT and the benefits derived from it.

HI: A significant relationship exists between the cost of collecting VAT and the benefits derived from it.

1.6 Significance of the Study

This research work will be an invaluable source of literature for researchers, student, marketing practitioners, accountants, bankers, companies, government agencies and related field who might be interest in knowing much about the concept of VAT.

Its general contributions to economic development of Nigeria were mentioned. Its advantages and disadvantages, types of taxes, the origin of VAT, its application, impact and administration were thoroughly analyzed which will be an indispensable material to the above mentioned beneficiaries. It will also help the government in her policy formulation to suggest alternative strategies that can aid effective administration and monitoring of the VAT process and procedures. All these will contribute immensely to the knowledge previously had by some of the beneficiaries mentioned above.

1.7 Scope of the Study

This study covers selected manufacturing firms in Enugu State. The firms selected are; Innoson Nigeria Ltd, Emenite Nigeria Ltd and Coca Cola Bottling Company.

1.8 Limitation of the Study

The researcher encountered diverse constraints in the process of carrying out this research study.

1. Difficulty in gathering Research Material:

There was difficulty in gathering the necessary information or materials necessary for the successful completion of this research study. This is due to the fact that most of the respondents were either not on sit or were uncooperative in providing the necessary information as regards to their responses.

2. Time Constraints

Time also posed as a constraint to the successful completion of this research study. The researcher had to combine the time for lectures and work to carrying out this research study. Though it was not easy but she was still able to carry out the research work.

3. Finance:

There was not enough finance on the part of the researcher to complete this research study.

Irrespective of these constraints, the researcher was still able to successfully carry out this research study.

1.9 Definition of Terms

Value Added Tax: A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale.

Gross Domestic Product: Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

Total Consolidated Revenue: Total consolidated revenue is the aggregate of all revenue generated by a parent company and its majority-owned subsidiaries, after intercompany eliminations. Intercompany eliminations refer to sales included by one company to another majority-owned subsidiary or its parent.