Analysis of Value Added Tax on Nigerian Government Revenue Generation

This report delves into the conceptual and practical aspects of Value Added Tax (VAT) in Nigeria, examining stakeholders' opinions on its impact on government revenue generation. It explores VAT's role as a crucial component of fiscal policies and a key source of government income. The stu...Read More

Abstract
The paper sought to conceptually and examine Stakeholders opinion on
Value Added Tax (VAT) on government revenue generation profile in
Nigeria being one of the sources of government revenues and also an
important variable in fiscal policies. This is a library study where existing
literature on the subject matter were reviewed so as to examine
stakeholders opinion on the effects of value added tax on government’s
revenue generation and how it can be enhanced so as to boost the
government revenue generation profile in Nigeria in an effective and
efficient manner. The paper concluded that value added tax has positive
effect on government revenue generation profile in Nigeria thereby
contributing to its economic growth and development. The paper
recommended that government should improve the living condition of
citizens by the judicious utilization of value added tax proceeds in an
effective and efficient manner. The paper also recommended that the value
added tax bases be widened to bring the informal sector into the value
added tax net so as to stem possible evasion even by the so faithfully
complying.

CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Taxation forms the most important sources of revenue to the government.
Tax is a compulsory payment imposed by various tiers of government on
individuals and corporate organizations. Also there is no „quid pro quo‟
between tax payer and how the government spends the tax paid. In other
word the governments need not to explain to a payer how his own particular
payment will be utilized (Umeora, 2013). Tax revenue, all over the world
plays a vital role in the development of an economy, this facilitated many
nations to introduce value added tax on goods and services. Tax imposition
and its collection, mostly depends upon a country’s economic structure, its
developmental phase, growth of its service sector, extent to which the

country has been industrialized, and its employment level (Qamruz, Okasha,
& Muhammad, 2012).
VAT is a consumption tax levied at each stage of the consumption
chain and borne by the final consumer of the product or service. Each
person is required to charge and collect VAT at a flat rate of 7.5% on all
invoiced amounts, on all goods and services not exempted from paying VAT,
under the Value Added Tax Act 1993 as amended. Where the VAT collected
on behalf of the government (output VAT) in a particular month is more
than the VAT paid to other persons (input VAT) in the same month, the
difference is required to be remitted to the government, on a monthly basis,
by the taxable person (Oserogho & Associates, 2008). Where the reverse is
the case, the taxpayer is entitled to a refund of the excess VAT paid or more
practically, to receive a tax credit of the excess VAT from the government.
All exports are zero rated for VAT, i.e. no VAT is payable on exports. Also,
VAT is payable in the currency of the transaction under which goods or
services are exchanged (Umeora, 2013). Value added tax is a consumption
tax, levied at each stage of the consumption chain and borne by the final
consumer of the product or service. Value added tax has become a veritable
source of revenue in many developing countries in Sub-Saharan Africa; it
has been introduced in several countries. Nigeria can be traced to the
report of the committee set up by the Federal government in 1991 to review
the entire tax system with a view to expanding the financial base for
revenue generation so as to enhance the economic growth of Nigeria. The

introduction of VAT in Nigeria through decree 102 of 1993 marks the
phasing out for the sales tax Decree No. 7 of 1986. The Decree took effect
from 1st December 1993, but by administrative arrangement, invoicing for
the purpose did not commence until 1st January 1994 (Gendron, 2005).
The tax is charged on the supply of goods and services, the vendor
has the responsibility to collect VAT from the purchasers of goods and
services (individuals or companies), on behalf of the Federal Inland Revenue
Service (FIRS). The tax is charged and payable on the supply of all goods
and services, other than those exempted. The honourable minister of
finance may by order of the federal government to publish in Gazette amend
the rate of tax chargeable and also modify the list of exempted goods and
services. From the perspective of the seller it is a tax on the value added to
a product or services while from that of the buyer it is a tax on purchase
price. The producer or the service provider remits to the government the
difference between the VAT output and VAT input and retains the rest to
offset the taxes they have previously paid on the inputs. VAT has become a
major source of revenue in Nigeria; its adoption with the enactment of
Value Added Tax Decree in December, 1993 with an effective date of 1st
January 1994 was an important landmark in tax reforms in Nigeria
(Ajakaiye, 2000). The Nigerian economy has been plagued with several
challenges over the years such as the dwindling crude oil price, corruption
and over dependence on crude oil revenue. In spite of many, and frequently
changing, monetary, fiscal and other macro-economic policies, Nigeria is

yet to harness her economic potentials for rapid economic development
(Ogbole, Amadi & Essi, 2011). The objective of this paper is therefore to
examine the effects of value added tax on government revenue generation
and how it can be improved upon so as to meet the requirements of equity,
effectiveness and efficiency on value added tax administration.
1.2 STATEMENT OF THE PROBLEM
By virtue of section 7 of the Value Added Tax Act, the Federal Board
of Inland Revenue is responsible for the assessment and collection of VAT
and shall account for all amounts collected in accordance with the
provisions of the Act. Notwithstanding the fact that VAT was to be collected
and enforced by an organ of the Federal Government, VAT was excluded
from the jurisdiction of the Federal High Court by the 1999 Constitution.
The reason for this may not be far-fetched: by the sharing formula
provided in section 40 of the Act, it can be very well argued that the Federal
Government’s tax administrative machinery was used to collect VAT on
behalf of the state governments, as they had had jurisdiction over the sales
tax that was being introduced by Finance Decrees (Miscellaneous Taxation
Provisions) Nos 30, 31 and 32 of 1996 and Nos 18 of 1998 and 30 of 1999.
In contrast, revenues derived under the Sales Tax Act accrued exclusively to
the state governments while the VAT revenue is now shared by all levels of
government.

Section 40 of the Act provides as follows: Notwithstanding any
formula that may be prescribed by any other law, the revenue accruing by
virtue of the operation of this Act shall be distributed as follows, that is- (a)
5 percent to the Federal Government. (b) 50 percent to the State
Governments and the Federal Capital Territory, Abuja; and (c) 35 percent to
the Local Governments: provided that the principle of the derivation of not
less than 20 percent shall be reflected in the distribution of the allocation
amongst States and Local Governments as specified in paragraphs (b) and
(c) of this section. The Need to Embrace True Fiscal Federalism: The long-
disputed call for fiscal federalism was again brought to fore in a recent suit
filed by the government of Rivers State against the Federal Inland Revenue
Service, wherein the state government challenged the collection of VAT by
the agency. The Federal High Court, Port Harcourt Division, delivered its
judgment in the suit and held that it is the Rivers State Government, RSG,
and not the Federal Inland Revenue Services, FIRS that should collect
Valued Added Tax, VAT, and Personal Income Tax, PIT, in the state. The
Court further issued an order of perpetual injunction restraining FIRS and
the Attorney General of the Federation, both first and second defendants in
the suit, from collecting, demanding, threatening, and intimidating
residents of Rivers State to pay to FIRS, personnel income tax, and VAT.
Follow-up to the judgement of the Federal High Court, Governor of
Rivers State, Nyesom Wike, reportedly advocated for states to fully oversee
the collection of revenues accruing from Value Added Tax in their states.

Perhaps, in recognition of the inherent lapses in the 1999 Constitution
which conspicuously omits Value Added Tax from the Exclusive Legislative
List, but limits it to stamp duties, taxation of incomes, profits and capital
gains (items 58 and 59 of the Exclusive Legislative List), there has been a
move by the Federal Inland Revenue Service to push for the amendment of
the 1999 Constitution so as to put collection of Value Added Tax, VAT, on
the Exclusive List. However, this move has been publicly resisted,
particularly, by Southern governors who, through the Chairman of the
Southern Governors Forum, Arakunrin Rotimi Akeredolu, noted that: “The
issue of VAT, looking at the constitution, is under the purview of the states.
Southern governors have taken a decision to pursue fiscal federalism. This
is not a tax that is under the purview of the Federal Government. We, the
southern governors, clamour for true federalism, and true federalism
includes fiscal federalism. They know that the constitution did not give them
the power to collect VAT and that is why they are clamouring for the
amendment of the constitution. That amendment will be dead on arrival.”
The need to embrace fiscal federalism is now more imperative than
ever. The regional autonomy maintained by the Independence and
Republican Constitutions of 1960 and 1963, respectively, gave powers,
particularly fiscal and economic powers to the regions. However, this
structure gave way as a result of military misadventures, starting with the
1966 coup and subsequent countercoup, as well as the civil war from 1967

to 1970. It has been noted that this was the birth of a unitary system of
government which has indeed bequeathed the present lopsided,
impracticable, unsustainable, and divisive federalism.
The whole concept of fiscal federalism was well-articulated by K.C.
Wheare: “Financial subordination makes an end of federalism in fact, no
matter how carefully the legal forms may be preserved. It follows, therefore,
that both state and federal authorities in a federation must be given the
power in the constitution each to have access to and to control, its own
sufficient financial resources. Each must have a power tax and to borrow for
the financing of its own services by itself.”
It follows, therefore, that there is an urgent need for a national
dialogue to appropriately fashion out the modalities for achieving true fiscal
federalism among the component federating units. Had it been that same
issue had been resolved through dialogue – for instance, a sovereign
national conference – same may not have been subjected to diverse court
interpretations, and the attendant differing public perceptions and
misperceptions.
While the Federal High Court restrained the FIRS from collecting VAT
in Rivers State, the Court of Appeal ordered parties to maintain status quo.
Now, Rivers State has further appealed to the Supreme Court to set aside
the decision of the Court of Appeal that ordered it to maintain status quo on
the collection of Value Added Tax.

1.3 OBJECTIVE OF THE STUDY
The main objective of the study is to seek for stakeholder’s opinion on Value Added Tax
(VAT) brought to fore in a recent suit filed by the government of Rivers State against the
Federal Inland Revenue Service, wherein the state government challenged the collection
of VAT by the agency. The objectives are:
i. To critically appraise the impact of Value Added Tax (VAT) on both federal state
internal generated revenue and as well as local government.
ii. To access the benefits of value Added Tax on Nigeria economy.
1.4 RESEARCH QUESTION
The following research questions are raised:
i. What are the implications of a States’ VAT regime?
ii. Should federal government allow each states to collect its VAT?
iii. Should the sharing formular change if FIRS to be sole collecting agency?
iv. Who stand to gain or lost federal or states?
1.5 RESEARCH HYPOTHESIS
The following research hypotheses have been developed for the study:

H01: There will not be significant improvement on States’ VAT regime.
H02: States’ VAT regime will not provide the needed result on the citizens.
1.6 SIGNIFICANCE OF THE STUDY
It is expected that, the findings of this study will be of great importance to the following:
(i). States who has the capacity to administer and collect VAT on their own.
(ii). States who has no capacity to administer and collect VAT on their own.
(iii). FIRS who is the sole collecting agent of VAT.
(iii). Member of the public who are of the opinion that states should be the one to
collect VAT on their own.
(iv). The cost implications of states collecting VAT.
1.7 SCOPE OF THE STUDY
This study covers opinions of stakeholder’s opinion on Value Added Tax (VAT) brought
to fore in a recent suit filed by the government of Rivers State against the Federal Inland
Revenue Service, wherein the state government challenged the collection of VAT by the
agency.

2.1 CONCEPTUAL LITERATURE
Revenue generation for the government to settle its expenditures as
well as providing social amenities and welfare for the populace is the
primary purpose of taxation (Ihenyen & Mieseigha, 2014). Taxation is seen
as a burden which every citizen must bear to sustain his or her government
because the government has certain functions to perform for the benefits of
those it governs (Afuberoh & Okoye, 2014). According to Ogbonna and
Appah (2012), the imposition of taxes for financing state activities and for
the provision of a basis for apportioning the tax burden between members
of the society was justified so as to enable government generates revenue to
finance its expenditure. Omesi, and Nzor (2015) stated that taxation is the
life wire of every country and its level of development at times depends on
the income generated from tax. Taxation is one of the means in which
revenue is generated by the government to meet the desire of both
government and citizens.
Oloidi and Oluwalana (2014) stated that value added tax has been
attracting so much attention of financial experts, professional tax
consultants and those in the academics, to mention a few of the
stakeholders. VAT is a consumption tax, charged at 5 percent on all vatable
goods and services which depends on the general consumers’ behaviour,

thereby having a very large base (Soyode & Kajola, 2006). From the various
definitions, it can be seen that taxation is an important weapon in the hands
of government. Taxation is divided into major types, they are direct and
indirect taxes, for the purpose of this paper, only indirect taxes would be
discussed briefly in which value added tax (VAT) will be examined in details.
Value added tax is an indirect tax payable on all vatable goods and services
consumed by individuals and corporate entities (Omesi, & Nzor, 2015). VAT
is a consumption tax levied at each stage of the consumption chain and
borne by the final consumer of the product or service (Qamruz et al, 2012).
Each person is required to charge and collect VAT at a flat rate of 5% on all
invoiced amounts, on all goods and services not exempted from paying VAT,
under the Value Added Tax Act 1993 as amended (Adereti, Sanni, &
Adesina, , 2011).
Fiscal policy is the government deliberate actions in levying taxes and
spending money with the purpose of influencing macro-economic variables
in the required direction. The required direction includes among others low
inflation, sustainable economic growth and high rate of employment
opportunity (Microsoft Corporation, 2004). Taxation is a tool the
government uses to access, measure and control the informal sector of the
economy that dominates the economy of the developing nations of the world
(Wambai & Hanga, 2013).
2.2 GOVERNMENT POLICY AND REVENUE NEEDED

All governments undertake activities which are economic in nature
and are either transfers or exhaustive, which may lead to the output of
goods and services. Whichever way government requires financial resources
on a regular and steady basis to achieve their objectives (Okwori &
Ochinyabo, 2014). Revenue can be generated from different means such as
taxation i.e. direct taxes, for example personal income tax, company income
tax and petroleum profit tax and indirect taxes for example value added tax,
custom duty and excise duty which constitutes the main sources of revenue
for Nigerian Treasury.
The payment of tax is a civic duty and an imposed contribution by
government on her subjects and companies to enable her finance public
utilities and perform other social responsibilities. Taxes, thus, constitutes
the main source of government revenue (Adebisi & Gbegi, 2013). Taxes
generate revenue to government so as to enable her meet its traditional
responsibilities of maintaining law and other, general administration and
other obligations of providing social and infrastructural facilities to enhance
economic welfare and development of a country. Value added tax is a
consumption tax and it had been embraced by many countries world-wide
(Alan, 2003). The key priority sectors and areas where funds are mainly
expended are critical infrastructure, human capital development, food
security, physical security and maintenance of law and order, the Niger
Delta area, north east insurgent, power sector provision of credit facilities
to farmers, provision of fiscal incentive to enhance productivity in the real

sector and provide alternative transportation of goods and services through
investment in upgrading the existing railway network (Central Bank of
Nigeria (CBN), 2010).
2.3 ADMINISTRATION OF VALUE ADDED TAX
The study group on indirect taxation led by Dr. Ugoh Sylvester that
was set up in November, 1991 proposed the concept of value added tax in
Nigeria. This was followed by another committee headed by Ijewere
Emmanuel to investigate the issue extensively and make the necessary
recommendations. The Study Group in 1991 high-lighted the need to
increase tax revenue base by recommending the establishment of value
added tax. Value added tax finally came into being in Nigeria in 1993 by the
value added act No. 102 of 1993 to replace the sales tax that had been
operating under federal government decree No.7 of 1986 but administered
by the Federal capital territory and the states (Ugwa & Embuka, 2012).
Value tax system in Nigeria is administered by the Federal Inland Revenue
Service (FIRS) in close co-operation with Nigeria Customs Service (NCS)
and the State Internal Revenue Service (SIRS). According to section
10(1and 2) of VAT Act 1993, a taxable person shall pay to the supplier the
tax on taxable goods and services purchased by or supplied by him at the
time of making payment to a contractor, remit the tax charged on the
contract to the nearest local VAT office. The amount of VAT collected all
over the states of Nigeria. FIRS appoints an inspector to enter the premises
of vatable person without any warrant from time to time in order to ensure

compliance with the VAT legislation and regulations in all its ramifications;
ensure that full amount of VAT deducted are promptly accounted for;
examine method of recording transactions and offer suggestion where
necessary; afford the VAT payer the opportunity to ask any question and
seek clarification as may be necessary; and educate VAT payers on new
developments in the system (Adegbie, Jayeoba, & Kwabai, 2016).
2.4 EMPIRICAL STUDIES
Several studies have examined the effect of value added tax on
government revenue generation in different countries with diverse
techniques. The outcome of the investigations however, shows degree of
relatedness in the results (Adereti et al, 2011; Babalola & Aminu, 2011;
Okoye & Gbegi, 2013; Olaoye, 2009; Rostami, Nourbakhsh & Akbarian,
2012; Wambai & Hanga, 2013). Adereti et al, (2011) explored value added
tax and economic growth in Nigeria, their result found a positive and
significant correlation between values added tax and gross domestic
product. Babalola and Aminu (2011) examined the relationship between
fiscal policy and economic growth taking Nigeria into consideration
adopting the Engle-Granger approach to Co-integration test, stated that
productive expenditure was found to be statistically significant. Okoye and
Gbegi (2013) opined that most economy relies on income from taxation for
its development, and that in addition to its use as a means of raising
government revenue, it is also often used as an instrument of regulating the
economy; redistribute wealth and inducing preferred modes of behaviour,

particularly consumption patterns and investment choices. Their empirical
study revealed that revenue generated through VAT has a significant
influence on wealth creation in Nigeria and on total revenue generated in
Nigeria. In their recommendation, they pointed out that Federal Inland
Revenue Service should pay attention to the informal sector of the economy
by creating VAT offices at the Local communities so as to generate more
revenue and to fully achieve the objectives of wealth creation through VAT.
Olaoye (2009) studied the administration of VAT in Nigeria with the
objective of seeking ways of improving government revenue generation
base in order to improve the economy. The study recommended that the
government should increase people’s awareness on the existence VAT.
Rostami et al, (2012) examined the impact of fiscal policy on economic
growth in Iran with emphasis on the role of value added tax. They found
that value added taxes have significant effect on real output for Iran which
means value added taxes as a fiscal policy tool have useful performance in
Iran. Wambai and Hanga (2013) on taxation and social development in
Nigeria: tackling Kano’s hidden economy, they found that taxpayers’
attitude towards governance affects their tax compliance behaviour; they
recommended a tax system that concentrate on establishing simplicity,
predictability, and good governance.
2.5 NIGERIA’S VAT FACTS AND FIGURES

1. VAT was introduced in Nigeria via Decree 102 of 1993 and
implementation began in 1994. It replaced the sales tax introduced
via Decree 7 of 1986. Since introduction almost 3 decades ago, VAT
has become the fastest growing tax revenue head in Nigeria
displacing PPT (N1.52 trillion) and CIT (N1.41 trillion) in 2020 to
claim the top spot at N1.53 trillion.
2. The 1999 Constitution does not mention VAT, Sales or Consumption
Tax even though the VAT law predates the 1999 constitution. The
omission means it is considered a residual item which falls within the
remit of state to legislate on based on S.4(7) of the 1999 Constitution.
3 The VAT act has been amended several times with key changes such
as clear definition of exempt items, exemption threshold for small
businesses with annual turnover not exceeding N25m, requirement
for foreign suppliers to charge VAT, self-charging of VAT, exclusion of
rent, land and building from the scope of VAT, etc.
4. Over 500 food items are exempted from the national VAT including
bread, cereal, fish, milk, fruits, yam and water. In addition, education
books and materials, tuition, medical services, shared passenger
transport, commercial air travel, and rent are exempted.
5. VAT collection in 2020 was N1.53 trillion out of which about 51%
represented import VAT and international services. The top
contributing sectors are professional services & telecoms 10.6%,

other manufacturing 10.07%, commercial & trading 5.06%, breweries,
bottling & beverages 3.90%, transport & haulage 2.84%.
6. Alcohol which is banned in some states contributed less than 3% of
total VAT collection.
7. Some big sectors contribute very little to VAT revenue due to the
nature of their operations e.g. banks & financial institutions
contributed 1.62% (because VAT is only charged on a small
component of their income such as fees & commission but not on
interest or premium), oil marketing contributed only 0.63% given that
VAT is not charged on petroleum products.
8. In line with S.40 of the VAT Act, revenue is shared 15% to Federal Government, 50% to States &
FCT, and 35% to Local Governments. The principle of derivation of not less than 20% is reflected
in the distribution to states and LGs. Although not stated in the VAT Act, other factors used in
the distribution are equality 50% and population 30%. There is a 4% cost of collection for FIRS
and 2% for NCS in the case of import VAT.
9. States with the highest derivation are Lagos (50.5%), FCT (13.2%),
Oyo (2.9%), Rivers (2.7%), and Kano (1.4%). The bottom 32 states
contributed only 7% with the bottom 3 being Abia (0.08%), Osun
(0.07%), and Zamfara (0.06%). On the other hand, amounts shared by
the top states & their LGs are Lagos (14.7%), Kano (3.8%), Oyo
(3.2%), Rivers (2.7%) and FCT (2.5%). The bottom 3 states shared
Osun (2%), Abia (1.6%), and Zamfara (1.6%).

10. In the early years of VAT introduction, filing and payments were made
based on branch locations. This practice was complicated especially
with respect to offsetting of input against output VAT. A central
system of filing was therefore introduced about a decade ago. This
means VAT is currently filed and remitted centrally by companies
based on their head office locations. This gives rise to what I call the
“Headquarters Effect”. For instance, all the Telcos, Banks, big
manufacturing companies, top professional firms etc with head offices
in Lagos remit their VAT to FIRS offices in Lagos. This artificially
inflates the VAT attributed to Lagos while reducing the VAT revenue
attributed to other states. Other major states may suffer the HQ effect
to some extent e.g. PH Electricity Disco based in Rivers but serving
other states.
2.6 IMPLICATIONS OF A STATES’ VAT REGIME
1. If states enact their VAT or Sales tax laws, the guaranteed winners
will be the federal government in respect of import VAT and
international transactions (whether retained by FG only or paid into
the Federation account and shared), and the FCT. States that may
either lose or gain are Lagos and Rivers due to HQ effect and subject
to collection efficiency. Lagos also has to deal with granting input VAT
at 7.5% on items sourced by businesses outside the state against the
lower output VAT rate of 6%. All other states and 774 local
governments will be worse-off, all things being equal.

2. The positions of all states will be negatively impacted by lack of
capacity to collect, difficulty in auditing compliance, and higher cost
of collection which may be up to 15% especially in states where
consultants and other forms of agency structures are used for tax
collection.
3. States that have existing consumption tax such as Lagos, Edo and
others would have to repeal those laws when introducing VAT or sales
tax as to do otherwise would amount to legislating double taxation.
4. Small businesses with turnover not more than N25m that are exempt
under the national VAT would have to comply with VAT under the
states VAT laws.
5. Penalties for failure to register is as high as N50,000 for the first
month and N100,000 for each subsequent month while the fine for
failure to keep records to ascertain the correct VAT is up to
N250,000. This penalty regime will weigh heavily on businesses
especially SMEs such as barbers, hairdressers, tailors, shoemakers,
plumbers, bus and taxi drivers, makeup artists, restaurant owners,
etc. This further increases the risk of such businesses being harassed
and extorted in many states especially those employing tugs to
enforce tax compliance.
6. People will pay more, but government will collect less due to
inefficiency of collection and leakages. There will be higher cost of

goods and services arising from input VAT claim and refund
complications in addition to items which are not exempted under the
states VAT law such as rent, tuition, processed foods such as amala,
suya, jollof rice, and ogbono soup. In addition, there will be incidence
of double taxation due to likely conflicts between origination and
destination principle in different states. Worse still when the reality of
inability to implement VAT hits home many states will inevitably
introduce sales tax with its cascading effect.
7. Nigeria’s ease of doing business and paying taxes will deteriorate in
view of the multiple VAT compliance and Nigeria’s tax to GDP ratio
will decline.
8. Tax practitioners including lawyers and accountants will benefit as
the states VAT regime will create multiple fee opportunities to assist
taxpayers comply.
9. Local governments will be worse off. Effectively between states and
LGs, the VAT revenue split under the national VAT is 59% to 41%.
However, states are prescribing lower rates for LGs e.g. Rivers 30%,
Lagos 25%.
10. FIRS will lose cost of collection on VAT revenue within states and may
have to improve its operational efficiency to sustain current capacity
or seek additional funding from the National Assembly which will
reduce revenue accruing for sharing to all level of government.