EFFECTS AND ADMINISTRATION OF VALUE ADDED TAX IN THE NIGERIA ECONOMY (A STUDY OF FEDERAL BOARD OF INLAND REVENUE)

EFFECTS AND ADMINISTRATION OF VALUE ADDED TAX IN THE NIGERIA ECONOMY (A STUDY OF FEDERAL BOARD OF INLAND REVENUE)

CHAPTER ONE

INTRODUCTION

Nigeria is a developing country and an emerging economy whose exports are primarily crude oil, though the country possesses abundant natural resources including natural gas, tin, iron ore, coal, limestone, lead, zinc, and arable land (Oto & Wayas, 2024). Nigeria covers a land mass of approximately 923,768 square kilometres and is one of the most populous countries in Africa, with a population exceeding 200 million people (National Bureau of Statistics [NBS], 2023). The Nigerian government continues to face the challenge of diversifying revenue beyond crude oil, making taxation particularly Value Added Tax (VAT) increasingly critical to national fiscal sustainability (Akinola & Akinrinola, 2023).

Emerging economies such as Nigeria are nations that have large territories and populations and are undertaking significant development projects requiring new infrastructure, such as power generation plants and telecommunications systems (Adeyemi, 2022). These countries have pursued economic policies leading to faster growth and expanding trade and investment globally. Consequently, the need to finance such development through sustainable domestic revenue mechanisms, including VAT, has become even more urgent (Oto & Wayas, 2024).

These infrastructural development demands require substantial financial resources. Value Added Tax (VAT) remains one of the principal mechanisms for funding such developments, supplementing oil revenues as the federal government seeks to diversify its revenue base (Yaska, Akpan, & Ologunla, 2024; NBS, 2023).

1.1 BACKGROUND OF THE STUDY

Governments across the world have devised various means of obtaining resources needed to meet their ever-increasing responsibilities. In contemporary societies, taxation is the oldest and most significant source of public revenue and remains a critical tool for achieving economic stabilisation objectives (Akinola & Akinrinola, 2023; Jooji, Oyekan, Momoh, & Onuh, 2023).

Tax is a compulsory levy imposed by a public authority on incomes, consumption, and the production of goods and services. Such levies include personal income tax (comprising salaries, business profits, interest income, dividends, royalties, etc.), company profits tax, petroleum profits tax, capital gains tax, and capital transfers. Three key characteristics define taxation: (i) it is a compulsory contribution imposed by the government on persons residing in the country, meaning refusal to pay is a punishable offence; (ii) tax revenues are used by the government for the benefit of all citizens through public services such as hospitals, schools, and utilities; and (iii) tax is not levied in return for any specific service rendered to the taxpayer (Lawal, Igbekoyi, & Dagunduro, 2024).

VAT was introduced in Nigeria through Decree 102 of 1993, which came into effect on 1st January 1994, replacing the existing Sales Tax regime. The Finance Acts of 2019 through 2023 have since introduced progressive reforms to VAT administration, including the increase of the VAT rate from 5% to 7.5% effective February 2020, and provisions addressing the digital economy (Federal Ministry of Finance, 2024; Jooji et al., 2023). VAT revenue in Nigeria is shared among federal (15%), state (50%), and local governments (35%), making it a multi-tier revenue instrument (VAT Act, 2004).

Value Added Tax is a multi-stage tax imposed and collected on transactions at all the various stages of the sale and distribution of designated goods and services. In accounting terms, it refers to the incremental value that a producer adds to raw materials from the extractive stage through processing to the completion of a finished product. Because it is a consumption tax, the burden is ultimately borne by the final consumer (Oto & Wayas, 2024). Existing literature consistently affirms that VAT is a high-revenue-yielding tax, particularly when it extends to the retail level, and that its yield provides a fairly accurate measurement of economic growth because purchasing power which determines VAT yield increases with economic expansion (Akinola & Akinrinola, 2023; Yaska et al., 2024).

Recent empirical evidence confirms that VAT significantly boosts real GDP, per capita income, investment, and government revenue in both the short and long run (Akinlo, Adebanjo, & Samuel, 2024). However, administrative inefficiencies including manual processing and corruption continue to hinder effective VAT collection (Olasunkanmi & Adejuwon, 2024). The Federal Inland Revenue Service (FIRS) has in recent years adopted digital platforms to enhance transparency and reduce revenue leakages (FIRS, 2022).

1.2 STATEMENT OF THE PROBLEM

The attitude of Nigerians toward taxation remains a persistent concern, as many prefer not to pay taxes if given the opportunity. The economy continues to lose huge revenue through tax avoidance and tax evasion practices. Studies indicate that the Federal Inland Revenue Service (FIRS) loses an estimated $20 billion annually due to tax evasion alone, with Nigeria having reportedly lost $178 billion to tax evasion by multinationals over a ten-year period (Jooji et al., 2023; FIRS, 2022).

Among the documented causes of non-compliance are: the design of Nigeria's tax system, public misperceptions about the purpose of taxes, a lack of taxpayer education, weak tax regulations, inflation, and most critically corruption and a lack of trust in government officials (Jooji et al., 2023; Olanrewaju & Bamidele, 2024). Research shows that distrust in government significantly reduces taxpayer willingness to comply voluntarily (Ayoola, Olatunji, & Adebayo, 2023).

Furthermore, out of more than 440,000 companies registered in Nigeria, only approximately 120,000 were paying taxes to the FIRS, meaning over 320,000 companies remained outside the tax net representing a massive revenue gap (FIRS, 2022). The cost of tax collection, encompassing both social and economic dimensions, has also become prohibitively high, threatening to outweigh the benefits derived from the system (Lawal et al., 2024).

It is against this background that this research examines the effects and administration of Value Added Tax in the Nigerian economy, with particular reference to the Federal Board of Inland Revenue (FBIR).

1.3 OBJECTIVES OF THE STUDY

The major objective of this study is to examine the effects and administration of Value Added Tax in the Nigerian economy, with particular reference to the Federal Board of Inland Revenue. The specific objectives are as follows:

1. To ascertain whether sharp practices in administration between the staff of FBIR and assessed consumers have contributed to tax evasion.

2. To ascertain if any variation exists between financial statements used for Annual General Meetings (AGMs) and those submitted to the FBIR for tax administration.

3. To ascertain whether a loss of confidence in government officials has contributed to tax evasion.

1.4 RESEARCH QUESTIONS

In order to meet the above objectives, the following research questions were formulated:

1. To what extent have sharp practices in administration between the staff of the FBIR and assessed consumers contributed to tax evasion?

2. Is there any variation between financial statements used for AGMs and those submitted to the FBIR for tax administration?

3. To what extent has the loss of confidence in government officials contributed to tax evasion?

4. Is VAT a vital instrument of revenue to the government?

1.5 RESEARCH HYPOTHESES

HYPOTHESIS ONE:

H₀: Sharp practices in administration between the staff of FBIR and assessed consumers do not contribute to tax evasion.

H₁: Sharp practices in administration between the staff of FBIR and assessed consumers contribute to tax evasion.

HYPOTHESIS TWO:

H₀: There are no variations between financial statements used for AGMs and those submitted to the FBIR for tax administration.

H₁: There are variations between financial statements used for AGMs and those submitted to the FBIR for tax administration.

HYPOTHESIS THREE:

H₀: Loss of confidence in government officials has not contributed to tax evasion.

H₁: Loss of confidence in government officials has contributed to tax evasion.

1.6 SCOPE AND SIGNIFICANCE OF THE STUDY

The scope of this study is limited to the Federal Board of Inland Revenue, Ebonyi State. The study is significant as it contributes to a body of literature on VAT administration and tax evasion within the Nigerian context. Students, scholars, and academics in the fields of taxation, accounting, and public finance will find the research useful for further inquiry.

In addition, the findings will be of value to taxpayers, business communities, and the federal, state, and local government organisations charged with the administration of taxes and levies. The study contributes to current policy discussions on strengthening VAT administration in Nigeria, particularly in the light of ongoing reforms introduced under the Finance Acts 2019–2023 and the proposed 2025 Tax Act (Federal Ministry of Finance, 2024; Jooji et al., 2023).

1.7 LIMITATIONS OF THE STUDY

This research is limited to a detailed study of VAT and an assessment of its actual contributions to the economic development of Nigeria. The following constraints were encountered:

a) TIME CONSTRAINT:

The need to submit the completed work before the expiration of an academic deadline limited the breadth of the study.

b) FINANCIAL CONSTRAINT:

Limited funding restricted the scope of fieldwork and data collection that could have been carried out.

c) POOR RECORD-KEEPING:

Inadequate data-keeping practices at relevant institutions posed a significant limitation. The absence of detailed records in libraries and statistical offices constrained the depth of data retrieval for this research.

1.8 OPERATIONAL DEFINITION OF TERMS

In order to avoid semantic ambiguity, the following technical terms are defined as they relate to the context of this research:

1. ASSESSMENT AUTHORITY: This is the body appointed by the board for the purpose of assessing the tax payable by a taxpayer.

2. EFFICIENCY AND EFFECTIVENESS: Efficiency refers to the optimum relationship between inputs and outputs in the tax administration process, while effectiveness refers to the accomplishment of predetermined tax collection objectives. Tax collection is considered effective when a high proportion of assessed taxes is actually collected (Lawal et al., 2024).

3. FEDERAL INLAND REVENUE SERVICE (FIRS): The body charged with the overall administration of federal taxes in Nigeria. In recent years, FIRS has adopted digital platforms to modernise tax assessment and collection, improving transparency and reducing revenue leakages (FIRS, 2022).

4. INCOME: For the purpose of this study, income is broadly defined to encompass any amount deemed to be income under applicable tax legislation, including salaries, business profits, dividends, royalties, and interest (ITMA, 1961).

5. TAX ARREARS: Assessments of tax from preceding periods whose payment is received in the current assessment period.

6. TAX EVASION: A fraudulent, dishonest, and intentional distortion or concealment of facts by a taxpayer in order to reduce tax payable. Tax evasion is an illegal and criminal act punishable under law. It is distinguished from tax avoidance in that the intent of the taxpayer determines the legal characterisation of the act (Jooji et al., 2023). Research indicates that corruption, weak enforcement mechanisms, and distrust in government remain the primary drivers of tax evasion in Nigeria (Ayoola et al., 2023; Lawal et al., 2024).

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