IMPACT OF VALUE ADDED TAX ON THE PERFORMANCE OF CORPORATE ORGANIZATIONS IN EBONYI STATE (A STUDY OF GUARANTY TRUST BANK ABAKALIKI)

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

In the last half-century, the Value Added Tax (VAT) has been widely implemented in many parts of the world. This popularity can be explained by the key features of the tax: neutrality and transparency. Tax neutrality is ensured by the mechanism of deduction of input tax through the supply chain, as far as the end consumer. This important feature helps producers to avoid the pressure for preferential nature of the product, number of transactions and structure of the distribution chain. With regards to international trade, VAT demonstrates neutral treatment of export, as VAT taxes exports at a zero rate, or is exempt from VAT with an allowance for input tax deduction. VAT does not affect the competitiveness of domestic firms to export, and is well suited to the demands of a globalizing economy. The transparent nature of VAT provides a simple method of calculation and payment for consumers. It is calculated for them at the point of sale and they make the payment as a part of the purchase price. Perceived as transaction-based, VAT has a high revenue-raising capacity and provides a large revenue source in almost all countries-members of the Organization for Economic Cooperation and Development (OECD), including Norway. Considering all forms of taxation, OECD Revenue Statistics (2016b) ranks Norway 9th out of 35 OECD countries with 38,1% in terms of the tax-to-GDP ratio in 2015. Tax policy reform is an area that has been widely revisited by academicians in recent times as there is an increasing need to curtail overdependence on foreign sources of funding government expenditure. This area of reform has been tackled differently by different researchers over the years. Whereas Joshi and Ayee (2009) focused their attention on tracing the history of various tax reforms instituted in less developed countries, Muriithi and Moyi (2014) emphasized the need for governments to effectively evaluate and choose between competing domestic funding sources for government budgets. In a similar vein, Tyran and Sausgruber (2013) called on policy makers to replace corporate income tax (CIT) with value added tax (VAT) as firms are unable to transfer the cash flow burden associated with CIT to the final consumer. These calls are based on the notion that firms require cash to carry on business. Indeed, Manisha (2012) asserted that cash is the lifeblood of every successful business organization. Even though emphasis on most tax policy reforms in less developed countries is shifting toward VAT implementation due to its purported ability to transfer the associated tax burden to the final consumer, little effort is exerted to discover the cash flow effect across various industries. Epstein and Jermakowicz (2010) described cash flows as “inflows and outflows of cash and cash equivalents”. A number of factors influence the cash flows of firms. Scherr (1989) argued that organizational cash balance is significantly influenced by its cash conversion cycle consisting of its inventories holding period, accounts receivables collection period, and accounts payables payment period. Prior studies relied on projected data to assess the impact of VAT on corporate cash flow (Murphy, 1991). In some instances, actual data was employed to ascertain the general cash flow effect of VAT on corporate bodies (Salia, 2016). Generally, a good tax system should improve government revenue without hampering private sector participation in infrastructure development (Ali-Nakyea, 2014). Private sector participation in infrastructure development is only possible if firms have cash to finance their activities. The purpose of this study is to ascertain the effect of VAT on the performance of corporate organizations in Nigeria.

1.2. STATEMENT OF PROBLEM

VAT was introduced in Nigeria following a study group set up by the federal government in 1991 to review the nation’s tax system. It was this group that proposed VAT and in that same manner, a committee was set up to conduct feasibility study on the implementation of the VAT (Thacker, 2009). The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose huge amount of revenue through the unwholesome practice of tax avoidance and tax evasion, these loss of revenue can change the fortune of many economy particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is overdue. The cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that, if left unchecked, the cost may soon outweigh the benefit or value derived from such operation and that will not be appropriate for the system. The rate of corruption on the part of tax officials is alarming as most of them connive and collude with supposed-tax- payer to evade and avoid tax. Sometimes, the tax officials are not properly trained on the modern ways of tax administration and most of the corporate organizations will fall if not properly checked. This study therefore attempts to address the issues of impact of Value Added Tax (VAT) on the performance of corporate organizations in Nigeria.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine the impact of value added tax on the performance of corporate organizations in Ebonyi state. Other specific objectives of the study are:

1. To examine the implications of cash flow of VAT remittance on corporate organizations.

2. To examine the relationship between Value Added Tax and the performance of corporate organizations.

3. To identify the major factors influencing an effective VAT administration in Nigeria.

1.4 RESEARCH QUESTIONS

1. What are the implications of cash flow of VAT remittance on corporate organizations?

2. What are the relationship between Value Added Tax and the performance of corporate organizations?

3. What are the major factors influencing an effective VAT administration in Nigeria?

1.5 RESEARCH HYPOTHESIS

H01: There are no implications of cash flow of value added tax remittance on corporate organizations.

H02: There is no significant relationship betweenValue Added Tax and the performance of corporate organizations.

H03: There are no major factors influencing an effective VAT administration in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study will assist the government in policy formulation as it relates to Value Added Tax and monetary policies. It will help to strengthen the operation of the relevant government agencies such as Federal Board of Inland revenue, Central Bank of Nigeria, Joint tax Board and others. This study will bring government attention to other sources of revenue apart from overdependence on revenue from petroleum. The study will be restricted to the aspect of Value Added Tax that falls under the jurisdiction of the Federal Board of Inland Revenue (FBIR), Federal Inland revenue Service (FIRS). Knowledge of the cash flow implications of VAT remittance on firms in different industries should enhance government decisions on the application of VAT rate to various industries without having adverse effects on corporate cash flow in various industries.It is also expected to aid corporate managers to determine which sectors to invest their scarce productive resources without being heavily hit by cash flow challenges resulting from VAT imposition.

1.7    SCOPE OF THE STUDY 

The study covers theimpact of value added tax on the performance of corporate organizations in Ebonyi state: A study of guaranty trust bank Abakaliki.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

Issues of sampling error: population specification error was limited as the researcher well understood the population to survey which was mainly selected staff from selected corporate organizationsin Ebonyi state.

Selecting error was also limited as the researcher went the extra lengths to get participation by initiating pre-survey contact requesting cooperation, actual surveying and post survey follow up with interviewing respondents.

However, in spite of the above mentioned limitations, efforts were being made by the researcher to ensure that the quality and the result of the study/work were not compromised.

1.8 DEFINITION OF OPERATIONAL TERMS

Tax: This is the money which government has legislated that adults should pay for the development of the country.

Tax compliance:  Refers to fulfilling all tax obligations as specified by the law freely and completely. Tax compliance means submitting a tax return within the stipulated period, correctly stating income and deductions, paying assessed taxes by due date and paying levied taxes.

VAT: A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

Corporate Organization: A corporate organization is one, which is governed by a body of people. They may be a board of directors or they may be elected politicians as in the case of municipal corporations or local authorities. It is a structured system with a common goal and an identifiable boundary delineating its function and purpose. A corporate organization has a distinct identity and generally will have its own mission statement or ethos which its members and staff should adhere to.