ASSESSING THE CONTRIBUTION OF VAT TO THE REVENUE PROFILE OF NIGERIAN GOVERNMENT
1.1 BACKGROUND OF THE STUDY
The increasing cost of running government coupled with dwindling revenue has left various state governments in Nigeria with formulating strategies to improve the revenue base. More so, 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 reduction in their share of the National Revenue from the Federation Account. Despite the numerous sources of revenue available to the various tiers of government as specified in the Nigeria 1999 Constitution, since the 1970s till now, over 80% of the annual revenue of the three tiers of government come from petroleum. However, the serious decline in the price of oil in recent years has led to a decrease in the funds available for distribution to the states. The need for state and local governments to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. This need underscores the eagerness on the part of state and local governments and even the federal government to look for new sources of revenue or to become aggressive and innovative in the mode of collecting revenue from existing sources.
To meet the inescapable need for increased revenue, the use of external tax consultants was introduced by the federal and state governments in Nigeria to boost revenue generation under a programme known as the Accelerated Revenue Generation (ARG) Programme. The Federal government appointed Consultants/ Monitoring agents on Value Added Tax (VAT).
Value added tax (VAT) has become a major source of revenue in many developing countries. VAT has become an important contributor to total government tax revenues. Shalizi and Squire (1988) find that VAT accounted for about 30% of total tax revenues in Nigeria in 1982. The oil producing countries are not excluded from the list of countries introducing this tax handle. This 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.
Specifically, the Federal Inland Revenue Service (FIRS) pointed out that VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries world-wide (FIRS, 1993: 4). Evidence so far supports the view that VAT is already a significant source of revenue in Nigeria.
VAT is a multi point levy where the tax paid on local purchases from the registered dealer can be set off against the tax payable on the sale of goods, other than special goods. A value added tax is a tax on sales to consumers that is collected at different stages of the production process. It has the same base as a retail sales tax (RST) that is collected only on sales to final consumers.