An important landmark in tax reform in Nigeria was the adoption of the value-added tax (VAT )in January through the VAT Act No. 102 of 1993, but its implementation actually began in January 1994.

Since its introduction, 15 of the 42 sections of the Act have been amended. Replacing sales tax, VAT was originally imposed on 17 categories of goods and 24 service categories. Such items as basic foods, medical and pharmaceutical products, books, newspapers and magazines, house rent, commercial vehicles and spare parts and services rendered by community and people’s banks, however, were VAT-free.

Value added tax (VAT) has become a major source of revenue in many developing countries. In sub-Saharan Africa, for example, VAT has been introduced in Benin, d·Ivoire, Guinea, Kenya, Madagascar, Mauritius, Niger, Senegal, Togo and, lately, Nigeria.

Evidence suggests that in these countries, VAT has become an important contributor to total government tax revenues.

According to the past president of Chartered Institute of Taxation of Nigeria (CITN), Mr Kayode Naiyeju, ‘VAT accounts for about 30% of total tax revenues in d·Ivoire, Kenya and Senegal.

The oil producing countries are not excluded from the list of countries introducing this tax handle.

Research shows that VAT has been in effect in Ecuador and Mexico since at least 1973, and by 1983 accounted for 12.35% and 19.71% of total government revenues in these countries, respectively.

The introduction of VAT requires a lot of preparation because of the complexity in the implementation of VAT which requires the cooperation of the tax-payers.

In January, 1994, when the implementation of the tax began, ` there were no adequate machinery, public enlightenment and consumer education. The problems were created by inadequate preparation and lack of understanding of the workings of VAT coupled with administrative bottleneck.

Although prices of VATable goods are expected to rise, businesses are taking advantage of the existence of VAT to increase prices of goods and services arbitrarily. The excessive price increase has further led to higher inflation in Nigeria.

The VAT rate in Nigeria at 5% is considered too low because of high cost of administration. At 5%, the cost, as a proportion of revenue, will be very high.

Data on cost of introducing and administering VAT are not yet available but it is expected to be significant.

It is believed that for most countries, a VAT is probably not worth introducing at less than 10% .Specifically, the traditional incidence studies tend to concentrate on the issue of who pays the tax, so that the question of who gains or loses from the tax, whose income and welfare are reduced or increased, and whose employment opportunity is threatened or promoted are not sufficiently considered.

For efficient administration of VAT, businesses must keep proper source documents and books of accounts. Unfortunately, it is the very problem with most enterprises in Nigeria The invoicing of all sales, the need to compel businesses to keep records of transactions and encourage consumers to demand receipts for every purchase have become mandatory.

According to the Federal Inland Revenue Service (FIRS, 1993), the idea of introducing VAT in Nigeria originated from the report of a study group set up by the federal government in 1991 to review the entire tax system.

Subsequently, a committee was set up to carry out feasibility studies of its implementation. It should be noted that the committee was not requested to carry out any analysis of the impact of the tax, neither was there an active debate among the various interest groups such as the organised private sector, labour unions and academics as well as other professionals through which certain aspects of the impact might have been considered and taken into account in its design and implementation.

Eventually, government agreed to introduce VAT but the actual implementation did not commence until January 1994 after the promulgation of the Value-Added Tax Act No. 102 of  1993.

According to the VAT Act, a VATable organisation is an existing manufacturer, distributor, importer or supplier of goods and services. The following are the main features of the Nigerian VAT.

First, it is a single rate (5%) VAT, which makes it easier to administer. Second, it adopts the input-output tax mechanism, which makes it self policing.

Specifically, although it is a multiple stage tax, it is expected to have a single eff ect on consumer prices and should not add more than the specified rate to the consumer price no matter the number of stages at which the tax is paid.

  In essence, it is the official view that the VAT should not be cascading whatsoever since the tax liability of a VATable organisation is the difference between VAT on output and VAT on inputs.

In other words, the credit method of collection should eliminate any cascading effects. Third, all goods are VATable with the exception of the following (FRN, 1993): Medical and pharmaceutical products; Basic food items such as peas, beans, yam, cassava, maize, rice, wheat, milk and fish; Infant food items; Books, newspapers and magazines; Educational materials (laboratory equipment);

Baby products such as carriages, clothes and napkins, as well as sanitary towels; Commercial vehicles and spare parts, tractors, public transport passenger vehicles, motorcycles, tanks and other armored fighting vehicles, and bicycles.

Agricultural equipment such as those for soil preparation or cultivation, harvesting or threshing, milking and dairy machinery, and poultry keeping machinery; Veterinary medicine equipment; and Fertilizers and farming transportation equipment.

Similarly, all services are subject to VAT except: Medical and health services; Services by community banks, people’s banks and mortgage institutions (interest earnings on loans by commercial banks and premiums paid to insurance companies are not VATable).

Performances conducted by educational institutions as part of learning; Social services such as orphanages, charities and fire fighting; Pure postal services; Religious services; Non-commercial cultural services; Overseas air transportation; and Public telephone and telegram services (excluding business or commercial services).

The following other goods and services are also exempted from VAT: salt, water, salary or wages from employment, director’s emoluments, hobby activities, private transactions such as sale of domestic or household articles, vehicles, personal effects or private motor vehicles, and residential house rent.

For avoidance of doubts, these goods and services are exempted from VAT but their inputs are VATable and they cannot claim credit for such input taxes.

On the other hand, all exports are zero-rated, implying that exporters do not collect VAT on exports but they can claim credit for VAT paid on their inputs.

All imports are VATable, whether imported raw materials or finished goods.

Moreover, VAT on imports is calculated on the total value of the total cost, insurance and freight (CIF) plus customs duties and all other charges on imported goods.