ASSESSMENT OF THE EFFECT OF VAT ON CONSUMPTION BEHAVIOR.
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ASSESSMENT OF THE EFFECT OF VAT ON CONSUMPTION BEHAVIOR.
Chapter one
INTRODUCTION
1.1 Background of the Study
Governments around the world require finances to successfully run and control their economic activities, and one source of revenue is taxation. Taxation can be defined in numerous ways. Fundamentally, it is a compelled charge on income because the decision to pay tax is not made by the taxpayers.
Taxation is the process or machinery by which communities or groups of people are required to contribute in some agreed-upon amount and way for the purposes of societal administration and development (Igbonyi, 2008).
As per Amaechina (1998:9), “taxation has been defined as a levy which a government imposes on the income of the citizens or corporation in a state for which the government gives no direct benefit to the taxpayer” and/or “a non-punitive but yet a compulsory levy by government on the properties and income of individual and corporation” .
Taxation has traditionally been a means of providing common facilities such as access roads, religious facilities, and security to communities in Nigeria’s current economic regime (Obadimi, 1994).
Taxation in Nigeria dates back to the early twentieth century, when the colonial masters ruled. The introduction became required due to the government’s massive workload. Under current Nigerian legislation, taxation is imposed by three levels of government: local, state, and federal.
The tasks include determining how the government can control its economic operations, achieving the desired degree of price inflation and deflation, and controlling the quantity of money. In Nigeria, the tax system has experienced considerable modifications in recent years.
The tax rules are being revised with the goal of eliminating obsolete sections while streamlining the main ones. Nigeria’s modern and well-regulated taxation system began in 1940 with the implementation of direct taxation decree No. 29 (CAP 54) of that year. Prior to the 1940 legislation, Lord Lugard instituted income tax in northern Nigeria in 1904.
It was referred to as the communal tax, and it underwent various revisions. The Federal Government established a study group in 1991 to analyse the entire tax structure, which came up with the notion of establishing VAT in Nigeria.
VAT was proposed, and a committee was formed to conduct feasibility studies for its implementation. In January 1993, the then-government decided to implement VAT by the middle of the year.
It was later rescheduled for September 1st, 1993, by which time the necessary legislation and preparations would have been completed. The practical implementation, however, did not begin until January 1994, following the enactment of Value Added Tax Decree No. 102 in 1993.
Value Added Tax (VAT) is a tax levied on commodities consumed domestically or imported into the country. The customer considers it a tax on the purchase price, whereas the supplier sees it as a tax on the value added to a product, material, or service (Tabansi, 2001).
Maurice Laure, joint director of the French Tax Authority, was the first to implement VAT on April 10, 1954, while German industrialist Wilhelm Van Siemens presented the idea in 1918. It was originally intended for major businesses, but it was eventually expanded to encompass all business sectors.
In France, it is the most important source of public finance, contributing for about half of total revenue (Thacker, 2009). VAT became implemented in Nigeria on January 1, 1994 (Noko 2006). Though Nigeria has recently joined the list of countries that use VAT, the country’s implementation of the policy is quite distinctive.
It is levied at a flat rate of 5% on some goods and services. As a reminder, VAT is not collected directly on your profits, as is the case with several other forms of taxation, implying that it is not a direct taxation
. As the name implies, it is a value-added tax on products and services. Value is added to a product throughout the manufacturing process, therefore VAT is paid on the amount of value contributed to the goods and services given
which is why VAT is due on goods and services ‘consumed’ by any ‘person’. Consumed implies used up in this context, and ‘any person’ refers to an individual, a business, or the government.
1.2 Statement of the Problem
Value added tax (VAT) changes and restructuring have received major attention worldwide. Perhaps this is due to its significant contributions to government revenue, growth, and development in many economies (Owolabi and Okwu, 2011).
Many countries have turned to higher indirect taxation as a reliable source of government revenue, and a few more are considering doing so. VAT, which raises consumption spending, is predicted to alter consumer behaviour.
The term consumption is inherently linked to the concept of VAT. As Plunkett (2008) stated, VAT normally applies to products purchased for consumption within a specific jurisdiction. In fact, Ghatak (2003) refers to VAT as a consumption-based tax.
Similarly, the European Commission (2000,) describes this tax as “a general consumption tax that is directly proportional to the price of goods and services.” According to Sopkova and Spisiakova (2007), VAT burdens the end customer through the cost of products and services.
Abed goes on to say that the majority of the VAT tax burden is borne by consumers. This implies that VAT has an impact on consumer prices and behaviour.
Countries’ VAT policies should consider the impact of VAT on consumer behaviour and prices. This study was conducted to investigate the impact of Value Added Tax on consumption behaviour.
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