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ASSESSMENT OF THE EFFECT OF VAT ON CONSUMPTION BEHAVIOR
CHAPTER ONE
INTRODUCTION
Background of the Study
Value added tax (VAT) is a consumption tax levied at each stage of the consumption chain and borne by the final consumer of the product or service. The collection of VAT is comparatively simple, indiscriminating and hard to avoid. World over, major attention is on (VAT) with regards to reforms and reorganization. Perhaps, this has been owing to its sizeable contributions to government revenue, growth and development of many economies (Owolabi & Okwu, 2011). As a veritable source of government revenue, many countries have shifted and a few others are considering a shift towards a higher indirect taxation. For the fact that Value Added Tax rises spending on consumer goods, it is anticipated to affect the behaviour of the consumers. This implies that VAT changes price and consumption behaviour of the consumer. Consequently, cost effects of Value Added Tax and the resultant consumer behavioural pattern are issues of concern to different nations of the world and their Value Added Tax law.
Countries all over the world look for ways to boost their revenue, and this has necessitated the introduction of value added tax on goods and services in many nations of the world. For instance, in Africa, VAT has been introduced in Benin Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, and Nigeria. Available data supports that, in these nations, Value Added Tax has turn out to be the main provider of government income (Ajakaiye, 2000; Shalizi & Square, 1988; Adereti, Adesina, & Sanni, 2011). Nigeria introduced VAT in 1993; however its full implementation began on 1st January, 1994 (Umeora, 2013). Before its introduction, there was in existence, the Sales Tax. The underlying principle for replacing Sales Tax with Value Added Tax was as a result of some factors and considerations; noteworthy amongst these are the narrow nature of the Sales Tax in Nigeria as covered by Decree No. 7 of 1986. It covered only nine categories of goods as well as sales and services in registered hotels, motels and similar establishments.
VAT was designed such that the burden is borne by the final consumer. Since VAT can be applied on goods as well as services it has also been termed as goods and services tax (GST). A limited number of goods and services are exempted from Value Added Tax. Some of the goods excluded from Value Added Tax are drugs, pharmaceutical, essential foodstuff, books, learning materials, journals etc. The exempted services include medical services, services provided by micro finance banks and mortgage institutions, plays and performances conducted by educational institution as part of learning, as well as the supply of educational goods and services incidental to education by an educational institutions (Source: VAT Decree as Amended (2007)).
Value Added Tax is an expenditure tax that is fairly simple to control and hard to avoid, and it has been accepted by many nations worldwide (FIRS, 1993). There is evidence so far that Value Added Tax is an important source of income to the Nigerian government. For example, in the past 19 years, states and the Federal Government spending power has been boosted by over N4.273trillion Value Added Tax (VAT) revenues, Business Day resea rch has shown (The Economist Ng, 2012).
Value Added tax has wide scope since the cause of disagreeable variation can be effectively controlled under effective supervision (Leach, 2003) as sited in Onaolapo, Aworem and Ajala (2013). Income gotten from VAT can help to enhance the economic base of any country. This, nevertheless, has to do with the exploitation of the potentials and adoption of the kind of expenditure tax that will identify the tax payers as value minimizing persons and as such protect their evasion behavioural pattern. The main factor to consider before choosing Valued Added Tax choice among tax type are; review of managerial possibility of each alternative and other income sources, its comparative income possibilities, its level of deliberate conformity, its relative neutral stance, its fairness and the effectiveness of these criteria, one can effortlessly spot the main reasons behind countries replacing (RST) with VAT (Onaolapo et al, 2013).
VAT revenue is generated for distribution to the states and local governments in Nigeria. This helps to reduce over dependence on oil revenue; this assures a sustainable economic growth and development. Despite the fact that the effectiveness of Value Added Tax as a means of income is impressive, yet it‟s not easy to try to methodically appraise the influence of Value Added Tax on customer‟s expenditure therefore, the need for this study.
CHAPTER ONE
INTRODUCTION
Background of the Study
Value added tax (VAT) is a consumption tax levied at each stage of the consumption chain and borne by the final consumer of the product or service. The collection of VAT is comparatively simple, indiscriminating and hard to avoid. World over, major attention is on (VAT) with regards to reforms and reorganization. Perhaps, this has been owing to its sizeable contributions to government revenue, growth and development of many economies (Owolabi & Okwu, 2011). As a veritable source of government revenue, many countries have shifted and a few others are considering a shift towards a higher indirect taxation. For the fact that Value Added Tax rises spending on consumer goods, it is anticipated to affect the behaviour of the consumers. This implies that VAT changes price and consumption behaviour of the consumer. Consequently, cost effects of Value Added Tax and the resultant consumer behavioural pattern are issues of concern to different nations of the world and their Value Added Tax law.
Countries all over the world look for ways to boost their revenue, and this has necessitated the introduction of value added tax on goods and services in many nations of the world. For instance, in Africa, VAT has been introduced in Benin Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, and Nigeria. Available data supports that, in these nations, Value Added Tax has turn out to be the main provider of government income (Ajakaiye, 2000; Shalizi & Square, 1988; Adereti, Adesina, & Sanni, 2011). Nigeria introduced VAT in 1993; however its full implementation began on 1st January, 1994 (Umeora, 2013). Before its introduction, there was in existence, the Sales Tax. The underlying principle for replacing Sales Tax with Value Added Tax was as a result of some factors and considerations; noteworthy amongst these are the narrow nature of the Sales Tax in Nigeria as covered by Decree No. 7 of 1986. It covered only nine categories of goods as well as sales and services in registered hotels, motels and similar establishments.
VAT was designed such that the burden is borne by the final consumer. Since VAT can be applied on goods as well as services it has also been termed as goods and services tax (GST). A limited number of goods and services are exempted from Value Added Tax. Some of the goods excluded from Value Added Tax are drugs, pharmaceutical, essential foodstuff, books, learning materials, journals etc. The exempted services include medical services, services provided by micro finance banks and mortgage institutions, plays and performances conducted by educational institution as part of learning, as well as the supply of educational goods and services incidental to education by an educational institutions (Source: VAT Decree as Amended (2007)).
Value Added Tax is an expenditure tax that is fairly simple to control and hard to avoid, and it has been accepted by many nations worldwide (FIRS, 1993). There is evidence so far that Value Added Tax is an important source of income to the Nigerian government. For example, in the past 19 years, states and the Federal Government spending power has been boosted by over N4.273trillion Value Added Tax (VAT) revenues, Business Day resea rch has shown (The Economist Ng, 2012).
Value Added tax has wide scope since the cause of disagreeable variation can be effectively controlled under effective supervision (Leach, 2003) as sited in Onaolapo, Aworem and Ajala (2013). Income gotten from VAT can help to enhance the economic base of any country. This, nevertheless, has to do with the exploitation of the potentials and adoption of the kind of expenditure tax that will identify the tax payers as value minimizing persons and as such protect their evasion behavioural pattern. The main factor to consider before choosing Valued Added Tax choice among tax type are; review of managerial possibility of each alternative and other income sources, its comparative income possibilities, its level of deliberate conformity, its relative neutral stance, its fairness and the effectiveness of these criteria, one can effortlessly spot the main reasons behind countries replacing (RST) with VAT (Onaolapo et al, 2013).
VAT revenue is generated for distribution to the states and local governments in Nigeria. This helps to reduce over dependence on oil revenue; this assures a sustainable economic growth and development. Despite the fact that the effectiveness of Value Added Tax as a means of income is impressive, yet it‟s not easy to try to methodically appraise the influence of Value Added Tax on customer‟s expenditure therefore, the need for this study.
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