CHAPTER ONE

INTRODUCTION

Nigeria is a developing country and an emerging economy whose exports are largely dominated by crude oil. However, the country is also endowed with several natural resources, including natural gas, tin, iron ore, coal, limestone, lead, zinc, and fertile agricultural land (Oto & Wayas, 2024). Nigeria occupies approximately 923,768 square kilometres and has one of the largest populations in Africa, with over 200 million people (National Bureau of Statistics [NBS], 2023). Despite its natural and human resources, the government continues to face the challenge of reducing its dependence on crude oil revenue. This has made taxation, particularly Value Added Tax (VAT), an increasingly important source of government revenue and a means of supporting long-term fiscal sustainability (Akinola & Akinrinola, 2023).

Emerging economies such as Nigeria are generally characterised by large populations, extensive territories, and ongoing development programmes. These programmes require significant investment in infrastructure, including electricity generation facilities, telecommunications networks, and other essential public facilities (Adeyemi, 2022). Such countries have introduced economic policies aimed at encouraging growth, expanding international trade, and attracting investment. As a result, the need to finance development through reliable domestic revenue sources, including VAT, has become increasingly important (Oto & Wayas, 2024).

The provision of infrastructure and other public services requires substantial financial resources. Value Added Tax remains one of the major sources of revenue available to the government for financing these responsibilities. It also serves as an alternative source of income as the federal government continues its efforts to diversify revenue away from crude oil (Yaska, Akpan, & Ologunla, 2024; NBS, 2023).

1.1 BACKGROUND OF THE STUDY

Governments around the world have adopted different methods of generating the financial resources required to carry out their increasing responsibilities. Taxation is one of the oldest and most important sources of public revenue in modern societies. It also serves as an important instrument for achieving economic stability and supporting government policies (Akinola & Akinrinola, 2023; Jooji, Oyekan, Momoh, & Onuh, 2023).

Tax is a compulsory payment imposed by the government or an authorised public institution on individuals, businesses, income, consumption, and the production of goods and services. These taxes include personal income tax, which covers salaries, business profits, interest, dividends and royalties; company income tax; petroleum profits tax; capital gains tax; and taxes on capital transfers. Taxation has three major characteristics. First, it is a compulsory payment imposed by the government on individuals and organisations within its jurisdiction, and failure to comply may attract legal penalties. Second, the revenue generated is used to provide public services and facilities for the benefit of society, including hospitals, schools, roads, and other utilities. Third, tax payment does not entitle a taxpayer to receive a particular service directly in return for the amount paid (Lawal, Igbekoyi, & Dagunduro, 2024).

Value Added Tax was introduced in Nigeria through Decree No. 102 of 1993 and became effective on 1 January 1994, replacing the previous Sales Tax system. Subsequent reforms, particularly those introduced through the Finance Acts from 2019 to 2023, have brought changes to VAT administration. One major change was the increase in the VAT rate from 5% to 7.5%, which took effect in February 2020. Other reforms addressed issues relating to the taxation of digital transactions and economic activities (Federal Ministry of Finance, 2024; Jooji et al., 2023). Under the VAT Act of 2004, the revenue was allocated among the three levels of government, with the federal government receiving 15%, state governments receiving 50%, and local governments receiving 35%.

Value Added Tax is a consumption tax imposed on transactions involving the sale and distribution of taxable goods and services at different stages of production and distribution. From an accounting perspective, it represents the additional value created when a producer processes raw materials and transforms them into finished products. VAT is ultimately borne by the final consumer, even though it is collected at different stages of the production and distribution process (Oto & Wayas, 2024). Existing studies have identified VAT as an important source of government revenue, particularly when its administration covers the retail stage of economic activities. Its revenue performance may also provide an indication of economic activity because consumer purchasing power and spending generally influence the amount of VAT generated (Akinola & Akinrinola, 2023; Yaska et al., 2024).

Recent empirical studies have reported that VAT contributes positively to real gross domestic product, per capita income, investment, and government revenue in both the short and long term (Akinlo, Adebanjo, & Samuel, 2024). Despite these contributions, problems such as manual administrative procedures, corruption, and weaknesses in tax collection continue to affect the effective administration of VAT (Olasunkanmi & Adejuwon, 2024). To address some of these challenges, the Federal Inland Revenue Service (FIRS) has introduced digital platforms and other technological measures intended to improve transparency, strengthen tax administration, and minimise revenue leakages (FIRS, 2022).

1.2 STATEMENT OF THE PROBLEM

Tax compliance remains a major challenge in Nigeria because some individuals and business organisations are unwilling to fulfil their tax obligations. Many taxpayers would prefer to avoid paying taxes whenever possible, resulting in substantial government revenue losses through tax avoidance and tax evasion. Some studies have reported that the Federal Inland Revenue Service loses significant amounts of revenue annually because of tax evasion. Estimates cited in the literature include an annual loss of approximately $20 billion and a reported loss of $178 billion through multinational tax evasion over a ten-year period (Jooji et al., 2023; FIRS, 2022).

Several factors have been associated with tax non-compliance in Nigeria. These include weaknesses in the structure of the tax system, inadequate public understanding of the purpose of taxation, insufficient taxpayer education, ineffective tax regulations, inflation, corruption, and a lack of confidence in government officials (Jooji et al., 2023; Olanrewaju & Bamidele, 2024). Research has also indicated that when taxpayers lack confidence in government institutions and tax authorities, their willingness to comply voluntarily with tax obligations may decline (Ayoola, Olatunji, & Adebayo, 2023).

Another concern is the limited number of registered companies that actively fulfil their tax obligations. According to figures attributed to the FIRS, out of more than 440,000 companies registered in Nigeria, only about 120,000 were paying taxes, leaving more than 320,000 companies outside the tax-paying group (FIRS, 2022). This situation represents a potential gap in government revenue collection. In addition, the administrative and operational costs associated with tax collection, including their social and economic implications, may reduce the overall benefits of the tax system when they become excessive (Lawal et al., 2024).

These challenges raise concerns about the effectiveness of VAT administration and its contribution to government revenue and economic development. Issues such as improper practices during tax assessment and collection, possible differences in financial statements submitted for different purposes, and declining public confidence in government officials may encourage tax evasion and weaken revenue generation.

It is therefore necessary to examine the effects and administration of Value Added Tax in the Nigerian economy, with particular reference to the Federal Board of Inland Revenue (FBIR), in order to understand the factors affecting tax compliance and the contribution of VAT to government revenue.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effects and administration of Value Added Tax in the Nigerian economy, with particular reference to the Federal Board of Inland Revenue.

The specific objectives are to:

1. Determine whether improper practices between FBIR staff and assessed taxpayers contribute to tax evasion.

2. Examine whether differences exist between financial statements presented at Annual General Meetings (AGMs) and those submitted to the FBIR for tax administration.

3. Determine whether a decline in public confidence in government officials contributes to tax evasion.

1.4 RESEARCH QUESTIONS

To achieve the objectives of this study, the following research questions are formulated:

1. To what extent do improper administrative practices between FBIR staff and assessed taxpayers contribute to tax evasion?

2. Are there differences between the financial statements presented at Annual General Meetings and those submitted to the FBIR for tax administration?

3. To what extent does a decline in public confidence in government officials contribute to tax evasion?

4. Is Value Added Tax an important source of revenue for the government?

1.5 RESEARCH HYPOTHESES

Hypothesis One

H₀: Improper administrative practices between FBIR staff and assessed taxpayers do not contribute to tax evasion.

H₁: Improper administrative practices between FBIR staff and assessed taxpayers contribute to tax evasion.

Hypothesis Two

H₀: There are no significant differences between financial statements presented at Annual General Meetings and those submitted to the FBIR for tax administration.

H₁: There are significant differences between financial statements presented at Annual General Meetings and those submitted to the FBIR for tax administration.

Hypothesis Three

H₀: A decline in public confidence in government officials does not contribute to tax evasion.

H₁: A decline in public confidence in government officials contributes to tax evasion.

1.6 SCOPE AND SIGNIFICANCE OF THE STUDY

The scope of this study is restricted to the Federal Board of Inland Revenue in Ebonyi State. It focuses on the effects and administration of Value Added Tax, particularly the issues associated with tax compliance, tax evasion, administrative practices, and the contribution of VAT to government revenue.

The study is significant because it adds to existing academic discussions on VAT administration and tax evasion in Nigeria. Students, researchers, and academics in taxation, accounting, economics, and public finance may find the findings useful as reference materials for further studies.

The findings may also benefit taxpayers, business organisations, and government institutions responsible for administering taxes and other statutory levies at the federal, state, and local government levels. Furthermore, the study may provide useful information for discussions on improving VAT administration and strengthening the Nigerian tax system, particularly in relation to the reforms introduced through the Finance Acts of 2019–2023 and the proposed tax reforms referenced for 2025 (Federal Ministry of Finance, 2024; Jooji et al., 2023).

1.7 LIMITATIONS OF THE STUDY

This research focuses on VAT and its contribution to the economic development of Nigeria. However, certain challenges affected the extent of information and investigation that could be covered during the study. These limitations include the following:

a) TIME CONSTRAINT

The requirement to complete and submit the research within the approved academic period limited the amount of time available for extensive investigation, fieldwork, and data collection.

b) FINANCIAL CONSTRAINT

Insufficient financial resources restricted the extent of fieldwork and the collection of relevant information. This affected the level of research activities that could be carried out.

c) POOR RECORD-KEEPING

Inadequate record-management practices in some relevant institutions created difficulties in obtaining detailed information. The limited availability of records in libraries and statistical offices also affected the amount of data that could be accessed for the study.

1.8 OPERATIONAL DEFINITION OF TERMS

To ensure a clear understanding of the concepts used in this research, the following terms are defined according to their relevance to the study.

1. ASSESSMENT AUTHORITY: This refers to an authorised body or institution appointed by the tax board to determine the amount of tax payable by an individual or organisation.

2. EFFICIENCY AND EFFECTIVENESS: Efficiency refers to the ability to achieve the best possible relationship between the resources used and the results obtained during tax administration. Effectiveness refers to the extent to which established tax collection objectives are achieved. A tax collection system is considered effective when a substantial proportion of assessed taxes is successfully collected (Lawal et al., 2024).

3. FEDERAL INLAND REVENUE SERVICE (FIRS): This refers to the government agency responsible for administering federal taxes in Nigeria. The agency has introduced digital systems to improve tax assessment and collection, promote transparency, and reduce revenue losses (FIRS, 2022).

4. INCOME: In this study, income refers to any amount recognised as income under the relevant tax laws. It includes salaries, business profits, dividends, royalties, and interest earnings (ITMA, 1961).

5. TAX ARREARS: These are outstanding tax liabilities arising from assessments made in previous periods but paid during the current assessment period.

6. TAX EVASION: Tax evasion refers to the deliberate and unlawful act of concealing, misrepresenting, or withholding relevant financial information to reduce or avoid the payment of legally required taxes. It is a criminal offence under tax laws. Unlike tax avoidance, which involves the use of lawful methods to reduce tax liabilities, tax evasion involves intentional non-compliance with tax obligations (Jooji et al., 2023). Studies have identified corruption, weak enforcement, and a lack of public trust as important factors associated with tax evasion in Nigeria (Ayoola et al., 2023; Lawal et al., 2024).

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