Effect of Value Added Tax on a Profitability of Manufacturing Firm a Study of Some Manufacturing Companies in Enugu State

Abstract

1.1     Background to the Study

There are quite a number of definitions of tax or taxation depending on the qualities it poses. In that vein, taxation is the process or machinery by which communities or group of persons are made to contribute in some agreed quantum and method for the purpose of the administration and development of the society (Adedeji, 2010).Taxation is the system of imposing levy by the government against the income, profit or wealth of the individual, partnership and corporate organization (Aluko, 2009).In the present dispensation of Nigerian economy, taxation has always been a means by which communities are provided with common facilities such as access roads, security, amongst others from time immemorial.In Nigeria, sales tax came into being in 1986. VAT introduction in 1993 heralded the abolition of sales tax.According to Anyafor, (2006), the rationale behind replacing sales tax with VAT is informed by the following reasons;

1. The base of the sales tax in Nigeria is narrow. It covers only nine categories of goods plus sales and services in registered hotels, motels and similar establishments,

2. The sales tax act targeted only locally manufactured goods,

VAT is a consumption tax and is based on the general consumption behavior of the people, thus the base is large.Igbonyi, (2008) citing the Act (then decree) section 7 (2) which states that VAT shall be administered and managed by the Federal Board of Inland Revenue Service (FIRS) but shared by the three tiers of government in Nigeria from 1999 to date as follows Federal Government: 15%

State Government: 50%

Local Government: 35%Value added tax (VAT) according to Isah (2011) is a consumption tax, levied at each stage of the consumption chain and borne by the final consumer of the product or service. The administration of VAT is relatively easy, unselective and difficult to evade. Countries all over the world, look for ways to boost their revenue, this facilitated many nations to introduce value added tax on goods and services. For instance in Africa, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, Nigeria. Evidence suggests that in these countries VAT has become an important contributor to government revenue (Oyebanji, 2010).Value added tax (VAT) according to Tabansi (2005) is a tax introduced in Nigeria in 1993 and implemented in 1994.