CHAPTER ONE

INTRODUCTION/BACKGROUND OF THE STUDY

1.0 Introduction

Tax plays important role in the growth of infant industries and economic development in general. In the low-income countries, the role of infant industries is critical in pushing the socio-economic development agenda of the country further. Therefore, alignment of the tax system to the environment specific industrial growth needs can be considered an important agenda for policy makers. Keeping this issue at focus, Micro- and small enterprises are an important force for economic development and industrialization in poor countries. It is increasingly recognized that developing enterprises contribute substantially to job creation, economic growth and poverty alleviation. The 2005 World Development Report suggests that creating “sustainable jobs and opportunities for micro entrepreneurs are the key pathways out of poverty for poor people” (World Bank, 2004 p19). High tax rates and tax complicity discourage the growth of infant industries and discourages private sector investment (Oludele and Emilie, 2012 p14). Thus, tax has an economical impact on the growth of the economy of a given country.

From economic point of view, taxes increase production cost of goods and services which would eventually leads to higher price of goods/services to the final consumers. On the other hand, the revenue collected from taxes represents the major funding source for governmental expenditures (Toder, E and Rosenberg, J. 2010 p8). If the tax structure is not adequately designed to the specific environmental conditions, it may create a greater burden to the tax-paying organizations and eventually affecting the final consumer due to the shifter ability of tax.

Assessing the impact of tax systems on small and medium enterprises and other infant industries is not simply a matter of looking at tax rates. Tax systems play an important role in encouraging growth, investment and innovation and facilitating international trade and mobility. For the enterprises, key considerations are to minimize administrative burden while ensuring compliance, including considering the drivers and impacts of operating in the informal economy

1.1 Statement of Problem

Despite the enormous revenue that flows into the government’s treasury, there are critics who argue that the incidence of VAT like any other indirect taxes is regressive. The reason is that poor people spend a large portion of their income on purchases some which carry VAT. Also, the attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose hung amount of revenue through the unwholesome practice to tax avoidance and tax evasion this loss of revenue can change the fortune of many economies. Particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is over due to the cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that if left unchecked the cost may soon outweigh the benefit or value derived from such operation and that will not the appropriate for the system. In Nigeria, VAT is one of the instruments the federal government introduced to generate additional revenue. Yet, most prominent Nigerians and interest groups had spoken against its introduction. It would appear that VAT is froth with some problems. It is in view of these problems that this study is set to examine the problems and prospects of the administration of VAT in Nigeria.

1.2 Objectives of the study

The following are the objectives of the study;

1. To find out the impact of VAT on economic growth and development?
2. To reveal the problems of efficient administration of VAT in Nigeria?
3. To reveal the prospects of the administration of VAT in Nigeria?
4. Does reduction of VAT rate stimulate private investment?
5. How does VAT influence economic growth stability?

1.3 Research Questions

The following research questions were formulated to achieve the objectives of the study;

1. What is the impact of VAT on economic growth and development?
2. What are the prospects of the administration of VAT in Nigeria?
3. Does reduction of VAT stimulate private investment?
4. How do VAT influence economic growth and stability?

1.4 Significance of the study

The following are the significance of the study;

1. It will make known the effect of VAT on economic stability, growth and development
2. It will help in determining if reduction of VAT stimulate private investment.
3. It will also bring to light the problems and prospects of value added tax administration in Nigeria.
4. Finally, the study will serve as a useful reference material for other researchers seeking for information on the subject.

1.5 Scope and limitations of the study

This study is limited to the problems and prospects of administration of value added tax in Nigeria, using Federal Inland Revenue Service as a case study.

1.6 Definition of Terms

Value added tax: this is a tax on the value of goods and services consumed in the home market. It is therefore referred to as a tax on spending.

Tax: is a compulsory levy imposed directly or indirectly by the government of the state against the income of individual, partnership or corporate organization for the purpose of providing social amenities for the people’s good.