Impact Of Value Added Tax On The Manufacturing sector Of The Nigerian Economy.
Impact Of Value Added Tax (VAT) On The Manufacturing sector Of The Nigerian Economy was a decrees 102”. value added (VAT) was introduced in Nigeria on the 1st of January 1994, but was officially operational in Nigeria on January 7,1994 making them the 62nd country in the world to introduce VAT, while France was the 1st country in the world to introduce VAT.
1.1 BACKGROUND OF STUDY
The value added tax (VAT) was introduced to replace the sales tax which has a arrow base. The value added tax is veritable source of revenue for economic growth in Nigeria. It was as a result of the zeal to generate more resources (revenue) that the government in 1993 promulgated a decree “the value added tax decrees 102”. VAT was introduced in Nigeria on the 1st of January 1994, but was officially operational in Nigeria on January 7,1994 making them the 62nd country in the world to introduce VAT, while France was the 1st country in the world to introduce VAT.
The need to make the government less dependent on revenue derived from petroleum led to the introduction of VAT in Nigeria. The idea of introducing value added tax (VAT) in Nigeria came from the report of study group set up by the federal government in 1991 to review and revolutionize the entire tax system, in order to enhance the resources base of the economy.
Thus, the introduction of value added tax (VAT) in Nigeria, seems to have negative and positive impact on the manufacturing sector. Therefore, this research will look into the dual ways by which the manufacturing industries are affected and also proffer solution on how to curb or control the negative impact on the sales of the manufacturing industries.
1.2 STATEMENT OF RESEARCH PROBLEM.
VAT may have an adverse effect on sales and prices of the product of the manufacturing industries, as they pass through various stages of production and distribution. The research tends to know if actually:-
– VAT affects the price and sales of the manufacturing sector of the economy.
– It is regressive in nature, where the low income earners
(the poor) pay higher proportion on their income as tax than the high income earners (the rich) leading to an increase income inequality.
– Is the flat rate of 5% borne by the final consumer for both necessities and luxuries goods.
1.3 OBJECTIVE OF THE STUDY
The objective of this study is very vital in the research and therefore present the study and impact of VAT on the manufacturing sector of the Nigerian economy, which includes:-
1. To examine the introduction ands application of VAT in Nigeria.
2. To examine the merits and demerits of VAT in Nigeria
3. To examine the impact of VAT on the Nigeria economy
4. To speculates the effect of VAT on prices of product
5. To identify the relationship between VAT and sales tax.
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1.4 SIGNIFICANCE OF THE STUDY
This research work, which shall be of great relevance and benefit to policy makers, firms, individuals and on the government, on the impact of VAT on manufacturing industries and also know if VAT should be modified or not.
TO THE POLICY MAKER: The process of formulating policies, the policy makers, needs information on certain economic policies that are functional. This research work will be of a better help to the policy makers, in formulating further policies which can aid them in checking the negative impact of VAT.
TO THE FIRMS:- This research work will provide useful information to the firms based on the negative and positive impact of VAT to their establishment.
TO THE GOVERNMENT:- VAT is a source of revenue to the government. This research work will enable the government know its effect or impact on the individual and also if it should be continued or discontinued.
TO THE CONSUMERS:- Since, it is generally believed and widly accepted that the consumers suffer the impact of VAT more than others, it then means that the research work will show a computation on how the consumers bear the burden of VAT. This research work will also be educating the consumers on the reason for adopting VAT and why they should pay VAT every final goods bought.
1.5 THE RESEARCH QUESTIONS
In the course of these study, the following question would be answered
i) Has VAT any significant effect on manufacturing sector?
ii) Has VAT any negative effect?
iii) Has the policy maker reduce the negative effect of VAT on the consumer?
iv) Has VAT nay impact on the consumers?
v) Has VAT regressive effect?
1.6 RESEARCH HYPOTHESIS
The research is aimed at testing two hypothesis which are stated as:
a) Hypothesis 1:
H0: VAT has no significant effect on the sales of the manufacturing industries
HI: VAT has a significant effect on the sales of the manufacturing industries
b) Hypothesis II
H0: VAT is not responsible for any negative effect in prices of manufactured products
HI: VAT is responsible for the negative effect in prices of manufactured products.
1.7 SCOPE OF THE STUDY
This research work is carried out on the impact of value added tax (VAT) on the manufacturing sector, for a period of 11 years (2000-2011). Also, the work will be one on TWELVE (12) selected manufacturing industries in Lagos.
1.8 DEFINITION OF TERMS
To ensure a complete and perfect understanding of this work, certain terms needs to be defined. They include:
1) Value Added Tax: In view of Anyanwu (1993:pg4)
VAT is defined as a tax on the total value of commodity in question but only on the value added.
2) Sales Tax: This is a single tax levied at one of the selling prices when the good or services passed into the hand of the consumer.
3) Non-Quid-Pro-Duo: Emerenini (2003:pg8) explains it as the amount of tax paid which may not be in strict keeping with the amount of services the tax payer receives from the government. The one who enjoys more of the services from the tax money may be the one that pays little or no tax.
4) Multiple Stage Tax: It is a tax system which involves the levy of tax on goods and services as they pass through various stages of production and distribution.
5) Federal Inland Revenue Service (FIRS): This is a board established by the Federal Government to train, educate and collect VAT from various sectors of the economy.
REVIEW OF RELATED LITERATURE
This chapter provides an understanding of the concepts of the research. It tries to review the theories of various scholars who have written details on the course. The aim of this chapter is to explain the theories and the administration of VAT in Nigeria. It also aims at explaining the history of VAT in Nigeria together with its principles and criticism, and also the relationship between VAT and economic growth.
2.2 TAX AND ITS HISTORICAL CONSIDERATIONS
To tax is to impose a financial charge or other levy upon a tax payer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law. According to Wayne (1994:15) a tax may be defined as a support or a pecuniary burden lay upon individual or property owners to support the government.
As noted by Colliy (1989:44) a tax is not a voluntary payment or donation, but an enforced contribution imposed by government whether under the name of toill, tribute, tollage, gable, impost, duty, custom, exercise, subsidy, aid, supply or other name.
In modern taxation systems, taxes are levied in money but in-kind taxation are characteristics of traditional or pre-capitalist states and their functional equipments when taxes are not fully paid, civil penalties (such as incarceration) may be imposed on the non-paying entity or individual (Hill 2004:4). In view of Adeleke Salami (2011), taxation is one of the most important and easy sources of revenue to any government, as government possess inherent power to impose taxes and levies.
Funds provided by taxation have been used by states and their function equivalents throughout history to carryout many functions. Some of these include expenditures on war, the enforcement of contrasts etc Public works, social engineering and the operation of government itself. Government also uses taxes to fund welfare, and public services. These services can include education system, health care systems, and pensions for the elderly, unemployment benefit and public transportation. Energy, water and waste management systems are also common public utilities. In the words of Sanni O. (2010), some state governments, like Lagos state not only faulted the new policy on taxation, on the ground that all state houses of Assembly powers will be usurped from legislating on tax matters but also raise objection to why federal government is given the responsibility to charge fees like PIT and land use tax.
In addition, taxes are inculcated to fund foreign and military aid, to influence the macro-economic performance of the economy (the government strategy for doing this, is called its fiscal policy). Or to modify patterns of consumption or employment within an economy, by making some classes or transfer more or less attractive. In his contribution, Snattman (2003:20) had noted that: Taxation has four main purposes or effects namely, Revenue, Redistribution, Reprising and Representation.
The main purpose is Revenue: taxes raise money to spend on roads, schools and hospitals and on what indirect government functions like market regulation or legal systems. This (i.e. Revenue) is the most widely known function.
At second is Redistribution. Normally this means transferring wealth from the richer sections of society or poor sections of society.
A third purpose of taxation is Repricing. Taxes are viewed as a levy to address externalities. Tobacco is taxed, for instance to discourage smoking.
A fourth consequential effect of taxation in it’s historical setting has been Representation. This is that, which rulers tax citizens and citizens demand account ability from their rulers as the other part of the bargain.
A nation’s tax system is often a reflection of it’s communal values or the values of those in power. To create a system of taxation, a nation must make choices regarding the distribution of the tax burden, who will pay the taxes and how much they will pay and how the taxes collected will be spent. In democratic nations where the public elect those in charge of establishing the tax system, these choices reflect the type of community, that the public does not have a significant amount of influence over the system of taxation, that systems may be more of a reflection of the values of those in power.
Law established from whom a tax is collected. In many countries, taxes are imposed on business (such as corporate taxes or portions of pay roll taxes). However, who ultimately pays the tax (the tax burden) is determined by the market place as taxes become embedded into production cost (Snattman 2003:22).
Depending on how qualities supplies and demand vary with price (the elasticity of supply and demand) a tax can be absorbed by the seller or the buyer, if the elasticity of supply is low, more will be paid by the customer and contrary to the case, we have high elasticity.
To illustrate the issue of tax burden, an example taken from Wayne (1994:25) is as follows:
Suppose the market price of a product is US $
1.00 and that a $ 0.50 tax is imposed on the product that by law is to be collected from the seller. If the product is a luxury (in the economic sense of the term) a greater portion of the tax will be absorbed by the seller. This is because a luxury good has elastic demand which would cause a decline in quantity. Demand for a small increase in price.
Therefore, in order to stabilize sales, the seller absorbs more of the additional tax burden. For example, the seller might drop the price of the product to $0.70, so that, after adding in the tax, the buyer pays a total of N$1.20 or $0.20 more than he did before the $ 0.50 tax was imposed. In this example, the buyer has paid $0.20 of the $0.50 tax and the seller have paid the remaining $0.30.
2.2.1 HISTORY OF TAX
The first known history of taxation was in Ancient Egypt around 300BC. 2800BC in the first dynasty of the old kingdom (Steck, 1999:40). Records from the time, documents that the Pharaoh would conduct a biennial tour of the kingdom collecting tax revenue from the people. Other records are granary receipts on limestone Flakes and Papynis (Martin 2006:42) early taxation is also described in the Bible, in Genesis (chapter 47, verse 24. the New International version (NIV), it states “But when the crop comes in, give a fifth of it to Pharaoh. The other fifth, you may keep as seed for the fields and as food for yourselves and your households and your children” Joseph was relating to the people of Egypt how to divide their crops, providing a portion to Pharaoh. A share of (20%) of the crop was the tax.
According to Grant (2000:18) he noted, that in India, Islamic rulers imposed Jizya starting in the 11th century. It was abolished by Akbar.
Quite a few records of government tax collection in Europe since the 17th century is still available today. Taxation levels are hard to compare to the size flow of the economy since production numbers are not as reading available. Government expenditures and revenue is France during the 17th century went from about 24.30 million lives in 1600-1610 to about 126.86million lives in 1650-1659 to about 117.99 million lives in 1700-1710 when government debt had reached 1.6 billion lives in 1780-1789 it reached 421.50 million lives. (Silver, 1982:14) taxation as a percentage of production of final goods may have reach 15%-20% during the 17th century in places like France, the Netherlands and Scandinavia. During the war-filled years of the eighteenth and early nineteenth century tax rates in Europe increased dramatically as it becomes more expensive and government became more centralized and adopt at gathering taxes.
(Mcvay 1988:16). This increase was the greatest in England. In his work, O’Brien (1992:14) found out that per capital tax had grown almost six-fold over the eighteenth century, but that steady economic growth had the real burden on each individual only double over this period before the industrial revolution. Average tax rates were higher in Britain than France in the years before the French revolution, but they were mostly placed on international trade. In France taxes were lower but the burden was mainly on landowners, individuals and internal trade and thus created for more resentment (Mathian’s 1995:30).
Grestroke (2004:44) had noted that taxation as a percentage of Gross Domestic Products (GDP) in 2003 were 56.1% in Denmark, 54.5% in France, 49.0% in the United States, 35.2% in the republic of Ireland and among all organization for Economic Co-operation and Development (OECD) members an average of 40.7%.
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