The Implication Of Nigeria Value Added Tax (VAT) On The Payers



Value added tax has been given various definition by various tax professional , expert and tax institution . The aim of this chapter is to review related literature as written by the mentioned tax concerned persons on VAT and matters relating to it.

[widget id=”related-posts-by-taxonomy-2″]

According to Ani Wilson Uchenna ; companies income tax in Nigeria (2001). He defined VAT as a multistage tax levied and collected on transaction at all stages of sales and description , furthermore he also defined VAT as a tax levied on the value added to a particular goods or services at each stage.

VAT is a type of indirect tax which is based on consumption and which is final borne by the final consumer who eventually  pays the tax.

Also according to John Orjih ‘financial management volume ii (2001). Defined VAT as a tax on the value of added to a product.

He further argued that VAT was not based on the total value of the goods being sold but on the value added which is the difference between  the value factor services and the materials that the firm purchased as input and the value of the output .

Patrick O.M  ‘ chambers 20th centaury dictionary’ London (1983). Gave   an interesting definition of VAT as tax based on the rise in value of a proud due to manufacturing and marketing processes’ is what Hanson J.L in his book ‘ A  textbook of economics’ 7th edition London (1997) referred to as “Distribution”

In Patrick’s repletion of “manufacturing and marketing processes” it include “intermediate stage of the chain of distribution to the exclusion of indivisible articles , of trade such as the service of lawyers , architects, insurance companies etc.

In his definition they are net connected with the sale of tangible goods but are variable .

Sir ,Odoh N.N “introduction to public finance” A Nigeria approach Enugu (2004). Advocated that VAT is a tax that combines features of both single and multi- stage taxes which applies to each transaction but only to the value added.

He said that the intention of VAT is that the final consumer will hear the tax burden.

Hanson J.L (1979). In his study same VAT as a tax adopted by many countries on consumers expenditure and replace purchase tax in great Britain from which it differ in being imposed at each stage of production and distribution. He went further to show that VAT is applied over the whole filed of consumer transaction services  as well as goods , with few exemption

Related to Patrick’s view is the definition given by the new Collins compacts dictionary (1991) that VAT is a tax on difference between costs of articles made from them.

Trueth and Trueth “economics time mirrow” (1987).stated that VAT is a tax imposed on the value added to goods at each stages of production.

The shout coming to their definition being the exclusion of services. In Europe where they based their study, VAT has applied only to consumption goods not investment goods. Since one can invest on the production of goods and the value of such goods as well as the services of those in service rendering investment can the taxed .

The Trueth’s opinion  that VAT does not apply to investment is a deviation from the general understanding of the concept of VAT.

Long man dictionary contemporary English (1981) said that VAT is a multi stage sales tax based on the difference between  the net costs of basic materials added to the value of production i.e. goods and services at each  stages of production.

According to the new American Webster handy college dictionary by imposition and extraction which in turn is used to fulfill government obligation to the people.

VAT in other words is an instrument of government to get the government to contribute to the means of rendering essential services that promote national development , if only the two sides will strive to make all things equal on the long run

In each of these cases , VAT is seen to apply to goods , services or both at different percentage rating , thus , most of the works carried out in Europe , especially great Britain was VAT as applying to goods while some saw it saw applying to goods and services .

This shows that VAT in Britain might have been for goods only for sometime before service was included or there is misconception by some authors

Also Paul A . Samuel son and William D . Nordhaus “economics Singapore”(1992). Saw VAT as a tax levied upon a firm as a percentage of it’s value added. They went further to state that VAT collect tax at each stage of production .

Richard L. an introduction to positive economics: London (1982). A renounced economist and an author in his own point of view defined VAT as the difference between the value of factors or services and materials that the firm purchases as inputs and the value of it’s output

He further attached more attribute to VAT as representing the value that a firm adds by virtues of it’s own activities.

VAT in all it’s ramification is consumption tax paid or collected in stage defending on the 6input made and which tax burden is borne by the final consumers on the goods consumed or services enjoyed.



As was stated in Encyclopedia Britannica (1973-74) VAT first evolved in France in 1954, to overcome the inequality of the turnover , tax that had been in force it was later adopted in a local government of a state in Australia .

The VAT was first proposed in 1918 by a German industrial executives , was discussed sporadically for another three decades but the world recognition of VAT as a potential source of revenue began with the ‘shoup mission “ recommendation of 1949 in France and used by the Japanese prefectures [one of the local authorities ].           

A modified version of VAT was adopted in 1953 by the state of median in the united state of America and repealed in 1967 . it was officially adopted by the French national government in 1954 .  The fiscal and Finance committee of the European economic community [EEC]   In 1954 , the fiscal and finance committee of the European Economic Community [EEC]   In 1962 recommended it to its members ; Belgium , Denmark , Germany , Netherlands , Norway and Sweden have since followed suit .

At present , it is one of the conditionality for membership of the European Economic Community as to  unity the tax structure of member state . It is also seen by the EEC as a comprehensive tax to levy on all sort transaction whether at the retail , wholesale or manufactures  , level as an indirect tax that depends on the value of what is made and sold not on the income of the maker .

The value Added Tax procedure of collection was  instituted by the law of fractional payment  through the Degree of 26th September ,1948 in France . The aim being to replace the manufactures , sales  Tax underwent series of modification which gradually transformed the gross national product type of tax to consumption type of tax . The legislation  of September 3rd and October 7th 1853 in France introduced the first  tax burden on burden on building construction .

Other countries of the world are now considering the replacement  of consumption tax with the value Added Tax , In south America ,it has been involucel in Argentina , brazil and Columbia, Africa countries like cote divorcé  , Malagasy Republic ,Zambia Kenya ,have VAT already as part of their tax system .

In Nigerian ,state tax as operated under Decree No.7 of 1986 , government way  to value Added tax following the federal government  acceptance of the recommendation of a study group set up by the federal Government in 1991 to review the enter indirect Tax system in the economy . A committee to carryout feasibility  studies on the implementation of VAT immediately evolved . following the reports of the bodies , the abolition of sales tax as operated covered a relatively few categories of goods and  service in registered  hotels , motels and similar establishment .

Proper introduction and operation of value  Added  Tax into the Nigeria Tax system came into force by this promulgation of  Decree NO 102 of 1993. Thy  tax  was expected to go into operation as modified value Added Tax [ MVAT] alongside with sales Tax from 1st September to 30th November 1993 : This period know as the transitional period to  allow  everybody to adjust to the  have tax ,emerged from the  committee issued by the joint tax board at the end of its 77th meeting held at the legate  Holed , Katsina state from the 15th to the 17th of September 1993 , This was because the first and second commencement  dates of January  and 1st July 1993 respectively were unattainable due to inadequacy enlightenment on the masses . Also the December 1st commencement date was because  of the same reason of poor enlightenment on the public given a little push to 1st January  1994 .

According to tell magazine [1993] ,the value Added Tax would have to want once again ,until January  1994 , sources at the federal inland revenue services [FIRS] ,said the shift . this time is also as a result of ‘poor a enlightenment on the masses .

However , despite the shift in commencement date the full operation  of the tax started in January 1st 1994 , the strangeness of the  new tax to Nigeria  not with standing , up till this moment the usefulness , incidence , complication , implication of the   new tax system VAT remain illusory  to the greater percentage of Nigeria  populace ,  this stem on the fact that Nigeria is yet to embrace the  tenants of the  planned economy business wise , the effect of this also  tells on other  development sectors that make  for a great  notions, only affected  few who operate open door goods and service  business are involved  unconditionally in value Added  Tax and like  the notions tax evasion syndrome   which still lives with us , the collection and    payers must be properly drilled  and schooled to know the dangers and implication  of  VAT evasion on the country’s economy .



Most of the countries where VAT is practiced either had problem with the existing income Tax structure had need to promote  export oriented  industries or wanted to diversity ,  modernize and  broaden their revenue  source  .

The choice in Nigeria is modified  value  Added  Tax [MVAT] . A full –scale  Value Added Tax in Nigeria which will extend  from the manufacture  through the  wholesale to the retailer and to ultimate consumer has been thought to be impracticable at present because it is likely to be full of evasion and avoidance of VAT due to poor record keeping , the large number of illiterate, small retailers  and small business the preponderance of the informal sector in the distribution chain and the likely high cost of collecting VAT from large number of variable retailers .

These made the 1991 study group recommend and the government to accept that for now and to immediate future a modified VAT should be introduced , levied and collected at manufacturers /wholesalers and importers level for goods but that unlike under the current sales tax services should be made subject to the MVAT and that only a single rate of MVAT should be levied .

In essence, government should do everything now to evolve all that contain in the dictionary of true democracy and democratic rule without jungle politics or politics of tongue in order to achieve all the set goals.

Since modified VAT is a tax on consumption and Nigerians having a very high propensity to consume a very enormous with high rate of voluntary compliance of potential  revenue yield is sure to make at under solid propagation and administrative platform .



Sales tax and VAT are both indirect taxes which are taxes levied on expenditure of goods and services , they are sometimes known as outlay taxes since they are paid only when particular purchases are made with purchases sales and VAT forming the most importance revenue

The rational behind replacing sales tax with the VAT is informed by a number of factors and consideration, notable:

  1. The base of the sales tax in Nigeria as operated under decree No 7 of 1986 is narrow , it covers only nine categories of goods plus sales and services in registered hotels , and similar establishment. The narrow base of the tax negates the fundamental principles of consumption tax which by nature is expected to cut across all consumable goods and services VAT base on broader and include most professional services and banking transaction which are high profit generating sectors.
  2. Only local manufactured goods were targeted by the sales tax decree of 1986 , although this might not have been the intention of the law. VAT is neutral in this regard. Under VAT a considerable part of the tax under the new VAT , local manufactured goods will not be placed at a disadvantage relative to import.
  • Since VAT is based on the general consumption behavior of the people the expected high yield from it will boost the fortunes of the state government with  minimum resistance from the payers of the tax.

Unlike sales tax VAT has a refund of credit mechanism which ensure that it is the ‘output tax less input tax’ that constitute Vat payable, it is the equivalent of the VAT paid by the final consumer of the products that will be collected the government , it is the value added that is faced under VAT.

For example , suppose that there is a manufacturer (M) a wholesaler (W) and a retailer (R) all of whom are involved in the process of supplying a goods to be final consumer (C) .

Assuming that there is 5% VAT on all goods and services. Suppose the manufacturer provide his own raw materials and pays no VAT on them because he dose not purchase any raw materials , since VAT is paid by the final consumer whatever  VAT is payable by the manufacturer or by the wholesaler is usually returned to him or he is credited with the amount and deducted from any VAT to which he is viable .

Leave a Reply

Your email address will not be published. Required fields are marked *