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CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND TO STUDY

Value added tax is a concept in Nigeria introduction in January 1994.It antecedent contract to 1987 when structural adjustment programme [SAP]was introduced in the country. The architects of (SAP) which include the world bank and international monetary fund (IMF) had advised on total review of tax system in the country as a panacea for economic recovery.   The federal military government responded by setting up several committee in succession, which culminated in the introduction of VAT in 1994 through decree 102 promulgated in 1993.   Prior to the introduction of vat, sales tax had been in operation. Following recommendation from the committee, sales tax was abolished and VAT introduced as its replacement. The economic blue print behind SAP was generally to a tract more revenue for government. Specifically VAT apart from halting wide deficit in government account resulting from government expenditure running steadily ahead of revenue, also intend to:

·   Reduce the country dependence oil revenue.

·  Bring in a lot of money because by the incidence on the consumer who hardly know that he is paying the tax

·  Provide incentive for export and therefore enhance balance of payment position

·  Maintain even tax incidence across various stages of production

· Shift taxation toward consumption rather saving advocate of VAT had argued among other thing that the new system was desirable in economy because it will curb consumption of luxury and socially undesirable goods and services.

It was advocated furthers that VAT would eliminate the multiplicity of tax in the country. Moreover, it was argued that it will make room for more saving and subsequent investment since it, minimize consumption. VAT also was intended to promote export and discourage import because export will be given tax exemption while import will be taxed heavily. From the general objective of the new tax system, it was intended to revamp the national economy through improved revenue and attitude changes. The enabling law clearly stated the modalities for its implementation, which was rested at the hands of federal inland revenue services (FIRO), at its inception, it was opposed by section fo Nigeria especially manufacturers association of Nigeria it was argued by the opponents that VAT was regressive, discriminative of its unpopularity, this is not however to suggest that VAT may not have its shortcoming  VAT, has been in operation for five years, the players are several industries and services, which are publicly and privately owned. Five  years is enough period for any policy to make its impact, in view of this, the effect of VAT in Nigeria industries

1.2      STATEMENT OF PROBLEM

Prescribing economic and fiscal policy that will keep the economy of Nigeria afloat has been a tall and tough other various economic methods principles and policies were put in place by several leaders in the past, yet the economy has defiled all the solution value added tax (VAT) was one of such conscious economic policies put in place to get the economy going.The problems facing the economy were enormous and multi dimensional. To turn it around, the government in it fiscal and monetary policies always focuses on the private sector and the industries. Industries are at the center stage of implementation and execution of VAT. They are the manufacturers of good and provide of several whose products are taxed at each production stages. Although VAT may attract more revenue for the ultimate beneficiary the government, but what problem does it constitute to industries? Does it lead to profit or loss on the part of the industries concern? The driving force in any enterprise to the profit motive. In the quest by the government to attract more revenue, does the extra burden imposed on the consumers in firm of value added tax affect the profit of these industries and provide of services.

Apart from the impact of VAT on profit on the industries, it could equally affect the industries in liquidity, that is the ability of the industries to settle its debts as and when due. Moreover, another problem posed by implementation of Vat on industries is the effect on the volume of transaction of business in the industries. VAT, may have two sides of he same coin, it may contribute to the economy by attracting more money for the government while at the same time it may be a burden on the economy by reducing the spate of performance of industries. It is therefore pertinent to resolve the question by how, why and whether VAT in one way or the other affect the profitability, liquidity volume of transaction and overall performance of industries in Nigeria using NEPA  and ABC as reference points.

1.3  OBJECTIVE OF THE RESEARCH

The following objective will guide this research

·   To ascertain what value added tax (VAT) actually means as a tax system.

·   To ascertain the objective of value added tax (VAT)

·  To verify the effect of value added tax (VAT) in Nigeria industries especially as it concerns Nigeria economy

·  To ascertain the advantages and disadvantages of values added tax (VAT).

·  To X – ray the problem, prospectus and make recommendation of resolving issues in (VAT)

1.4  SIGNIFICANCE OF THE STUDY

The outcome of this research work the “effect of value added tax in Nigeria industries”, will be of immense significance in both practical and theoretical terms. Practically, different group stand to gain enormously from finding of this research.  First in this regard is the government of Nigeria government as the major beneficially of VAT and the regulator of social life and industrial and fiscal policies will use the finding of this research to smoothen the rough ends of VAT as it affect both the government industries and the public at large. The manufacturing sector will find the finding of this research beneficial in coping with whatever problem VAT has caused to the sector.            
The financial sector will equally benefit from the research work as it exposes the VAT items and highlight benefit accruing from imposition of VAT on certain securities. Foreign interest group especially prospective foreign investors and foreign financial bodies will find this work useful. It will not only explain to them what VAT is and what it is not and the benefit accruing from it but also provide them in platform for comparison on the operation of VAT in Nigeria and other countries. The general public will find the outcome of this research work interesting it will serve as an orientation to many of them may not be a square of the VAT system of tax in Nigeria. Many question unresolved about VAT on their minds will be their clarified by the outcome of this research work.Theoretically, the work contributes its quota on already existing knowledge about value added tax and the economy of Nigeria. It will offer a source of secondary data collection for many researches student. In this way, the research work will add to the scientific world.

1.5   SCOPE OF THE STUDY

This study will focus its searchlight on certain selected industries in Nigeria. These are national electric power authority (NEPA). Nigeria bottling company plc. Using the above industries as reference points the researcher will generalize on other industries in Nigeria specifically, the research will be centred on the effect of VAT on profitability of these industries adopting a longitudinal study overtime ranging from pre – VAT to VAT era. It will also focus on liquidity of these industries limiting it to the same pre – VAT and VAT period as periods of analysis. It will equally focus on the effect of VAT on volume of business transaction in these industries using the same range of pre VAT period. In all selected establishment, the research consult with those in account department and top management who are in position to supply the information needed for the research. It is the intention of the research to carry out a comprehensive study on this subject matter.

1.6   LIMITATION OF THE STUDY

However the research envisages that the following constraints may hinder the work. Time is a big factor that will constrain the research work. As a result time factor may not permit the research is a student who combines the rigorous academic activities with the research work. As the result, the factor may not permit a effective coverage of target areas. Also inadequate finance may constrain the research work. The researcher is a student who depends on scarce economic resources coming mainly inform of feeding money. The research work is an expensive project which financial involvement might not be met by the student. Another limiting factors may be the uncooperative attitude of respondent it a known fact that staff are not free to release information about their organization for fear of loosing their job. Inadequacy of data may also constraints the research. VAT is a result there is not enough publication of that subject matter.

1.7    DEFINITION OF TERMS

Effective This mean the likely come of implementation of value added tax (VAT) on these selected industries. It can either positive in which case it enhance the economic funtune of industries or negative in which case it hinders the economic fortune of  industries. Profitability   This means the ability of the selected companies to make profit. Liquidity   This means the ability of the selected companies to settle its debts as at when due.      
Volume of transaction   This means of the level of business transaction of this companies

VAT invoice   This means invoice given to register person to collect VAT      
Incident of tax   This means the body of the tax on people.      
Input tax   This refers to tax collected by the register VAT able person.      
Physical policies   This refers to financial rules and regulation made by the government

Devaluation   This refers to reduction in value on the country currencies in relation to foreign country.      
Tax evasion   This refers to avoidance of payment of tax by taxable adult.
Tax base   This refers to income tax that will be taxed      
Tax net   This means tax environment.      
Tax rate   This refers to the data at which tax is access.

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