INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The rising cost of government operations, combined with declining revenue, has placed considerable pressure on state governments in Nigeria to develop effective strategies for increasing their revenue sources. The challenges facing the national economy have created financial difficulties for all levels of government, with state governments experiencing significant reductions in their allocations from the Federation Account. Although the 1999 Constitution of the Federal Republic of Nigeria provides for several sources of revenue for the different levels of government, petroleum has remained the major contributor to government income since the 1970s, accounting for more than 80% of annual government revenue. The decline in international oil prices in recent years has consequently reduced the funds available for distribution to state and local governments (International Monetary Fund [IMF], 2023).

The need to reduce Nigeria's dependence on petroleum revenue has therefore become an important issue in the country's fiscal policy discussions. According to the IMF (2023), Nigeria has one of the lowest revenue-to-GDP ratios globally. General government revenue was estimated at only 7.3% of GDP in 2021, less than half the average recorded by countries in the Economic Community of West African States (ECOWAS). Nigeria was also ranked 191st out of 193 countries in this regard. Furthermore, non-oil revenue has remained around 4–5% of GDP over the past decade, creating concerns about the country's ability to maintain long-term fiscal stability. Since petroleum continues to account for approximately 90% of Nigeria's foreign exchange earnings, fluctuations in international oil prices expose government finances to considerable uncertainty (Natural Resource Governance Institute [NRGI], 2023). These conditions make the development of reliable alternative revenue sources increasingly important.

In response to the need to increase government revenue, the Federal and State Governments introduced external tax consultants through a programme known as the Accelerated Revenue Generation (ARG) Programme. The Federal Government also engaged consultants and monitoring agents to improve Value Added Tax (VAT) collection and compliance. More recently, President Bola Ahmed Tinubu established the Presidential Fiscal Policy and Tax Reforms Committee to review the country's tax laws and policies comprehensively. This initiative reflects the government's renewed effort to establish a more modern, effective and equitable tax system (Olika, Ukomadu, Ogidan, & Abiodun, 2024).

Value Added Tax has become an important source of government revenue in many developing countries and contributes significantly to tax collections in several economies around the world. Its successful adoption in different countries influenced Nigeria's decision to introduce the tax in January 1994 through VAT Decree No. 102 of 1993. The Federal Inland Revenue Service (FIRS, 1993) described VAT as a consumption tax that is relatively simple to administer and difficult to evade, which explains its widespread adoption. Recent revenue figures also demonstrate the growing importance of VAT to Nigeria's public finances. According to the FIRS, VAT collections reached ₦6.72 trillion in 2024, representing an 84.62% increase from the ₦3.64 trillion collected in 2023. During the same period, non-import VAT increased by 75.09% to ₦5.13 trillion, while import VAT rose to ₦1.59 trillion, more than twice its previous level (FIRS, 2025).

VAT operates as a multi-stage tax system in which businesses can deduct the tax paid on eligible purchases from the tax collected on their sales. It is an indirect consumption tax imposed at different stages of production and distribution. From the buyer's point of view, VAT forms part of the purchase price of goods or services. From the seller's perspective, however, the tax liability relates to the additional value created at each stage of the production or distribution process. A business therefore calculates the difference between the VAT collected on its sales, known as output tax, and the VAT paid on eligible purchases, known as input tax. The resulting amount is remitted to the government (Chartered Institute of Taxation of Nigeria [CITN], 2023).

Before the introduction of VAT, Nigeria operated a sales tax system under which tax was generally collected at the first point of sale. This meant that businesses involved in subsequent stages of distribution did not contribute in the same way to tax collection, creating opportunities for revenue leakages. VAT addressed this weakness by applying tax to the value added at different stages of production and distribution rather than relying solely on the initial sale. Since its introduction under VAT Decree No. 102 of 1993, the VAT rate has changed over time. It remained at 5% from 1994 until January 2020, when it was increased to 7.5% through the Finance Act 2019. Despite this increase, Nigeria's VAT rate remains relatively low compared with rates in several other countries and across Africa (Stripe, 2024). Available sectoral figures indicate that manufacturing, information and communication technology (ICT), and mining and quarrying contributed 58.8% of total VAT revenue collected during the first half of 2024, showing the significant contribution of these sectors to formal economic activities (Intelpoint, 2024).

The value added by a business represents the difference between the selling price of its goods or services and the cost of materials and other taxable inputs used in producing them. This makes VAT different from the traditional sales tax system, where the tax is usually collected and paid to the government once, at the point of final purchase. Under VAT, tax is collected, credited and remitted at different stages of the supply chain. This approach helps to minimise the problem of tax cascading, improves transparency and creates a system in which transactions can be traced through records of purchases and sales (CITN, 2023). The availability of this transaction trail is one of the major administrative advantages of VAT over earlier forms of sales taxation.

VAT Decree No. 102 of 24 August 1993 also identified categories of goods and services that were exempt from VAT in Nigeria. The exempt goods listed include exported goods, medical and pharmaceutical products, children's products, basic food items, commercial vehicles and their spare parts, books and educational materials, fertilisers, agricultural machinery, agricultural products, farming transport equipment, veterinary medicines, magazines and newspapers. The exempt services include exported services, medical services, educational performances organised by educational institutions, and services provided by community banks, mortgage institutions and people's banks. However, organisations operating on a not-for-profit basis are still required to pay VAT on their taxable purchases.

Recent studies have drawn attention to differences in the effects of VAT reforms across various sectors of the Nigerian economy. Yaska et al. (2024) found that VAT reforms have significant but unequal effects on financial performance. Their findings indicated that formal and technology-driven sectors, such as telecommunications and manufacturing, experienced improved outcomes, while informal and agricultural sectors faced difficulties associated with limited digital capacity and compliance challenges. Similarly, a sectoral study published in the International Journal of Research and Innovation in Social Science reported positive relationships between manufacturing VAT (MVAT), education VAT (EVAT) and economic growth. However, agriculture VAT (AVAT) had a significant negative relationship with economic growth. This unexpected finding suggests that taxation may create additional difficulties for an agricultural sector that remains largely informal and underdeveloped but is important to the livelihoods of many people (RSISINTERNATIONAL, 2025). These findings demonstrate the need for VAT policies that consider the different economic conditions and characteristics of individual sectors rather than applying identical approaches across the economy.

1.2 STATEMENT OF THE PROBLEM

Collecting different categories of taxes remains a major challenge in many developing countries, including Nigeria. The difficulty is particularly noticeable in the administration of taxes on income and consumption. One of the factors responsible for this situation is the lack of honesty and commitment to tax obligations among some taxpayers and tax administrators, who may place personal interests above their legal responsibilities. These problems are further worsened by institutional and structural weaknesses that have affected the Nigerian tax system for many years.

VAT has continued to face several administrative and policy challenges in Nigeria. In spite of its importance as a source of government revenue, its performance has been affected by weaknesses and inconsistencies in tax policies. Even after the National Tax Policy (NTP) received approval from the Federal Executive Council (FEC), it did not provide the clear and consistent direction required to achieve systematic tax reforms. This contributed to delays in the development and improvement of the country's tax system (Olika et al., 2024).

Although different reforms have been introduced, several problems remain in VAT administration. Previous studies have indicated that some Federal Inland Revenue Service (FIRS) personnel lack sufficient technical and administrative skills to manage VAT operations effectively. In addition, some businesses responsible for collecting and remitting VAT do not fully understand how the system works and may regard the tax as an additional financial burden. Poor accounting and record-keeping practices among business organisations also make it difficult to monitor VAT transactions and ensure proper remittance (Aruwa, 2008, as cited in Yeldu et al., 2023). These challenges create opportunities for non-compliance and VAT evasion, thereby reducing the revenue available to government.

Tax fraud is another major problem affecting revenue generation and economic development in Nigeria. It involves the deliberate manipulation or falsification of financial records and other relevant information to avoid paying the correct amount of tax. Such practices reduce government revenue and weaken the resources available for public services and economic development (Okoye & Akenbor, 2022). Adetiloye et al., as cited in IJRIAS (2025), reported that Nigeria loses more than ₦3 trillion annually through tax-related crimes, placing additional pressure on public sector financing. The International Monetary Fund (IMF, 2021) has also identified tax fraud as a major global challenge, with developing countries such as Nigeria facing a considerable share of the consequences.

Fraudulent practices by tax officials also contribute to the weaknesses in tax administration. When officials engage in tax fraud, government revenue is reduced, while honest taxpayers may lose confidence in the fairness of the system. If fraudulent conduct is not properly addressed, taxpayers who previously complied with tax laws may become discouraged and begin to evade their obligations. Such activities can also distort economic information and undermine the fairness and distributional objectives of taxation. Forensic accounting provides one possible response to this problem because it combines accounting knowledge with investigative techniques to identify and address fraudulent financial activities (Ijeoma & Aronu, 2023).

Another challenge is the low level of voluntary tax compliance among some taxpayers. Research carried out in Lagos State showed that tax education programmes could improve voluntary compliance by informing taxpayers about the economic and social consequences of non-compliance and explaining how government revenue should be used transparently and responsibly (Olowookere & Fasina, 2013, as cited in PMC, 2023). This suggests that public education and awareness programmes can contribute to improved VAT compliance and revenue collection.

The introduction of digital technologies into tax administration also offers opportunities for addressing some of these challenges. Research has suggested that digitalising tax administration can help reduce tax evasion and improve government revenue generation in Nigeria (Olasunkanmi & Adejuwon, 2024). The Institute of Chartered Accountants of England and Wales (ICAEW, 2022) similarly reported that tax digitalisation has contributed to improvements in revenue collection in Nigeria. However, the specific effects of digitalisation on VAT administration remain unclear and require further examination.

These challenges demonstrate the need to assess the contribution of VAT to government revenue in Nigeria. In particular, it is important to examine the effect of VAT proceeds on government revenue, the influence of federal tax policies, the efficiency of VAT administration and the role of public tax education. This study therefore seeks to investigate these issues and identify ways of improving VAT collection and its contribution to the revenue profile of the Nigerian government.

1.3 OBJECTIVES OF THE STUDY

The general objective of this study is to examine the contribution of Value Added Tax to the revenue profile of the Nigerian government.

The specific objectives are to:

1. Determine the extent to which VAT proceeds influence the revenue profile of the Nigerian government.

2. Examine the effect of Federal Government policies on the contribution of VAT to the revenue profile of the Nigerian government.

3. Assess the effectiveness and efficiency of VAT administration in Nigeria.

4. Determine the extent to which public education on the importance of tax payment influences VAT contributions in Nigeria.

1.4 RESEARCH QUESTIONS

The following research questions will guide the study:

1. To what extent have VAT proceeds influenced the revenue profile of the Nigerian government?

2. Do Federal Government tax policies have a positive effect on the contribution of VAT to government revenue in Nigeria?

3. How effective and efficient is VAT administration in Nigeria?

4. Does proper public education on the importance of tax payment influence the contribution of VAT to government revenue in Nigeria?

1.5 FORMULATION OF HYPOTHESES

Based on the objectives of the study, the following hypotheses are formulated:

Hypothesis One

H₀: VAT proceeds have no positive effect on the revenue profile of the Nigerian government.

H₁: VAT proceeds have a positive effect on the revenue profile of the Nigerian government.

Hypothesis Two

H₀: Federal Government tax policies do not significantly affect the contribution of VAT to the revenue profile of the Nigerian government.

H₂: Federal Government tax policies significantly affect the contribution of VAT to the revenue profile of the Nigerian government.

Hypothesis Three

H₀: VAT administrators in Nigeria are not effective and efficient in carrying out their responsibilities.

H₃: VAT administrators in Nigeria are effective and efficient in carrying out their responsibilities.

Hypothesis Four

H₀: Public education on the importance of tax payment does not significantly influence VAT contributions in Nigeria.

H₄: Public education on the importance of tax payment significantly influences VAT contributions in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The findings of this study are expected to have important implications for fiscal policy, tax administration and academic research in Nigeria. From a policy perspective, the study will provide useful information that may guide the development and implementation of more effective VAT policies. It will also contribute to discussions on how VAT can be fairly and efficiently applied to the value added by businesses at different stages of production and distribution. The findings are particularly relevant to Nigeria's current tax reform efforts, including the activities of the Presidential Fiscal Policy and Tax Reforms Committee established by the present administration (Olika et al., 2024).

The study will also provide a better understanding of important issues surrounding VAT administration. These include the comparison of VAT rates across countries, the fairness of the tax system, its possible effects on inflation, administrative expenses, compliance challenges, relationships between different levels of government and the impact of VAT on international trade. By examining these issues in relation to government revenue, the study will provide additional evidence for discussions among policymakers, tax administrators and researchers.

Furthermore, the findings will help identify factors that may contribute to weaknesses in VAT administration and suggest areas that require improvement. The study will also improve understanding of the role of VAT in government revenue generation and long-term fiscal sustainability. Considering Nigeria's historically low tax-to-GDP ratio and its dependence on unstable petroleum revenue, improving VAT administration is particularly important. The significant increase in VAT collections to ₦6.72 trillion in 2024, representing an 84.62% rise from the previous year, further demonstrates the growing importance of VAT to government revenue (FIRS, 2025).

The research will equally serve as useful reference material for students, researchers, lecturers and other scholars interested in taxation, public finance, revenue generation and economic development. It will contribute to existing academic discussions on the relationship between VAT, government revenue and economic growth in Nigeria and other developing economies. Future researchers may also use the findings as a basis for further studies on improving tax administration and strengthening public revenue mobilisation.

1.7 SCOPE OF THE STUDY

This study focuses on examining the contribution of Value Added Tax to the revenue profile of the Nigerian government. In line with the research objectives and available resources, the empirical investigation will be limited to the branch office of the Federal Board of Internal Revenue (FBIR) in Enugu and the Board of Internal Revenue Head Office in Enugu.

The study will make use of both primary and secondary sources of data. Primary data will be obtained from relevant officials and taxpayers within the selected geographical area, while secondary data will be sourced from the Federal Inland Revenue Service (FIRS) and the Central Bank of Nigeria (CBN) for the period covered by the research.

1.8 LIMITATIONS OF THE STUDY

Several challenges may affect the conduct and completion of this research. These include the following:

Scope Limitation: The study is restricted to examining the contribution of VAT to government revenue within Enugu State. As a result, the findings may not fully represent the situation in other states or geographical regions of Nigeria.

Inadequate Time: The time available for completing the research may be limited by other academic responsibilities, including lectures, personal studies and examinations. These competing activities may reduce the amount of time available for an extensive investigation.

Negative Attitude of Respondents: Some respondents may be unwilling to provide the information required for the study. Others may view the researcher with suspicion and refuse to disclose relevant details that could improve the quality of the research.

Delay in Responding to Questionnaires: Some respondents may fail to complete and return questionnaires within the agreed period because of other personal or professional responsibilities. Such delays may slow down the data collection process and create difficulties in obtaining sufficient responses.

Data Accessibility: Detailed administrative information on VAT collections at the state or local level may not always be publicly available or regularly published. This may limit the amount of secondary data accessible for the study.

1.9 DEFINITION OF TERMS

The following terms are explained according to their meanings and application in this study:

Value Added Tax (VAT): Value Added Tax is an indirect tax imposed on the value added to goods and services at different stages of production and distribution. Businesses collect the tax from customers on behalf of the government and remit the amount due after deducting eligible input taxes paid on business purchases. From the buyer's perspective, VAT is included in the purchase price, while from the seller's perspective, it applies to the additional value created during production or distribution (CITN, 2023). Unlike traditional sales tax, which is generally collected at the final point of sale, VAT is administered at different stages of the supply chain. Nigeria's standard VAT rate is 7.5%, following the increase introduced by the Finance Act 2019 (Stripe, 2024).

Revenue: Revenue refers to the income received by government from different sources, including taxes, fees, levies, royalties and other financial activities. These funds are used to finance public expenditure and provide essential services such as infrastructure, education, healthcare and security. Government revenue is therefore important in determining the financial capacity of a country or government to meet its responsibilities (Oluba, 2008). In Nigeria, revenue is distributed among the federal, state and local governments through the Federation Account Allocation Committee (FAAC) mechanism.

Tax Revenue: Tax revenue refers to compulsory payments collected by government from individuals, businesses and other taxable organisations under existing tax laws. It is an important source of non-oil revenue for Nigeria and includes direct taxes, such as personal income tax and company income tax, as well as indirect taxes, including VAT, customs duties and excise duties. Improving the collection of tax revenue remains an important priority for strengthening Nigeria's public finances (IMF, 2023).

Tax Administration: Tax administration refers to the procedures, institutions and systems established by government to identify taxable individuals and organisations, assess their tax obligations, collect payments, monitor compliance and process refunds where applicable. Effective tax administration helps government increase revenue, reduce tax evasion and maintain public confidence in the tax system. In Nigeria, the Federal Inland Revenue Service (FIRS) is the principal institution responsible for administering VAT and other federal taxes at the national level.

Tax Compliance: Tax compliance refers to the extent to which individuals and organisations fulfil their legal tax responsibilities. These responsibilities include registering with the appropriate tax authority, providing accurate tax information, submitting required returns and paying taxes within the stipulated period. Compliance is important for improving VAT collection and supporting economic development (Tandfonline, 2023). Factors that influence compliance include taxpayers' attitudes, their understanding of tax laws, the cost of meeting tax obligations and their perception of the fairness and effectiveness of the tax system.

Tax Evasion: Tax evasion is the illegal act of deliberately avoiding tax obligations through practices such as concealing taxable income, falsifying financial records or providing misleading information to tax authorities. It differs from tax avoidance, which involves legally reducing tax liabilities through permitted arrangements. In Nigeria, tax evasion poses a serious challenge to government revenue and economic development. Tax-related crimes have been associated with annual revenue losses exceeding ₦3 trillion (Adetiloye et al., as cited in IJRIAS, 2025). Factors that may encourage tax evasion include inadequate enforcement, low public confidence in government, poor tax education and concerns about tax rates.

Consumption Tax: A consumption tax is a tax imposed on the purchase or use of goods and services rather than directly on income or wealth. It is generally an indirect tax collected by businesses or other intermediaries and subsequently paid to government. VAT is one of the most widely used forms of consumption tax globally and accounts for a significant proportion of tax revenue in many countries (Wikipedia, 2024). Its tax base is generally linked to spending on goods and services.

Input Tax: Input tax refers to the VAT a registered business pays when purchasing eligible goods and services for its business activities. Under the VAT system, the business can deduct the allowable input tax from the output tax collected on its taxable sales. The difference between these amounts represents the VAT payable to the government. Where eligible input tax exceeds output tax, the business may be entitled to a refund, subject to applicable tax rules (CITN, 2023).

Output Tax: Output tax is the VAT charged by a registered business on the taxable goods and services it sells to customers. The business collects this amount on behalf of the government and is required to remit it after deducting allowable input tax credits. This process ensures that VAT is accounted for at different stages of the supply chain until the final consumer bears the tax.

Federal Inland Revenue Service (FIRS): The Federal Inland Revenue Service is the federal government agency responsible for assessing, collecting and accounting for taxes and other revenues due to the Federal Government of Nigeria. Its responsibilities include administering VAT, Company Income Tax (CIT), Petroleum Profits Tax (PPT) and other federal taxes. According to Intelpoint (2024), the FIRS recorded its highest revenue collection at the time in 2024, with non-oil tax revenue reaching ₦15.9 trillion.

Fiscal Federalism: Fiscal federalism refers to the financial relationship among the different levels of government, namely the federal, state and local governments. It covers the allocation of revenue sources, distribution of expenditure responsibilities and transfer of funds between the different levels of government. In Nigeria, fiscal federalism guides the sharing of revenue collected into the Federation Account. The distribution of VAT revenue has also generated discussions about fairness and the appropriate allocation of resources among states (REPS, 2023).

Tax-to-GDP Ratio: The tax-to-GDP ratio measures the amount of tax revenue collected by a country in relation to its Gross Domestic Product (GDP). It is used to assess the country's tax collection capacity and the extent to which economic activities contribute to government revenue. Nigeria has historically recorded a low tax-to-GDP ratio compared with many other countries, although some reported figures indicate improvements in tax collection efficiency in recent years (Intelpoint, 2024).

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