CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

In Nigeria, the Value Added Tax (VAT) is a federal government tax that is administered

through the Federal Inland Revenue Services' existing machinery (FIRS). The Federal Inland

Revenue Services (FIRS), which has its headquarters in Abuja, has a VAT directorate. It has a

federation-wide network of zonal and local offices. A director leads the tax directorate, which

is supported by two deputy directors. The Federal Inland Revenue Services (FIRS) Zonal

Coordinators in Lagos, Ibadan, Enugu, Kaduna, and Jos oversee the activities of local VAT

offices within their districts and report to the VAT Directors in Abuja on all VAT-related

topics. VAT was implemented in Nigeria on January 1, 1994, based on the findings of a study

group established by the government in 1991 to assess the country's indirect tax structure. The

Federal Government has been working tirelessly on how to improve the Nigerian economy

since the introduction of VAT. A slew of economic measures has been enacted to this end. The

Second-Tier Foreign Exchange Market (SFEM), the Structural Adjustment Programme (SAP),

and the Foreign Exchange Market (FEM) were among the economic measures enacted. All of

these efforts to restructure the economy has end in futility, as the economy appears to be a sick

child that has rejected all economic therapy and budgetary remedies.

The Federal Military Government, led by General Sani Abacha, established a fiscal policy,

the Value Added Tax (VAT), in January 1994, in response to its stated goal of reviving the

Nigerian economy at whatever cost. VAT is a consumption tax that is paid by the final

consumer at each stage of the consumption chain. It requires a taxable person to charge and

collect VAT at a fixed rate of 5% on all vatable products and services after registering with the

Federal Board of Inland Revenue. The VAT liability will be either zero-rated or exempted if

1
the supply is not subject to VAT. All items and supplies that are zero-rated are for export. Zero-

rated supplies are nonetheless taxable, although there is no tax due to the government. The

main distinction between Zero-rated and exempt items is that any input VAT associated with

Zero-rated supplies is recoverable, whereas input VAT associated with exempt supplies is not.

The registration of Value Added Tax (VAT) is intended to encompass all of the vatable

persons' commercial operations. As a result, all domestic manufacturers, wholesalers,

distributors, importers, and providers of products and services in Nigeria are required to register

for VAT within six months after the decree's enactment or six months of the start of their

operation, whichever comes first. A vatable person is someone who engages in the exchange

of vatable products and services for a fee. Every vatable person is required to register for the

payment of Value Added Tax (VAT). Professionals that give professional services to their

clients, such as lawyers, accountants, and engineers, must register. As a result, there is no

registration criterion.

VAT paid by a business on purchases is referred to as input tax, and it is recovered through

VAT charges on corporate sales, which is referred to as output tax. If output exceeds input in

any given month, the excess is remitted to the Federal Board of Inland Revenue (FBIR), but if

the input exceeds output, the taxpayer is entitled to a refund of the excess from the Federal

Board of Inland Revenue (FBIR), though this is not always possible. A taxpayer, on the other

hand, can recover excess input from excess production in a later era. At this point, it should be

noted that recoverable inputs are limited to Value Added Tax (VAT) on commodities imported

directly for resale and products used in the stock-in-trade for the direct manufacturing of any

new product on which the output VAT is levied.

In Nigeria, VAT was implemented as a replacement or substitution for the previous sales

taxes. They were levied on all commodities produced in the country, as well as those produced

2
outside the country and sold in the country. The VAT's outstanding performance in the first

government fiscal initiatives, such as:

i. Getting rid of some kind of excise tax;

ii. The marginal rate of personal income tax is being reduced to 25%, while the lowest

tax bracket is being reduced from 10% to 5%;

iii. The corporate income tax rate will be reduced to 30%, and;

iv. The capital tax rate will be reduced from 20% to 10%.

Among the numerous sorts of taxes, Value Added Tax (VAT) appears to be the premium.

In this context, we'll look at VAT and observe how it affects the economic development of the

country.

1.2. Statement of the Research Problem

The importance of VAT, or the role of Value Added Tax in the development of the

country, cannot be overstated. For the growth of the nation's project, the government raises

revenue through taxation. The vat was enacted as a revenue-raising method to compensate for

the shortcomings of the previous sales tax, which was progressive. The government's capacity

to adequately and successfully recover funds from firms and other collection agencies

continues to be a concern. There does not appear to be adequate machinery for effectively

monitoring the remittance of the tax withheld to the relevant tax authorities, implying that the

federal Inland Revenue, the body charged with the administration and implementation of Vat,

lacks the logistic support, which will invariably allow for tax evasion and avoidance.

Secondly, the fraudulent act among some tax employees posed a severe threat to

Nigeria's effective tax administration, particularly when such acts have the potential to

demoralize honest taxpayers. Consumers will continue to desire to reduce the amount of Vat

they pay because most of these taxes are not properly represented on their invoice. Vat is

3
commonly thought to be another technique of reflecting economic hardship on consumers to

the benefit of manufacturers and businesses. It could be interpreted as an excuse to raise

arbitrary pricing for goods and services. For example, some hotels are currently charging taxes

on their services without remitting the money to the right authorities. These violate the vat

system's regulations. Because of the unusual nature of this tax system, the majority of people

are ignorant of its existence, resulting in a lack of trust in the government, leading to them

scorning the payment.

Poor vat administration and implementation have been exacerbated by a lack of skilled

people and logistic support from the government and FIRS, which has usually resulted in a

drop in vat income generation. In light of these circumstances, the purpose of this study is to

ask specific questions to establish if the implementation of VAT is a viable undertaking or

policy.

i. Has the introduction of the Value Added Tax (VAT) had any influence on

government revenue in Nigeria?

ii. Is there any impact of VAT on Nigerian consumption patterns?

iii. What are the challenges that Nigeria faces in implementing and administering VAT

effectively?

iv. And what impact has VAT had on Nigeria's corporate organizations, enterprises,

and industries?

The unifying goal of Value Added Tax is to simplify the tax structure, to create a standard

platform within which taxes may be managed to make collection easier and to capitalize on

VAT's strength as a revenue source with a lower collection cost than other kinds of taxation. It

is expected that taxpayers will find the convenience of payment appealing, resulting in a

reduction in tax avoidance from the unwholesome mentality of some taxpayers who are

4
prominent tax evaders, an attitude that many countries deem criminal due to the economic

impact. VAT was created to help people save money. Although there are several studies on the

chosen topic such as John Ebiere and Emmanuel, (2014), Ayuba and Eluwa (2013), Osundina

and Olanrewaju (2013), Loveday and Nwanyanwu (2015) amongst others, have all written on

effect of value added tax on the development of Nigerian economy. However, none of these

studies substantially address the chosen topic. Therefore, this study aimed at filling the gap in

terms of providing an update that previous studies have not covered.

1.3. Research Questions

The following are the questions guiding this study. These are:

(i) What effect does the value-added tax have on Nigerian consumption patterns?

(ii) Is the Value Added Tax (VAT) beneficial to the Nigerian economy?

(iii) How has VAT improved the performance of Nigerian businesses, organizations,

and industries?

(iv) Are there any issues with the VAT implementation and administration in Nigeria?

1.4. Objectives of the Study

The broad aim of this study is to determine the impact of the value-added tax on Nigeria's

economic development. However, the specific objectives of the study are to:

(i) determine the economic effect of the value-added tax on Nigerian consumption

patterns;

(ii) determine the economic impact of the value-added tax in Nigeria;

(iii) assess the impact of a value-added tax on potential Nigerian businesses firms,

organizations, and industries and to;

(iv) identify potential issues with the implementation and administration of the Value

Added Tax in Nigeria.

5
1.5. Research Hypothesis

The following hypothesis are formulated to assist the findings of the study.

H0: The Nigeria's consumption patterns are unaffected by the Value Added Tax (VAT).

H1: The Nigerian economy does not benefit from the Value Added Tax (VAT).

H3: In Nigeria, paying the value-added tax (VAT) has not boosted the prospects of businesses,

organizations, or industries.

Ho4: In Nigeria, there are no obstacles to the application and management of VAT.

1.6. Scope of the Study

This research looks at the economy as a whole (federal, state, and local governments),

with a focus on the Federal Board of Inland Revenue (FIBRS), Nigeria's primary tax authority

for the value-added tax. The study’s findings were generalized to cover VAT activities in the

country streamlined to vat generated to the VAT head office Revenue House, 15 Sokode

Crescent, Wuse Zone 5, Abuja, while the data collection was limited to the VAT office between

2012 and 2020.

1.7. Significance of the study

This study will be a great source of literature for researchers, students, marketing

practitioners, accountants, bankers, firms, government organizations, and other professionals

who are interested in learning more about the VAT notion. Its overall contribution to Nigeria's

economic progress was acknowledged. Its benefits and drawbacks, types of taxes, the genesis

of VAT, its application, impact, and administration have all been thoroughly examined, making

it an essential resource for the above-mentioned beneficiaries. It will also assist the government

in formulating policy by recommending alternative ways for the proper administration and

6
monitoring of the VAT process and procedures. The list of vatable goods and services, as well

as the countries that have used this system, will be discussed in the following chapter.

1.8. Operational Definition of Terms

The researchers hope that everyone who could be interested in this initiative, whether

official or not, will read and understand it. As a result, the importance of emphasizing the key

terms employed cannot be overstated. The Value Added Tax (VAT) was established by Decree

102, which was issued in 1993. Unless the context dictates otherwise, the following terms are

defined by the Decree. In terms of this study, the meaning is the same as it is in the Decree.

i. Value Added: This is the amount of value added in the process of production of

goods or the rendering of a service.

ii. Value Added Tax: This is the amount of tax charged on the value added to a

product at each stage of the production process

iii. Economic Development: Economic development here means increase in the

production of goods and services in a country over time which results in a better

standard of living for the citizens. For the purpose of this study, economic

development shall be measured in terms of Government Revenue (GR) and the

Gross Domestic Product (GDP).

iv. Government Revenue: Government revenue refers to revenue generated (or

collected) by all the three tires of government, the Federal, State and Local

Governments in Nigeria.

v. Gross Domestic Product: This represents the total production of goods and

services in Nigeria over the given time period, measured at the current basic prices.

vi. Importer: This refers to a person who brings taxable products into the country.

vii. Invoice: This refers to any document issued as proof of a payment demand.

7
1.9. Outline of the Study

The study comprises of five chapters. Chapter One consists of the research question, the

background to the study, statement of the problem, objectives of the study, scope of the study

and limitations of the study, among others. Chapter Two undertakes the review of relevant

literature and theoretical underpinning, while Chapter Three provides the methodology of the

research. Chapter Four presents and analyzes collected data while Chapter Five summarizes

and concludes the findings of the study.

8
 CHAPTER TWO

LITERATURE REVIEW

2.0. Introduction

Although there is very little literature on the subject of value-added tax in less developing

countries, it has been written by various groups of scholars, academicians, tax experts and

professionals, international monetary funds (IMF) World Bank commissioners, and

organizations of petroleum exporting countries (OPEC). Nonetheless, extensive research has

been conducted on the impact of indirect taxes on developing countries in general and Nigeria

in particular. Eminent scholars have investigated the primary purpose of taxation as a revenue-

generating instrument in developing countries.

Since then, a growing number of developing countries have turned their focus to VAT as a

means of streamlining their taxation systems. Nigeria, Senegal, Côte d'Ivoire, Morocco,

Tunisia, and others are among them. Because it is supposed to have a neutral effect on business,

VAT is levied on practically all commercial transactions in over 130 nations across the world.

Taxes, rates, fees, fines, special assessments, and revenue from government-owned enterprises

and mineral resources are the main sources of revenue for the government. In developing

nations like Nigeria, government revenue is primarily derived through indirect taxation, but in

rich countries like the United States, government revenue is primarily derived from direct

taxation. Borrowing becomes necessary when regular sources of income are insufficient to

cover expenses. The borrowed funds must be returned with interest from existing income or by

additional borrowing. However, borrowing cannot be a regular component of government

management, necessitating the creation of revenue collection agencies in emerging countries

to maximize revenue collection.

9
2.1. Conceptual Review

2.1.1. Taxation

Taxation is frequently defined as "the collection of mandatory contributions by public

authorities with jurisdiction to defray the costs of their activities." The money raised is utilized

for the common good of the citizens, such as the creation of certain services that are seen to be

more efficiently delivered by the government than by individuals. For example, maintaining

domestic law and order and defending against exterior threats.

2.1.2. Purpose of Taxation

The main aim of taxation is highlighted in the preceding definition of taxation. This is

to generate revenue to cover the expense of state-provided services. Other goals of taxation

include reducing inequities in wealth distribution, restricting particular types of spending,

protecting domestic businesses, and controlling specific sectors of the economy. Balance of

payments, employment, savings, investment, and productivity are only a few examples. In

addition to the foregoing, further taxing purposes can be stated as follows.

i. The nation's effective productivity has increased.

ii. An increase in the amount of money collected.

iii. Improvements in government services.

iv. Increase employment across all industry sectors

v. Incorporation of cutting-edge technology into the system

vi. Rationalization of the economic system's terms and conditions.

vii. Employment terms and conditions should be rationalized.

10
2.1.3. Attributes of a Good Tax System

Adam Smith (1778), a British economist, identified four characteristics that he dubbed

"taxation cannons" (in his book The Wealth of Nations). These concepts are extremely

important, and they still hold today as they did back then. They are as follows:

1. Fairness: The tax system should be equitable for both tax collectors and taxpayers.

Every state's subject should contribute to the government's assistance as nearly as

possible by their respective skills. The term "ability to pay" relates to a person's

financial resources.

2. Clarity: Tax authorities should make all tax systems and administration modes fully

apparent to taxpayers. In other words, taxpayers should be made aware of the tax system

is implemented. They should also be knowledgeable of the system's requirements.

Similarly, the taxpaying public should be aware of the benefit that will be gained.

Furthermore, both the tax administrator and the taxpayer must be aware of the time of

payment, the manner of payment, the amount to be paid, the location of payment, as

well as all rights and obligations under the tax laws. The tax system should be made

very convenient for the taxpayer.

3. Convenience: All taxes should be imposed at a time or in a manner that is most likely

to be convenient for the contributor. The tax should be collected in such a way that the

majority of taxpayers understand it and comply with it regularly. The collecting

mechanism should not trespass too much on taxpayers' privacy, but it should leave little

room for noncompliance.

4. Economy: This means that tax revenue should always be more than the expense of

enacting or administering the tax. Every tax should be designed to take and keep as

little money as feasible out of people's pockets over and above what it puts into the

consolidated fund.

11
Apart from the canons of taxes described above, these are other characteristics that later emerge

to substantiate Adam Smith's assertions. They are:

i. Simplicity: One of the most important aspects of economic efficiency is tax

structure simplicity, which refers to how much it costs taxpayers to comply with tax

policy.

ii. Elasticity: This refers to a tax system's ability to adjust automatically to changes in

the wealth, population, and other relevant variables of the taxpayer.

iii. Productivity: This idea emphasizes that the tax system should create a high met

return of income without jeopardizing the revenue source.

2.1.4. Impact, Incidence and Taxable Capacity

1. The effect of taxes. This refers to the payment squeeze, which is imposed on the individual

who pays the tax first. It is those who are responsible for the first payment to the tax authorities.

2. The tax incidence: This refers to the tax's overall economic impact. It is the financial weight

that falls on the person who pays the tax in the end and is unable to pass it on to another. The

phrases denote the tax's final resting location.

3. Capacity to be taxed: This is a country's maximum capacity to accept and absorb taxation,

which is governed in part by several factors, including;

i. The country's valid wealth.

ii. The population's attitude toward taxation, in general, • The types of taxes imposed

iii. The potential for tax avoidance

iv. The point at which any increase in taxation is likely to result in a decrease in national

income. (For example, the impact of tax incentives, wage demands, and price hikes).

12
2.1.5. Types of Taxation

There are three major taxation systems in use in the United States:

1. Progressive Tax: A progressive tax system is one in which those with higher income pay

more tax while those with lower income pay less. Because of the graded tax rate, PAYE in

Nigeria uses a progressive tax system.

2. Regressive Tax System: In this system, higher-income earners pay a lower tax rate, while

lower-income earners pay a higher rate. Only a few wealthy countries use regressive taxation.

3. Proportional Tax System: This is a tax system in which everyone pays a flat rate of tax

regardless of their income. The amount you pay in taxes is proportionate to your income.

2.1.7. Types of Taxes

There are numerous classifications by various authors as to what should be the primary type of

tax. The most widely accepted classification is

a. Direct Tax

b. Indirect Tax

Direct Tax

A direct tax is levied directly on the person who will bear the burden. It is a tax that is directly

deducted from the taxpayer's earnings. The poll tax, general property tax, and income tax are

all included. Internal Revenue Services (IRS) or a similar entity is in charge of enforcing this

type of tax (Board of internal revenue).

13
Advantages

i. It is simple to calculate the incidence and yield.

ii. The taxpayer knows exactly how much he will have to pay.

iii. As wealth and population rise, the yield rises automatically.

iv. In general, direct taxes are progressive.

Disadvantages

i. The administrative costs are significant.

ii. Those with high salaries may experience a significant impact on incentive,

enterprise, and savings.

Indirect Taxes

This is the tax that is levied in an indirect process. It is imposed on commodities before

they reach the final consumer, yet the consumer eventually pays it as part of the market price.

Various people have different impacts and incidences. They are named indirect because the

taxing authorities who collect taxes on goods and services do so indirectly through importers,

manufacturers, and other intermediaries, rather than directly from the customer. The tax

element is loaded on the selling price of the goods sold to the next person in the commercial

chain until it is finally borne by the consumer, so transferring or passing on the burden.

Advantage of Indirect Taxation

i. Tax payment and collection are simple and convenient.

ii. Its yield is elastic in general.

iii. Evasion is a difficult task.

Disadvantages of indirect taxation,

i. Restriction of harmful consumption

14
 ii. They are frequently regressive.

iii. Revenue may be uncertain where demand for the product is high.

iv. The taxable good is malleable.

v. Determining the incidence is difficult.

vi. They are not always equally distributed.

The above-mentioned taxation systems would be incomplete without a mention of the well-

known tax theory known as “The Faculty Theory of Taxation”.

This faculty taxation theory aims to establish the notion that taxpayers should contribute

to the state's revenue in proportion to their ability to do so. The notion is that the wealthy should

pay a higher tax rate than the poor because they have a greater ability to pay. Persons with

annual incomes of up to N 10,000, for example, may pay N30,000, which violates the

fundamental rule of taxation, which is equity.

2.1.8. Value-added Tax in Nigeria

Nigeria has a 2.7 per cent VAT. In Nigeria, the concept of VAT began with the federal

government's acceptance of the study committee on indirect taxation's report in November

1991. The federal government, on the other hand, was dissatisfied with the money generated

by the sales tax, which has a norm-based base and only applies to nine categories of

commodities as well as sales and services in registered hotels, motels, and similar

establishments. It is believed that the restricted base of consumption contradicts the core

principles of consumption taxation, which is designed to cut across all types of spending. Value

Added Tax, on the other hand, has a broader base and includes most professional services and

banking transactions, which are high profit-generating sectors. In this regard, VAT is neutral.

Imported items account for a significant portion of the VAT to be collected. This means that,

under VAT, locally created goods will not be penalized in comparison to imported ones.

15
Because VAT is based on people's general consumption habits. The predicted high yield from

it will boost the state government's fortunes with no opposition from taxpayers (Ola, 1999).

The decision to accept the recommendations of the federal government's study

committee on indirect taxation, which was established in November 1991, was made public in

the Head of State's budget speech. As a result, the modified Value Added Tax (MVAT)

committee was established on June 1, 19992, as recommended by the study group. The federal

government rejected the committee's recommendation that VAT is managed by an independent

commission rather than the federal inland revenue services, which is already responsible for

the administration of most other taxes in Nigeria. This resulted in the introduction of Value

Added Tax (VAT) in Nigeria with Decree 102 of 1993, which marked the end of the sales tax

decree No 7 of 1986. The Decree went into effect on December 1, 1993, although invoicing

for tax purposes did not begin until January 15, 1994, due to an administrative arrangement: A

consumption tax on economic activity, such as imported products and services, is known as the

Value Added Tax (VAT). Vat is calculated at a flat rate of 5% of the price of goods and

services, with zero rates applied to exports (Seyi, 1993).

2.1.9. Conceptual Analysis of Value Added Tax (VAT)

Different authors and writers have provided different definitions of the term VAT

(Value-Added Tax). According to Nworji (Chima 1996), Value-Added Tax is defined as a

consumption tax in which the tax burden is borne by the consumer. The tax burden is passed

from the manufacturer to the wholesaler to the retailer, and finally to the consumer, who has

been designed to bear it without complaint. As a result of the foregoing, the consumer can only

avoid paying VAT if he does not purchase any vatable goods or services, that is, an item on

which VAT is paid. According to an IMF report, VAT is an indirect tax imposed on each

transaction, starting at the beginning of the production and distribution cycle and ending with

16
consumer sales. It even went so far as to give the appearance that the VAT is absorbed by the

consumer as part of the sales price, demonstrating that VAT is a consumption tax collected

along the manufacturing chain.

VAT is a broader-based tax on consumer spending that, with a few exceptions, is

imposed on all products and services at varying rates depending on the jurisdiction. Okpe

(2000) defined VAT as a multi-stage tax levied on the value added to goods and services as

they pass through various stages of production and distribution, as well as on services as they

are rendered, that is ultimately borne by the final consumer but collected at each stage of the

production and distribution chain. The three characteristics of value-added tax are highlighted

in this definition below.

i. VAT (Value Added Tax) is a consumer tax.

ii. The final consumer is subject to VAT.

iii. Value Added Tax (VAT) is a multi-stage tax.

VAT is a tax levied at each level in the supply chain, according to Jennings (1986). This

could happen at the main producer, manufacturer, wholesaler, or retailer stages in the case of

manufactured goods. The consumer is ultimately responsible for it. According to Jennings'

definitions of VAT, there are intermediaries through whom manufactured goods or services

must travel before reaching the financial consumer. At each stage, a value is added to the

products as they transit from one individual to the next. This is the value that is taxed and

ultimately absorbed by the final customer. According to the preceding, the end consumer's

value of goods and services is the sum of all the values added by subsequent traders or

intermediates in the chain. Because each trader only pays the VAT attributable to the value

contributed at his stage, the ultimate tax for any given final value is the same, regardless of the

number of stages in the system or chain.

17
 VAT can be considered as a typical chain of transactions in which a manufacturer's goods

are sold to a wholesaler, who then sells to a retailer, who then sells to a customer. Except for

the customer, who receives a reimbursement for the imputed VAT he paid on his purchases.

Because the consumer is not entitled to a return for the VAT contained in the price he paid to

the shop, the tax can be considered part of the net cost of the products he purchased at this

point. Ezejelue (Ezejelue, 2001).

According to Oyegbile (1996), the Value Added Tax was implemented in Nigeria for a

variety of reasons, including the following.

i. To diversify the nation's revenue base, making it less reliant on oil exports.

ii. Increase the tax base by levying the same rate on imported and domestically

produced products and services. The former sales tax disadvantages locally

manufactured goods in comparison to imported goods.

iii. It would reduce the proportion of taxes levied on expenditure rather than income.

iv. It was hoped that by implementing a Value Added Tax, we would be able to

harmonize our tax structure, especially with these nationwide flat rates of 5%.

v. Because a registered person must hold the tax invoice, it makes it easier to claim an

input tax credit.

vi. It makes it easier for enterprises or organizations that have registered with the

federal inland revenue Services (FIRS, VAT Directorate) for VAT purposes to

collect tax on behalf of the federal government.

vii. The introduction of VAT offered justice to all taxpayers by bringing together

several items and services that were previously not covered by sales taxes under the

VAT framework.

viii. To undermine the country's tax system, because VAT is the sole tax imposed on a

wide range of goods and services, regardless of where the item was manufactured

18
 (local or imported) or the particular nature of the commodity. (Products that are

both luxurious and hazardous.)

ix. To assist the general public, traders, industrialists, and the government. It is,

undoubtedly, a step toward efficiency, as well as healthy competition and the

inclusion of farmers in the tax system.

Table 2.1.10: African Countries within their VAT Ratio

Country Date introduced State levied Tax rate%

Algeria 1992 Retail 7,13,21,20

Benin

Republic 1991 Wholesale 18

Cote-d‘ivore 1960 Wholesale 5,11,25,35

guinea 1960 Retail 13,6

5,18,30,50,
Kenya 1960 Retail
75

Madagascar 1960 Retail 15

Malawi 1989 Retail 10,17,55,85

Mali 1991 Wholesale 10,5,

Mauritius 1983 Retail 5,

Morocco 1986 Retail 7, 14,19

Niger 1986 Retail 10,17,24,

Senegal 1961-1980 Retail 7,20,30,34

South Africa 1991 Retail 14

19
 Country Date introduced State levied Tax rate%

Togo 1984 Retail -

Tanzania Mid 1994 Retail -

5
Nigeria 1994 Wholesales

1,17,29

Tunisia 1988 Manufacturing

Source: Author’s Compilation, 2022

According to the table above, most African countries adopted the VAT system of

taxation earlier than others, with Nigeria and Tanzania being among the most recent to do so.

In Nigeria, the impact of the value-added tax is as follows:

The introduction of VAT (Value Added Tax) into the tax system of the country has had

a significant positive influence. Though, in the pursuit of any line of action, any approach used

cannot be complete without virtue or fault. This is also true for the implementation of VAT in

our economic body polity. There are several grounds in favour of VAT adoption in Nigeria,

but there are also people who are against it. According to the Daily Times (1996), the value-

added tax (VAT), which is a consumer-based tax, has gained prominence since the government

implemented it in 1994 to replace the previous sales tax. In the first half of 1994, the value-

added tax generated an anticipated sum of N 13.677 billion, which was 24% higher than the

pro-rata revenue of Nil billion projected for the time. The report further stated that according

to data gathered from the Federal Inland Revenue Services (FIRS), approximately N7.791

billion was collected from VAT on imports during the period, while non-imports brought in

N5.886 billion.

20
 The highest monthly yield of N2.914 billion was achieved in May, while the lowest

monthly yield was recorded in February, with January yielding 2.3 billion, March 2.255 billion,

and June yielding 2.186 billion, all below the expected monthly yield. The Federal Government

predicted that VAT will bring in N22 billion in 1996, compared to N19 billion in 1995. In

1995, the government recorded a development that prompted the Federal Government to cut

personal tax relief; by the end of the year, the new tax plan had increased its contribution to the

government's revenue pool to the tune of N20.26 billion. As a result, the government has stated

its plan to move its focus away from income tax and toward taxation of consumption, which

he claims is less prone to tax fraud and more progressive. In the first three months of 1996, the

government earned around N7.01 billion through VAT.

Naiyeju (2000) goes on to say that there are obvious reasons why the proper

administration of the value-added tax in Nigeria deserves nothing less than a national

celebration. Despite public outrage against the tax regime at its beginning, Alheri (1995) stated

that VAT has proven to be a reasonable economic policy. The federal budget in 1994 stipulated

that VAT must generate an estimated revenue of N6 billion, while international financial

organizations estimated N4 billion. Surprisingly, VAT met and exceeded the budget estimate

in 1994 by over N2 billion, raising a total of N36 billion in that year. Alheri further stated that

589 local governments in Nigeria shared N6 million in VAT revenue in 1994, while the federal

capital territory FCT collected N317 million in 1994 and 1995. Finally, the administration of

VAT in Nigeria has influenced the global understanding of tax as a dynamic material. Payment

of income tax was moved to be made through the bank as part of the 1996 VAT policy

revisions. Selected banks have been entrusted with receiving VAT profits, which will be

remitted to the Central Bank of Nigeria at regular intervals (Ani 1996). In Nigeria, the success

of VAT is the triumph of logic and competence. It is a triumph of determination on the part of

governments in implementing a challenging fiscal strategy.

21
2.1.11. VAT administration in Nigeria

Nigeria's VAT system is managed by the Federal Inland Revenue Service (VAT

directorate). The board is responsible for tax assessment and collection, and it is required to

account for all sums collected in compliance with the decree's provisions. It is, however,

administered and regulated by the federal government, which employs the federal Inland

Revenue Service's existing tax machinery in close collaboration with the Nigeria Customs

Service and state Inland Revenue administrations. The net earnings from VAT are split

45.35:20 between the federal, state, and local governments. The potential VAT payer collects

and completes Form 002, which is then returned to the nearest VAT office. Once registered,

the VAT earnings are required to be sent to the VAT office every month. This is done by the

Nigerian regulations creating these bodies in charge of VAT.

i. The federal Inland Revenue Services Board (The board of FBI).

ii. The Federal Inland Revenue Service (FIRS), which is led by one of the six directors

and has its headquarters in Abuja.

iii. Technical committees: These committees were established under section 3 of the

VAT decree and have a major advisory capacity.

iv. The Directorate of VAT, As previously stated, the entire administrative machinery

of VAT is housed in this directorate, which collaborates closely with the Nigeria

customer service and state inland revenue services.

Accounting for VAT

VAT was implemented a long time ago, and there is a need to emphasize the unique

component of accounting that it entails. These include;

22
 1. The taxable period is the period in which a VAT return is filed. In Nigeria, this period

lasts one month. The Federal Inland Revenue Services have extended it

administratively.

2. Basis of payment: - How to account for VAT collected and the taxable period during

which a payment is made or received. Registered persons must remember the following

point while accounting for VAT.

3. When a trader pays VAT on goods for resale, the amount is debited to a VAT account

as receivable. If the VAT collected is greater than the VAT paid, the VAT account will

have a credit balance, which the trader must pay to the VAT directorate.

VAT should not be recorded in the account as an expense when a trader acts as a collecting

agent for items that he bought for resale. When the VAT directorate receives the returns and

pays the VAT, the VAT account should be debited and the cash book credited. Any VAT that

has not yet been paid to the government should be recorded as a liability in the balance sheet

at the end of the trader's accounting period. When a merchant pays VAT that he is unable to

pass on to the final consumer, such as when he purchases a vehicle for his business, the VAT

will only increase the cost of the goods or services to him and should be accounted for as such.

2.1.12. Nigerian VAT Calculation

Different countries throughout the world that have adopted VAT as their tax system

have a variety of ways for computing VAT. According to Okpe (2001), in Nigeria, there are

three options for calculating VAT or its computation.

These are some of them:

i. The method of addition

ii. Method of Subtraction

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iii. Japanese model

iv. Payment method

The method of Addition

This method involves calculating Value Added Tax by adding all payments for untaxed inputs

and multiplying the total by the VAT rate to arrive at the amount of VAT owed to the

government.

Method of Subtraction

There are two models for this method. There is a European model as well as a Japanese

approach or model. The input tax is removed from the output tax in European models, therefore

VAT = output - input.

Japanese model

To calculate the tax liability, subtract the cost of taxable inputs from sales and multiply by the

tax rate: in other words, Sales - purchases x tax rate = Tax liability.

Payment method

To compute VAT collected on sales, a company would multiply its sales by the tax rate.

Second, the company would credit VAT paid on inputs against VAT collected on sales, and

the difference would be sent to the government. To fully shift the VAT to the consumer, the

company would calculate its VAT burden before determining its prices.

2.1.13. Remittance of VAT

While filling out a VAT return, every vatable person must send the net VAT payable

to the applicable local VAT office, which is the difference between the output tax and the input

tax. Remittances are supposed to be made in conjunction with the VAT returns that have been

24
filed. On vatable products and services, the VAT has a single rate of 5%; zero rates are assumed

for export, while some commodities and services are exempt from the tax. Below are the three

major types of VAT.

i. The consumption VAT

ii. VAT on cross-products

iii. The VAT on income

Taxable products and services, and rates

Vat applies to both manufactured and imported commodities, as well as professional

and banking services. The FIRS list of affected goods and services, however, is still susceptible

to change. Table 2.1.1 lists some of the goods and services that can be charged, as well as the

application-specific rate.

VAT-exempt goods and services

Essential items, for example, all medical and pharmaceutical products, basic food,

books and educational materials, newspapers and magazines, baby products, fertilizers, age

culture and veterinary care, farming, and transportation equipment are all subject to VAT,

whereas: Medical services, as well as those provided by community banks, people's banks, and

mortgage institutions, are exempt. All diplomatic commodities, as well as airline tickets for

overseas travel, are exempted under international accords.

2.1.14. Registered Person Offenses and Penalties

Under the law, several offences carry hefty penalties. The VAT system is in place. Some of

these infractions include:

i. Giving false information about a matter that is considered material

ii. Failure to inform a change of address is number two.

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 iii. Failure to provide receipts

iv. Obstructing the inspection of premises to determine if they are being used for

taxable goods or services.

There are a variety of quick automatic sanctions based on the sort of offence. The penalties are

the same as before.

Penalties

i. The penalty for submitting a false document or statement is a fine of twice the

amount declared if convicted.

ii. Tax evasion is a crime:

On conviction, the offender faces a fine of N30,000 or two times the amount of tax avoided,

whichever is greater, or a sentence of imprisonment of not more than three years.

Failure to inform a change of address within one month after the change is a third offence.

Penalty- Payment of N5000

Failure to issue a tax invoice for goods sold or services rendered is a fourth offence.

Penalty - Upon conviction, a fine of 50% of the unpaid invoice will be imposed.

Offense - resisting, contemplating, obstructing, or attempting to conceal or concealment

(obstruct an authorized officer from performing his duty on inspection).

Penalty - a fine of N6, 000 or imprisonment for one year if convicted (a term of 6 months or

to both fine and imprisonment).

Offense - failure by a taxable person to file returns

Penalty- Payment of a fine of N5000 per month if the failure continues

26
Offense: Failure to keep proper records and accounts for his business transactions so that tax

can be calculated correctly.

Penalty- Payment of N2000 penalty for each month when the failure continues.

2.1.15. Advantages of Value Added Tax in Nigeria

1. The introduction of VAT brings with it a slew of benefits and advantages. One of these

is a uniform VAT rate, which will stimulate trade and create a favourable environment

for the country's economic experience.

2. It will generate more revenue for the government than the sales tax while also reducing

the government's reliance on oil revenues.

3. It has built-in capacity to raise more tax revenue, the introduction of VAT will broaden

the tax base.

4. It reduces the risks of taxpayers visiting tax offices, resulting in better tax compliance.

5. The regime will be in charge of all goods and services taxes.

6. The introduction of VAT will reduce tax evasion to a reasonable extent.

7. VAT can be used as a tool of government fiscal policy to achieve specific economic

goals by exempting certain classes of goods and services.

8. The VAT is more efficient than the previous sales tax. It has taken the place of

inefficient, distorting, or poorly administered taxes on capital goods, exports, and

imports (Ezejelue 2001).

9. The neutrality of the Value Added Tax is another benefit. This refers to a situation in

which a tax has no effect on the behavior of both consumers and producers.

10. As a result, VAT will benefit ordinary people, traders, industrialists, and the

government. It is, in fact, a step toward tax system efficiency, healthy competition, and

fairness.

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2.1.16. Disadvantages of VAT in Nigeria

There are fewer problems associated with the implementation of VAT than there are

benefits. Despite these minor drawbacks, this nevertheless points to the notion that VAT is a

welcome tax system.

1. Its regressive nature, for starters. Because the VAT rate on both luxury products and

services is the same at 5%, the higher the income, the lower the proportion spent on

consumption and, as a result, the lower the percentage paid in consumption tax.

2. The imposition of VAT has raised the prices of the majority of goods and services in

the country. For example, a hotel room that costs N3000 per night is hiked to N3150 to

benefit the proprietors, who in most cases do not return VAT.

3. Some argue that levying VAT on raw materials imported into the country will increase

the cost of production.

4. Okpe (2001) also argued that VAT will result in a one-time increase in price inflation,

high administrative costs due to the tax's expanded base, a tendency for tax officials to

rely on the tax's self-policing nature to do his work for him, and finally, that the burden

of record keeping for VAT agents can be very high in terms of materials and time spent.

2.1.17. Economic Development

The Concept of economic development is the process of developing and becoming

larger, stronger or more spectacular, successful or advanced," according to Microsoft Encarta

Dictionary (2009). It goes on to add that it is "the encouragement of more intensive and

sophisticated economic activity by such measures as education, improved tools and procedures,

more readily available financing, improved transportation infrastructure, and the formation of

new firms," among other things. Economic development and growth can cost a country in the

following ways:

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 i. Environmental effects of traffic, pollution, and carbon emissions;

ii. loss of established ways of life and culture;

iii. the ‘one fits all approach to economic development prevents subtle differences in

development routes;

iv. (iv) the 'one size fits all approach to economic development prevents subtle

differences in development routes;

v. may discourage countries from focusing on social goals such as caring for the

elderly or children;

vi. acceptance of materialism as a general goal in life; and

vii. global culture homogenization (Microsoft Encarta Dictionary, 2009).

2.1.18. Economic Development Indices or Measures

Economic growth is quantifiable. Economic progress can be quantified in the following

ways, according to Wikiversity (2012):

i. Gross National Product (GNP): This is a metric for a country's economic output that

measures the increase in real national income over some time. It is a logical extension of the

Gross Domestic Product (GDP).

ii. Per Capita Real Income (PCRI): This is a measure of real income that takes into account

the country's population over time. It is computed by dividing the country's GNP by the

population for the period in question.

(iii). Physical Quality of Life Index (PQLI): This is about people's most fundamental

requirements, which take into account a variety of elements such as health, education, water

quality, nutrition, and sanitation. It is calculated by averaging three factors:

(a) Neonatal mortality,

29
(b) Life expectancy at one year, and

(c) Literacy rate, and assigning equal weight to each.

(iv). The Human Development Index (HDI): This is a measure of how far people have

progressed in (HDI). The human development index (HDI) is a measure of one's quality of life.

It's a composite indicator that takes into account life expectancy, adult literacy, and years of

schooling, as well as per capita income (in real terms). It is a composite index of a long and

healthy life, knowledge, and a decent standard of living, as well as the process of broadening

people's choices and improving their well-being.

HDI= (a + b + c)/3

Where,

a= life expectancy.

As a population of health and longevity, this is also known as life expectancy at birth (Unegbu

& Irefin, 2011).

b = education, as defined by the adult literacy rate (two-thirds weighting) and the gross

enrolment ratio for primary, secondary, and tertiary education (one-third weighing), and the

combined primary, secondary, and tertiary gross enrolment ratio (with one-third weighting)

(Unegbu & Irefin, 2011),

and c = standard of living, as measured by the natural logarithm of gross domestic product per

capita at purchasing power parity (with one-third weighting) (Unegbu & Irefin, 2011).

HDI is considered high if it is greater than 0.80, medium if it is between 0.50 and 0.80,

and low if it is less than 0.50.

30
(v). Human capacities (HC): This metric assesses one's ability to make their own decisions.

Freedom of choice is at the heart of human well-being since it improves people's capacity to

achieve higher levels of health, education, self-respect, and the ability to engage fully in

community life. Freedom from starvation, hunger, and malnutrition, as well as the ability to

engage in communal life and proper shelter, are all important elements in making decisions. It

is worth noting that all of the above-mentioned economic development indexes have some sort

of association with the Gross Domestic Product (GDP) or its corollaries. This is why it is such

a crucial indicator of economic progress. It is for this reason that the GDP is used as a proxy

for economic development in this study.

2.2. Empirical Review

Ajakaiye (1999) used a computable general equilibrium technique to investigate the

macroeconomic implications in Nigeria. His research revealed that VAT revenue in Nigeria is

already a significant source of revenue. According to the analysis, actual VAT revenue in 1994

(the year of commencement) was in billions. To mimic the expected Nigerian condition, actual

VAT revenue was used in three scenarios in 1995. To begin, he assumed that the government

adopted an active fiscal strategy that included the reinjection of combination with a presumed

non-cascading VAT treatment. The analysis found that the cascade approach of VAT combined

with active fiscal policy had the most negative consequences on the scenario that most closely

resembled the Nigerian situation.

Adereti et al. (2001) examined the impact of Value Added Tax (VAT) on GDP in

Nigeria from 1994 to 2008. They employed GDP and VAT revenue time series data for the

period and performed a simple regression analysis and descriptive statistical approach.

According to their data, VAT revenue as a percentage of total tax revenue averaged 12.4%,

31
which they judged low when compared to 30% in Ivory Coast, Kenya, and 19.71 per cent in

Mexico. VAT revenue as a percentage of GDP averaged 1.3 per cent. Their research also

reveals that VAT revenue and GDP have a favourable and significant relationship. The study

also points out that there is no link between GDP and VAT revenue. The research continues by

advising the government to close all administrative gaps identified for VAT revenue to

contribute more meaningfully to Nigeria's economic growth. Ebiringa and Emeh (2012)

investigated the impact of several types of taxes on Nigerian economic growth. Secondary data

was gathered between 1985 and 2011, and a model was developed and calculated using

econometrics. The findings revealed that tax is a determinant component of economic growth

in the country, with only customs and exercise duties having an inverse connection and being

significant to GDP. Economic instability was recorded between 1986-1987 and 1993-1995,

however, the graph shows that economic growth was stable during the rest of the period.

Economic instability was detected between 1986-1987 and 1993-1995, but the graph in the

remainder of the years of the study showed stability in economic growth around the benchmark

value of the zero line of the GDP forecast graph based on tax generations in Nigeria. As a

consequence of the analysis, it was advised that the company's income tax system be

restructured to produce more favourable revenue outcomes capable of contributing more

significantly to the Nigerian economy, as is done in other countries across the world. Due to a

lack of accountability, transparency, and leakages in the system, customs service operations

and revenue production at the border were not practically reflected in the economy.

The role of VAT in the development of the Nigerian economy was empirically explored

by Izedonmi and Okunbor (2010). From 1994 to 2010, time-series data on the Gross Domestic

Product (GDP), VAT Revenue, Total Tax, and Total (Federal Government) Revenue were

studied using both simple regression analysis and descriptive statistical methods supplied from

the Central Bank of Nigeria (CBN). The findings revealed that there is a positive but

32
insignificant relationship between VAT revenue and GDP. Both economic indicators varied

significantly over time, however, VAT revenue remained relatively consistent. As a result, this

report suggests that all detected administrative loopholes be closed for VAT revenue to

continue to contribute significantly to the country's economic development.

The influence of the value-added tax on revenue collection in Nigeria was studied by

Ajala, Oladayo, and Ayorinde (2010). The secondary level The Central Bank of Nigeria

Statistics Bulletin (2010), the Federal Inland Revenue Service Annual Reports and the Journal

of the Chartered Institute of Taxation of Nigeria were used as data sources. The data were

analyzed with the use of stepwise regression analysis. The findings revealed that in Nigeria,

the Value Added Tax had a statistically significant impact on revenue generation. The study

suggests that all VAT collection and payment agents should be dedicated and appear honest

and that the government should endeavour to enhance the method value-added tax is collected

to the greatest extent possible.

Yakubu and Jibrin (2013) focus their research on the influence of the value-added tax

(VAT) on Nigeria's economic growth. The Johansen Co-integration test was performed to

analyze the data. The findings suggest that the value-added tax has a positive impact on

Nigeria's economic growth. The study believes that Nigerian officials should continue to

pursue this fiscal strategy in conjunction with other macroeconomic variables, as doing so will

benefit the Nigerian economy, particularly during times of global economic crisis.

The study conducted by Eyisi, Chioma, and Nwaorgu (2015), intended to determine the

effects of taxation on microeconomic performance in Nigeria between 2002 and 2011. The

information was gathered from secondary sources. The ordinary least squares regression

approach was used to evaluate three hypotheses. The findings imply that government revenue

from taxes will influence consumer spending and raise output production levels. According to

33
the report, to secure Nigeria’s quick economic growth, the government should encourage local

makers of output by providing tax advantages. Increases in import taxes are also used to

discourage the importation of foreign goods that compete with domestic goods, resulting in

more tax revenue, which boosts economic growth. Using 20-year time-series data, the

government should continue to be fair in determining consumer income taxes to encourage

consumers to spend. The central bank provided all of the data for the analysis.

Umeorah (2013) looked into the impact of the Value Added Tax (VAT) on Nigeria's

economic growth (GDP) and overall tax income. VAT was implemented in the country in 1994,

and its contributions to GDP and total revenue are being calculated. To do so, two hypotheses

were proposed: First, HO, that VAT has no discernible impact on GDP. The second is HO:

VAT has no major impact on total tax revenue. For the period 1994–2010, the basic Linear

Regression approach was used to examine time series relating to VAT, GDP, and Total

Revenue, with computations done with the help of SPSS. Regression research reveals that VAT

has a considerable impact on both GDP and total tax revenue. Both Null Hypotheses (Ho) are

therefore accepted.

The role of VAT in the development of the Nigerian economy was empirically explored

by Izedonmi and Okunbor (2014). From 1994 to 2010, time-series data on the Gross Domestic

Product (GDP), VAT Revenue, Total Tax Revenue, and Total (Federal Government) Revenue

were studied using both simple regression analysis and descriptive statistical methods supplied

from the Central Bank of Nigeria (CBN). According to the findings, VAT revenue and total

revenue account for up to 92 per cent of the variance in GDP in Nigeria. VAT Revenue and

GDP have a positive but insignificant relationship. Both economic indicators varied

significantly over time, however, VAT revenue remained relatively consistent.

34
 The study by Okwori and Ochinyabo (2014) examined the impact of the Value Added

Tax on revenue generation for Nigeria's long-term growth. The goal of the research is to

develop a new approach to analysing taxation based on the Income Productivity hypothesis,

which states that a large all-inclusive base can provide high revenue at a low cost. The study

discovered a positive 0.186 tax elasticity and buoyancy using log-linear data for regression on

the e-views 7.0 approach, which is ideal. This demonstrates that VAT is not only a legitimate

taxation mechanism in Nigeria, but it also has a high potential for generating sufficient money

for the government. However, the government inserted various exclusions, lavish concessions,

and arbitrary waivers as part of the package, particularly for unproductive ventures. This has

had a significant impact on the revenue base, resulting in large annual budget deficits and poor

fiscal performance. This has ramifications for the right VAT threshold, which raises worries

about abuse and excessive costs, resulting in revenue losses and a poor VAT response to GDP

growth. As a result, the report suggests that tax collecting technologies be taken into account.

That is the tax instruments' viability, administration costs, and compliance. In addition, specific

emphasis must be paid to automation, customer information, and the mechanisms used to

respond to GDP flexibilities. Holds unfavourably, causing the consumer price index to rise to

an unfavourable level.

2.3. Theoretical Framework

In this study combination of theories is adopted. These theories are Pareto Optimality,

Endogenous Growth and Revenue Productivity theories.

2.3.1. Pareto Optimality Theory

The first theory employed by this study is the Pareto Optimality theory to underpin the

impact of Vat on Nigeria's economic development. The idea is intimately related to the study

35
of economic efficiency and income redistribution, as well as how these factors affect people's

general well-being. In practice, it aims to give tools to help government policymakers achieve

positive social and economic results for the economy. The theory also aims to assess the costs

and advantages of economic changes, as well as to steer public policy toward improving

society's overall well-being (Bird and Gendron, 1993). Pareto Optimality ensures that societal

welfare is maximized by ensuring that no resources are redistributed to benefit one individual

without benefiting at least another. As a result of the signing of the 2020 Finance Bill into law,

the Nigerian economy is advancing towards Pareto Optimality.

2.3.2. Theory of Endogenous Growth

The concept of economic growth has been based on a variety of theories, including

Solow's (1956) neoclassical growth theory, which claimed that taxes can stifle economic

progress. It offered a transient growth model rather than long-term tax implications (Hall &

Jengenson, 1967). As noted in the endogenous growth theory, it has promoted sustainable

development by assuming that policy adjustments can result in savings (King &Rebelo, 1990).

Where there is a high degree of innovation, government policy, including taxation, can result

in a permanent increase in per capita output. The idea implies that government taxes and other

fiscal policies can raise per capita output over time (Okoror and Onatuyeh, 2018). Economic

expansion, according to Myle (2000), is the foundation of improved affluence. And, because

incremental growth is not limited to organic units, the Kuznets' economic growth viewpoint is

doomed to fail. The unified and new theory of economic growth lies beyond the neoclassical

and endogenous theories of economic growth. Galor (2005) proposed the unified theory of

economic growth as an offshoot of the endogenous growth theory. The Galor contribution

underlined that a thorough grasp of the mechanisms that brought developed economies to their

current condition is required to understand the issues of developing economies. On the other

36
hand, Romer (1994), as stated by Okoror & Onatuyeh (2018), popularized the new growth

hypothesis.

The unified growth theory included technology advancement into a market-functioning

model. According to the thesis, any economy's growth is driven by knowledge and technical

improvement. The study's theoretical framework was based on revenue productivity theory,

which is regarded by financial authorities as an important standard for judging a successful tax.

The two dimensions of revenue productivity agree that the tax base must be large enough and

that the tax system's operational costs must be lower than the money it collects. Adam Smith

also maintained that a tax system in which the expense of collection is higher than the realized

tax income makes little sense.

Hollander (1982), stressed this importance by prioritizing revenue in their three-part

split of public finance: "revenue, expenditure, and public debt. The main goal of instituting

VAT was to increase revenue, and the law establishing VAT confirms this. The look-inward

technique was coined by Ndukwe (1991). This is yet another crucial element for determining

whether or not a tax is good. The tax base must be large enough, and the cost of managing the

tax system must be low, according to both components of revenue productivity. In support of

the economic principle, the revenue productivity hypothesis believes that instituting a tax

system where the cost of collection is higher than the realized tax income makes little sense.

The theory also highlights the importance of having a large adequate tax base to cover all costs

at the lowest possible cost, as well as an efficient tax administration. Other theories, such as

socio-political theory, expediency theory, and benefit received theory, were also explored.

2.3.3. Theory of Revenue Productivity

Authorities in finance believed revenue productivity theory to be an important criterion

for judging a good tax. The two dimensions of revenue productivity agree that the tax base

37
must be large enough and that the tax system's operational costs must be lower than the money

it collects. Adam Smith also maintained that a tax system in which the expense of collection is

higher than the realized tax income makes little sense. Others, such as Hollander (1982),

stressed this importance by prioritizing revenue in their three-part split of public finance:

"revenue, expenditure, and public debt." The main goal of instituting VAT was to increase

revenue, and the law establishing VAT confirms this. The look-inward technique was coined

by Ndukwe (1991). This is yet another crucial element for determining whether or not a tax is

good. The tax base must be large enough, and the cost of managing the tax system must be low,

according to both components of revenue productivity. In support of the economic concept,

revenue productivity theory acknowledges that instituting a tax system where the cost of

collection is higher than the realized tax revenue makes little sense. The theory also highlights

the importance of having a large adequate tax base to cover all costs at the lowest possible cost,

as well as an efficient tax administration. Other theories, such as socio-political theory,

expediency theory, and benefit received theory, were also explored.

2.4. Gap in Literature

Based on the reviewed literature, the identified gap for the study is that there is the dearth

of studies on the chosen topics particularly, the effect of value added tax on the development

of Nigerian economy. This is the gap that the study has identified and intends to fill up.

38