ASSESSING THE CONTRIBUTION OF VAT TO THE REVENUE PROFILE OF NIGERIAN GOVERNMENT

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The increasing cost of running government coupled with dwindling revenue has left various state governments in Nigeria with the daunting task of formulating strategies to improve their revenue base. The near collapse of the national economy has created serious financial stress for all tiers of government. Hardest hit are the state governments, all of whom have experienced unusual reductions in their share of the national revenue from the Federation Account. Despite the numerous sources of revenue available to various tiers of government as specified in the Nigerian Constitution of 1999, since the 1970s till the present, over 80% of annual government revenue has been derived from petroleum. The serious decline in oil prices in recent years has led to a steep fall in the funds available for distribution to states and local governments (International Monetary Fund [IMF], 2023).

The urgency of diversifying government revenue away from petroleum dependence has become a central theme in Nigeria's fiscal policy discourse. According to the IMF (2023), Nigeria has one of the lowest revenue-to-GDP ratios in the world, with general government revenue recorded at just 7.3% of GDP in 2021 less than half the average of countries in the Economic Community of West African States (ECOWAS) and ranking 191st out of 193 countries globally. Non-oil revenue has stagnated at around 4–5% of GDP over the past decade, making fiscal sustainability a pressing concern. This chronic dependence on oil, which continues to supply approximately 90% of Nigeria's foreign exchange earnings (Natural Resource Governance Institute [NRGI], 2023), exposes government finances to the erratic swings of international commodity markets and underscores the imperative for robust alternative revenue streams.

To meet the inescapable need for increased revenue, the Federal and state governments in Nigeria introduced external tax consultants under a programme known as the Accelerated Revenue Generation (ARG) Programme. The Federal Government also appointed consultants and monitoring agents on Value Added Tax (VAT) to strengthen collection and compliance. More recently, President Bola Ahmed Tinubu established a Presidential Fiscal Policy and Tax Reforms Committee to undertake a comprehensive review of Nigeria's tax laws and policies, signalling a renewed governmental commitment to building a modern, equitable tax system (Olika, Ukomadu, Ogidan, & Abiodun, 2024).

Value Added Tax (VAT) has emerged as a major source of revenue in many developing countries and has become an increasingly important contributor to total government tax revenues globally. The impressive performance of VAT in virtually all countries where it has been introduced clearly influenced the decision to introduce VAT in Nigeria in January 1994 through the VAT Decree No. 102 of 1993. The Federal Inland Revenue Service (FIRS, 1993) noted that VAT is a consumption tax that is relatively easy to administer and difficult to evade, which has contributed to its adoption across the world. Evidence from recent fiscal data strongly supports the view that VAT has grown into a significant source of revenue in Nigeria. According to the FIRS, Nigeria's VAT collections reached an unprecedented ₦6.72 trillion in 2024, reflecting an 84.62% year-on-year increase compared to ₦3.64 trillion recorded in 2023, with non-import VAT alone rising by 75.09% to ₦5.13 trillion and import VAT more than doubling to ₦1.59 trillion (FIRS, 2025).

VAT is a multi-point levy where the tax paid on local purchases from a registered dealer can be set off against the tax payable on the sale of goods. It is a form of indirect consumption tax applied at each stage of production and distribution. From the perspective of the buyer, it is a tax on the purchase price; from the perspective of the seller, it is a tax only on the 'value added' at each stage of the manufacturing or distribution process. The manufacturer remits to the government the difference between the output tax charged on sales and the input tax paid on purchases, retaining the rest to offset previous tax payments (Chartered Institute of Taxation of Nigeria [CITN], 2023).

Before VAT was introduced, sales tax was levied only at the first point of sale and resellers did not contribute to government revenue, creating significant leakages. VAT corrected this by taxing the value added at every stage of production and distribution rather than only on the gross sales price. Nigeria's VAT rate has evolved since the introduction of VAT through the VAT Decree No. 102 of 1993: the rate stood at 5% from inception until January 2020, when it was increased to 7.5% under the Finance Act 2019. Despite this adjustment, Nigeria's VAT rate remains relatively low by international and African standards (Stripe, 2024). Sectoral analysis shows that manufacturing, ICT, and mining and quarrying accounted for 58.8% of total VAT revenue collected in the first half of 2024, reflecting the concentration of formal economic activity in these sectors (Intelpoint, 2024).

The 'value added' to a product by a business is the sale price charged to its customers minus the cost of materials and other taxable inputs. VAT differs from a traditional sales tax in that, with the latter, the tax is collected and remitted to the government only once at the point of purchase by the final consumer. With VAT, collections, remittances, and credits for taxes already paid occur at each stage of the supply chain, reducing the risk of tax cascading and making the system more transparent and self-policing (CITN, 2023). This inherent audit trail is considered one of VAT's key administrative advantages over its predecessors.

The VAT Decree No. 102 of 24th August 1993 specified categories of goods and services exempt from VAT in Nigeria. Exempt goods include all exported goods, medical and pharmaceutical products, products meant for children, basic food items, commercial vehicles and their spare parts, books and educational materials, fertilisers, farming machinery, agricultural products, farming transport equipment, veterinary medicines, magazines, and newspapers. Exempt services include all exported services, medical services, plays and performances run by educational institutions for educational purposes, and services provided by community banks, mortgage institutions, and people's banks. Companies or business organisations that operate on a not-for-profit basis are also required to pay VAT on their taxable purchases.

Recent scholarly attention has focused on the uneven effectiveness of VAT reforms across Nigeria's economic sectors. Yaska et al. (2024) found that VAT reforms have a significant but uneven effect on financial performance, with formal and technology-enabled sectors such as telecommunications and manufacturing experiencing improved outcomes, while informal and agrarian sectors face barriers due to limited digital readiness and compliance constraints. Reinforcing this, a sectoral analysis published in the International Journal of Research and Innovation in Social Science found that, while manufacturing VAT (MVAT) and education VAT (EVAT) had positive relationships with economic growth, agriculture VAT (AVAT) had a significant though negative effect a counterintuitive result reflecting the distortive impact of taxation on a sector that is underdeveloped, largely informal, yet crucial for subsistence livelihoods (RSISINTERNATIONAL, 2025). These findings underscore the importance of context-sensitive, sector-specific VAT policy design rather than uniform reform approaches.

1.2 STATEMENT OF THE PROBLEM

In most developing countries of the world, including Nigeria, it is extremely difficult to assess and collect various taxes, especially those levied on income and consumption. This difficulty stems largely from the insincerity of both taxpayers and tax administrators, who prioritise personal gain over compliance. The fundamental problem is compounded by structural and institutional weaknesses within Nigeria's tax system that have persisted over decades.

It has long been evident that VAT in Nigeria has remained among the most unsatisfactory, disappointing, and problematic of all taxes in operation. This is partly a result of weaknesses and inconsistencies in tax policy. The National Tax Policy (NTP), even after approval by the Federal Executive Council (FEC), had not provided the clear directional thrust needed to systematically reform the tax system, resulting in a slow pace of development and reform (Olika et al., 2024).

Despite ongoing reforms, structural problems in VAT administration persist. Studies have identified that a significant proportion of Federal Inland Revenue Service (FIRS) staff are not adequately equipped technically or administratively to handle VAT operations, that organisations liable to remit VAT frequently lack knowledge of how VAT operates and perceive it as a cost burden, and that poor record-keeping by business enterprises is a major obstacle (Aruwa, 2008, as cited in Yeldu et al., 2023). These challenges culminate in high rates of VAT remittance evasion, which directly erode government revenue.

Tax fraud remains a significant threat to Nigeria's economy. It involves the deliberate falsification of financial records to evade taxes, undermining public services, revenue generation, and broader economic growth (Okoye & Akenbor, 2022). Nigeria loses over ₦3 trillion annually to tax-related crimes, severely constraining public sector financing (Adetiloye et al., as cited in IJRIAS, 2025). The International Monetary Fund (IMF, 2021) also reports that billions of dollars are lost globally each year to tax fraud, with developing economies such as Nigeria bearing a disproportionate share of this burden.

Fraudulent activities by tax officials represent an additional layer of the problem. Tax fraud by officials leads to loss of government revenue, erodes the faith of honest taxpayers in the system, tempts compliant taxpayers to join the league of tax dodgers when such behaviour goes unchecked, and creates artificial biases in macroeconomic indicators. It runs counter to the distributional and equity goals of taxation. Forensic accounting has emerged as an effective countermeasure, integrating investigative and accounting skills to detect and combat fraudulent practices (Ijeoma & Aronu, 2023).

The challenge of tax evasion is further magnified by a lack of voluntary compliance. Research conducted in Lagos State, Nigeria, demonstrated that a tax education programme focused on informing taxpayers about the socioeconomic ramifications of non-compliance, and on the transparent and responsible use of tax revenues, had a significant positive impact on taxpayers' voluntary compliance (Olowookere & Fasina, 2013, as cited in PMC, 2023). This suggests that public education remains one of the most cost-effective levers available for improving VAT collection in Nigeria.

The increasing adoption of digital tax administration tools presents a partial solution. Studies suggest that the digitalisation of tax administration can reduce tax evasion and improve revenue generation in Nigeria (Olasunkanmi & Adejuwon, 2024). The 2022 report of the Institute of Chartered Accountants of England and Wales (ICAEW, 2022) also suggested that tax digitisation in Nigeria has contributed to improvements in tax revenue generation, though evidence on the effect on VAT specifically remains inconsistent. These competing findings highlight the need for continued research into optimal VAT administration strategies tailored to Nigeria's unique socioeconomic context.

1.3 OBJECTIVES OF THE STUDY

The general objective of the study is to assess the contribution of VAT to the revenue profile of the Nigerian government. To meet this main objective, the study will focus on the following specific sub-objectives:

1. To determine the extent to which VAT proceeds impact on the revenue profile of the Nigerian government.

2. To determine the extent to which Federal Government policies affect the contribution of VAT to the revenue profile of the Nigerian government.

3. To determine the effectiveness and efficiency of VAT administration in Nigeria.

4. To determine the extent to which proper public education on the importance of paying tax influences the contribution of VAT in Nigeria.

1.4 RESEARCH QUESTIONS

The following questions will be addressed in this study:

5. To what extent have VAT proceeds impacted the revenue profile of the Nigerian government?

6. Does Federal Government tax policy affect the contribution of VAT in Nigeria positively?

7. How effective and efficient are VAT administrators in Nigeria?

8. Does proper public education on the importance of paying tax influence the contribution of VAT in Nigeria?

1.5 FORMULATION OF HYPOTHESES

Given the objectives of the study, the following hypotheses are formulated:

Hypothesis 1

H0: VAT proceeds impact negatively on the revenue profile of the Nigerian government.

H1: VAT proceeds impact positively on the revenue profile of the Nigerian government.

Hypothesis 2

H0: Federal Government tax policies do not affect the contribution of VAT to the revenue profile of the Nigerian government.

H2: Federal Government tax policies affect the contribution of VAT to the revenue profile of the Nigerian government.

Hypothesis 3

H0: VAT administrators in Nigeria are not effective and efficient.

H3: VAT administrators in Nigeria are effective and efficient.

Hypothesis 4

H0: Proper public education on the importance of paying tax does not influence the contribution of VAT in Nigeria.

H4: Proper public education on the importance of paying tax influences the contribution of VAT in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The findings of this study carry significant implications for fiscal policy, tax administration, and academic discourse in Nigeria. At the policy level, the study will provide evidence-based insights to guide the design and implementation of more effective VAT regimes, ensuring that VAT is imposed equitably at all stages of production on the value added by firms across the supply chain. The study's findings will be especially valuable in the context of Nigeria's ongoing tax reform agenda, including the work of the Presidential Fiscal Policy and Tax Reforms Committee established by the current administration (Olika et al., 2024).

The study further illuminates how aspects of VAT including its international comparisons, rates relative to other countries, equity implications, inflationary effects, administrative costs, compliance challenges, intergovernmental relations, and the balance-of-trade raise important concerns for policymakers and researchers. By providing empirical grounding for these discussions, the study contributes to more evidence-informed public finance debates in Nigeria.

The study will enable proper adjustment to factors that may lead to the failure of VAT administration. It will facilitate a deeper understanding of the importance of VAT to overall revenue generation and fiscal sustainability. Given Nigeria's low tax-to-GDP ratio and its heavy reliance on volatile oil revenues, strengthening VAT which has demonstrated remarkable recent growth, with collections rising by 84.62% to ₦6.72 trillion in 2024 (FIRS, 2025) is especially critical for long-term fiscal resilience.

The study will also be of immense benefit to other researchers, students, and scholars who wish to conduct further inquiry in this field or related areas of public finance, taxation, and development economics. It contributes to a growing body of recent scholarly literature examining the relationship between VAT, revenue generation, and economic growth in Nigeria and comparable developing economies.

1.7 SCOPE OF THE STUDY

This research is specifically concerned with assessing the contribution of VAT to the revenue profile of the Nigerian government. In view of the focus and available resources, the researcher intends to confine the empirical investigation to the branch office of the Federal Board of Internal Revenue (FBIR) in Enugu and the Board of Internal Revenue Head Office in Enugu. The study draws on both primary data gathered from officials and taxpayers in this jurisdiction and secondary data from FIRS and the Central Bank of Nigeria (CBN) for the period under review.

1.8 LIMITATIONS OF THE STUDY

In carrying out this research, several factors served as constraints:

• Scope Limitation: The research is confined to assessing the contribution of VAT to the revenue profile of the Nigerian government within a specific geographic jurisdiction (Enugu), which may limit the generalisability of the findings to other states or regions.

• Inadequate Time: The time available for the research was limited by concurrent academic obligations including lectures, studies, and examinations, which constrained the depth of investigation possible within the study period.

• Negative Attitude of Respondents: Some respondents were non-cooperative and unwilling to provide relevant information, viewing the researcher with suspicion and withholding useful data that could have enriched the findings.

• Disappointment from Respondents: A number of respondents failed to complete questionnaires within agreed timelines, citing competing demands on their time, which slowed data collection and created gaps in the primary data.

• Data Accessibility: Official administrative data on VAT collections at the sub-national level is not always publicly available or systematically published, limiting the scope of secondary data analysis.

1.9 DEFINITION OF TERMS

The following key terms are defined as used within the context of this study:

Value Added Tax (VAT): VAT is an indirect consumption tax levied on the value added to goods and services at each stage of production and distribution. It is collected by businesses on behalf of the government and remitted after deducting input taxes paid on purchases. From the buyer's perspective, VAT is a tax on the purchase price; from the seller's perspective, it is a tax only on the value added by that stage of manufacture or distribution (CITN, 2023). VAT differs from a sales tax in that it is collected incrementally at each stage of the supply chain, rather than only at the final point of sale. Nigeria's standard VAT rate is currently 7.5%, as set by the Finance Act 2019 (Stripe, 2024).

Revenue: Revenue refers to all income received by a government from taxes, fees, levies, royalties, and other sources, used to finance public expenditure and services. In the context of government fiscal management, revenue determines the capacity of a government to provide infrastructure, education, healthcare, and security to its citizens (Oluba, 2008). In Nigeria, government revenue is shared among the three tiers of government federal, state, and local through the Federation Account Allocation Committee (FAAC) mechanism.

Tax Revenue: Tax revenue refers to compulsory transfers to the government sector by households, businesses, and other entities, levied pursuant to legislation. Tax revenue constitutes the primary non-oil fiscal resource for the Nigerian government and encompasses direct taxes (such as personal income tax and company income tax) and indirect taxes (such as VAT, customs duties, and excise duties). Improving tax revenue mobilisation has been identified as one of Nigeria's most urgent fiscal priorities (IMF, 2023).

Tax Administration: Tax administration refers to the set of institutional processes, systems, and mechanisms through which a government identifies taxable persons, assesses tax liabilities, collects taxes, enforces compliance, and processes refunds. Effective tax administration is essential for maximising revenue yield, minimising evasion, and maintaining taxpayer confidence in the fiscal system. In Nigeria, the Federal Inland Revenue Service (FIRS) is the principal agency responsible for administering VAT and other federal taxes at the national level.

Tax Compliance: Tax compliance refers to the degree to which taxpayers fulfil their obligations under tax law, including timely registration, accurate reporting, and prompt payment of taxes due. VAT compliance is crucial for revenue generation and the strengthening of the national economy (Tandfonline, 2023). Compliance is influenced by factors such as taxpayer perception and attitudes, organisational characteristics, the cost of compliance, and the perceived fairness and efficacy of the VAT system.

Tax Evasion: Tax evasion is the illegal practice of deliberately concealing taxable income, falsifying financial records, or otherwise misrepresenting information to reduce one's tax liability. Tax evasion is distinct from tax avoidance, which involves legally minimising tax liability through permissible means. In Nigeria, tax evasion poses a serious threat to government revenue and economic development; the government loses over ₦3 trillion annually to tax-related crimes (Adetiloye et al., as cited in IJRIAS, 2025). Factors contributing to evasion include high tax rates, low trust in government, poor enforcement, and inadequate tax education.

Consumption Tax: A consumption tax is a tax levied on spending on goods and services rather than on income or wealth. Consumption taxes are usually indirect, collected by an intermediary (such as a retailer or manufacturer) and remitted to the government. VAT is the most prominent form of consumption tax globally, raising approximately one-fifth of total tax revenues worldwide (Wikipedia, 2024). The tax base of a consumption tax is the money spent on consumption, making it broad-based and relatively stable compared to income-based taxes.

Input Tax: Input tax refers to the VAT paid by a business on its purchases of goods and services used in the course of its business activities. Under the VAT system, a registered business is entitled to reclaim or offset the input tax it has paid against the output tax it has charged to its customers. The difference between output tax and input tax is remitted to the government; if input tax exceeds output tax, the business is entitled to a refund (CITN, 2023).

Output Tax: Output tax is the VAT charged by a business on its taxable sales of goods and services to customers. The output tax collected by a registered business is held on behalf of the government and must be remitted after deducting allowable input tax credits. The output tax mechanism ensures that VAT liability is transferred progressively along the supply chain until it is ultimately borne by the final consumer.

Federal Inland Revenue Service (FIRS): The Federal Inland Revenue Service is the government agency of the Federal Republic of Nigeria responsible for assessing, collecting, and accounting for tax and other revenues accruing to the Federal Government of Nigeria. The FIRS administers VAT, Company Income Tax (CIT), Petroleum Profit Tax (PPT), and other federal taxes. Recent data shows that the FIRS grossed its highest revenue of all time in 2024, with non-oil tax revenue reaching a record ₦15.9 trillion (Intelpoint, 2024).

Fiscal Federalism: Fiscal federalism refers to the financial relationship between different tiers of government federal, state, and local including the division of revenue sources, expenditure responsibilities, and fiscal transfers. In Nigeria, fiscal federalism governs how revenue collected by the federal government is shared among the three tiers through the Federation Account. The distribution of VAT revenue under Nigeria's fiscal federalism framework has been a subject of significant debate, particularly regarding the equitable sharing of revenues between oil-producing and non-oil-producing states (REPS, 2023).

Tax-to-GDP Ratio: The tax-to-GDP ratio is a measure of a country's total tax revenue relative to its gross domestic product (GDP). It serves as an indicator of the fiscal capacity and tax effort of a government. Nigeria's tax-to-GDP ratio has historically been among the lowest in the world, though it reached a peak of 24.9% in 2022/23, signalling enhanced efficiency in tax collection during that period (Intelpoint, 2024).

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