Value Added Tax (VAT), also known as Sales and Services Tax (GST), is the type of Tax that is based on collection, based on increase in value, relating to a Product, or Services.
This is normally during the stage of Production or distribution. VAT has the major role in providing a State, the particular Percentage value of end Market Price. The problems of VAT are as outlined below:
1. Burden on Low Income Earners
Value-added Tax discourages the Poor, as percentage from their income, is deducted, to pay more than the Rich. This is because while the value of goods or services increases during distribution, consumers are made to pay more. Poor people with lesser Income, will be forced to pay, regardless of this increment.
This doubles the actual prices of goods and services. The Rich however, will not have the effect on their income, at all.
2. Tax Evasion
Certain Industries, like Small-scale Services, and even Government Organization avoid paying Value Added Tax. In Nigeria, Government Establishment, like Nigerian Ports Authority, have been accused of non-compliance in payment of VAT.
This is particularly common during cash transactions, where in most cases, collection of VAT is very weak. For example, a Building Construction Company, may offer to provide services, for cash, to a Home Owner. This will result in the Transaction, being done, without receipt i.e. without VAT. The Home Owner will pay lower cost of the services, and the Builder will avoid paying the Tax, and other costs.
3. Issue of Fraud
Most countries like Nigeria sign treaties, which involve Multi-lateral Trading, which allows VAT free, during movement of Goods. It could cause fraud, during Trading. One of such Fraud is known as Missing Trader Fraud. This was discovered earlier in the 1970s. It is when the person who commits the Act, charges VAT, on the sales of Goods.
Instead of paying the Tax for Government’s collection, absconds with the VAT. Theft of this kind of Tax has become a major problem in Countries like United Kingdom and even Nigeria.
4. Taking as Unfair Practice
Many Politicians and Economists, see the collection of VAT as an unfair Practice, in Trade. Countries like America and Nigeria who are members of World Trade Organization, (WTO), deliberated on removal of VAT on imported Goods, coming from other Countries.
The placing of VAT charge on imported Goods, brought from other Countries, is what most Economists, call ‘the Border Tax Disadvantage’.
5. Difficulty to Collect
Revenue from VAT, is not easy to collect because of the cost of Administration. Countries’ find it difficult to implement, because it may not favour Manufacturers or Wholesale Marketers. Difficulties, in collection, could be due to religious beliefs of a State.
For instance in Northern Nigeria, VAT Ban has been placed on Alcohol and Tobacco, because those Goods are prohibited. Countries are also finding ways to reduce costs of Trade, for easy access.
6. Absence of Refund Mechanism
Few Taxpayers especially in Nigeria, have been refunded excess Tax, even after Investigative Audit. For instance, under Section 10 of the VAT Act in Nigeria, says that all Oil and Gas Companies, should deduct VAT from invoices, payable by them.
These Companies, also has customers, of which they are expected to deduct from invoices and remit to Federal Inland Revenue Service. Taxpayers who have VAT deducted, will have it difficult to gain back excess money.
7. Not in all cases Recoverable
VAT in Nigeria has the feature of Sales Tax, unlike other Countries in the World. Input VAT is directly attributed from production and recoverable from Output VAT.
This makes other forms of VAT not recoverable. For instance, a manufacturer of Engine Oil, may recover input VAT from Products he buys for Materials like Base Oil, Packaging Materials etc. However, the same Manufacturer, may not recover Input VAT from Electricity Bills, during Production.
8. Expensive VAT charges on Bank Services
VAT mechanism is being charged on Bank services. For an economy that has high lending rate, VAT charges on Banking Services, such as Commission on Transfer, Interest, and other Banking charges. This has further increased the cost of doing business in countries like Nigeria. It makes Domestic goods less competitive in the international Market.
9. Unbalanced collection and distribution of VAT
In Nigeria, Lagos for instance collects VAT from Land use charges, from which it’s distributed evenly to different Local government areas of the State. This is the best form of Taxation.
Most States in Nigeria do not collect and evenly distribute Tax to its various Local Government. Most of the Tax is remitted to Federal Government. This leaves States in Nigeria, underfunded and not properly developed.
10. Inadequate VAT zonal centres for collection
Countries like Nigeria, have the infrastructure problem, due to lack of funding from Government. This has made it difficult to build for staff who would aid in collection of VAT. It is due to this problem that contributes to VAT not remitted or distributed properly, among States.
1. The Need for Proportional Tax
There is need for People who have higher income, to pay more, because they consume more. Government must insist that the more income you earn, the more percentage should be paid, in terms of VAT.
To better implement VAT, income Tax should be reduced, as well as any form of direct transfer payments, for Low income earners or groups. This will reduce huge burden, on the Poor.
2. The Need for better Enforcement to tackle Tax Evasion
Countries like Nigeria, need to enforce better enforcement mechanisms, like a tax Task force, which should be stated in their taxation Laws. This Force is to make sure that small scale businesses, and even Government Organizations, do not evade tax, especially VAT.
3. VAT Penalty measures to tackle Tax Evasion
It’s important for Countries, to decide suitable Penalty measures to combat Tax Evasion. For instance, UK, have implemented the Finance Bill 2017, to introduce a Penalty, for Tax Evasion, especially VAT fraud. For instance, the law states that Company Officers should be penalized for failing to pay Tax.
Countries, like Nigeria, must find better ways to ensure by creating better Legislative measures, to enforce that Company Officials or individuals, in Business Organizations, pay monetary compensation, as Penalty, for the Tax Evasion Offence, especially VAT.
4. Border Tax Adjustment to fix Unfair Practice
This is referred to Border Tax Adjustment. America adopted this kind of Tax, to encourage Domestic goods to sell in the International Market. This kind of Tax enables for lesser burden, being shifted from Domestic goods.
There is need for Countries like Nigeria, to enforce this Tax, to encourage better local Business Operations and attract Foreign Investment into the Country.
5. Better collection of VAT Tax
VAT can be properly collected, if there is proper registration of Foreign and Local Companies. This also applies to having adequate records of Private Small Scale Businesses and Government Organizations. There must also be better Enforcement Mechanisms, in Taxation Legislations, to ensure proper registration.
6. Better Refund Mechanism
This will be fair and conducive for Investors, who do Business, in a Country. There must be an effective System that ensures that Tay payers who have valid claims for excess Tax payments, be attended to, and refunded adequately. In Nigeria, there is need to amend the Section 17(1) of VAT Act, for better effective refund system.
7. Better Legislation to enforce recoverable VAT
Countries in European Union, have enforced laws, to enable Businesses to claim back VAT, paid on expenses, incurred while doing Trade in Member Countries. This can be applied in Nigeria.
8. Reduction of VAT charges on Bank services
This will reduce lending rates, that will attract doing Businesses and attract Foreign investors in Countries like Nigeria.
9. Better collection and distribution of VAT
Countries like Nigeria, must ensure VAT collection by ensuring that States generate revenue, and evenly distribute it to Local Governments. This is creates better usage of the Tax for Infrastructural Development.
10. Better provision of VAT Zonal offices VAT collection
There must be more centres available in States, to encourage better VAT collection.
Key Words: Vat, Services, Countries, Development, Refund, Penalty, Revenue, Bank, Legislation
Akoni Olasunkanmi, There are so many things wrong with Nigeria’s VAT Operation-Adedeji Tax Consultant> vanguardngr.com>accessed on 21st April, 2018.
Freund, Caroline (18th January, 2017), ‘Trump is Right: Border Adjustment’ Tax is complicated’ Bloomberg view, Bloomberg News>retrieved on 21st April, 2018.
Gillespie Patrick, Border Tax Adjustment: What you need to know> CNN Money> accessed on 21st April 2018.
Napley Kingsley, Budget 2017-35 New ways to tackle Tax avoidance and evasion>kingsleynapley.co.uk>accessed on 21st April, 2018
Ogunbiyi Ayoola, Problems of Value Added Tax Administration in Nigeria>academia.edu.> accessed on 21st April, 2018.
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