1.1       Background to the Study

Taxation is just one of the oldest economic occurrences whereby the cost of providing necessary services for the generality of a given set of individuals within a geographical is funded. In some nations, taxation is as old as their history. Traditionally, it can be meant that the Sumerian empire might be the starting point where taxes were levied and accounts for the utilization made (Abdulrazaq, 2010). The primary goal of taxation is to provide revenue required to finance the budget. This is proven by the attention that taxation had received for many years. The primary function of tax is to increase revenue, meet government expenses, and redistribute wealth and management of the economy (Ola, 2001). The significance of tax depends on its capability to generate revenue for the government. It also affect the consumption pattern of individuals and regulate the economy with its influence on important aggregate economic variables such as income, employment, prices of goods and services and a host of others (Fasoranti, 2013). Tax comprises the process whereby the government appropriates part of the income of private sector. The revenues so derived were used to finance government expenses. To name a few things, taxation is an essential tool of fiscal plan in the economy. It produces income for the government for the funding of economic activities capable of increasing the growth rate. It is a way of redistributing income and wealth amongst consumers.

The capacity of the tax system to create revenue impacts the services provided by the government. Regrettably, the Nigerian tax system has not been able to perform the expected function of revenue generation and regulation of income redistribution (Olaoye, Asaolu and Adewoye, 2009). This is consequently of the architectural and management problems of the tax obligation system. The machinery and procedures for implementing tax systems are poor, resulting into tax evasion and avoidance by many people and organizations (Akintoye, 2008). The resultant impact is low revenue generation.

Also, the need for more sources of revenue generation for the government cannot be over emphasized. Revenue continues to rise and fall as a result of price fluctuations in the world market. Furthermore, revenue from the non-oil industry has been grossly inadequate to satisfy public needs as a result of the increase in pressing social and economic needs. It was on the above claim that the Edozien-led committee was inaugurated in 1991 to assess the Nigerian tax system. The committee clearly determined the need to change the outmoded sales tax that was then administered by the state government. In the same vein a parallel study group was set up to analyze the feasibility of introducing Value Added Tax in Nigeria as an enhancement on the existing sales tax (Ijewere, 1993).

The major challenge of Nigeria's tax structure since independence has been its over dependence on oil revenue and a couple of other sources of tax revenue (Ayeni-agbaje, Akinleye & Olaoye, 2014). According to Wawire, 2000, Muriithi and Moyi, 2003, Wawire, 2003 & Wawire, 2006) the primary sources of tax revenue consist of: Personal Income Tax, Corporate Tax, Education Tax, Withholding Tax, Stamp Duties, Capital Gain Tax, Capital Transfer Tax (abrogated), Trade Taxes, Customs and Excise, Sales Tax/VAT and Income Tax. According to Ajakaiye (2009), VAT adds about 20% to overall revenue in the less developed nations. In Nigeria, the contribution of VAT to overall tax revenue has been on the increase since 1994. It increased from N7, 260m in 1994 to N58 million in year 2000 and by year 2006, its contribution was N221 million (Fasoranti, 2013).

VAT revenue is generated for distribution to the state and local government in Nigeria. Unlike the oil revenue whose market government has no control over. This helps to reduce over dependence on oil revenue, this ensures a sustainable economic development and growth. While the efficiency of VAT as a source of revenue in Nigeria is motivating, it implies difficult to find attempts to methodically evaluate the effect on VAT on the economy.

1.2       Statement of the Problem

VAT is an essential source of public revenue and has been commonly used by more than 120 nations and areas, with coverage from the under-development in Africa and Asia to the well-developed Western Europe and North America. It is declaimed as one of the most essential of the latter twentieth century and definitely one of the most breaking and with its considerable influence on the domestic economy and the government policies (Ping Z., 2006).

            Most under developed nations are presently dependent on external financial resources to fund their development activities. Consequently, their budgetary issues become more worsened. To adjust this scenario, these countries ought to make use of and strengthen their domestic financial resource base in order to bring about lasting development. Or else, it is hard to achieve extensive growth with dependence on external sources. External sources are insatiable and outside investment cannot be a dependable significant source of income to support the country.

            VAT in Nigeria is not a new thing any longer. It came into realization in 1994 and plays an essential role in the economy in terms of its contribution to ever-increasing domestic income and reducing budget deficit. Thus, domestic financing of development projects, its application at national and regional level is not free from multi directional bottlenecks both from the side of implementers and business community.

1.3       Objectives of the study

            The main objective of the study was to assess the problems and prospect of value added tax (VAT) by using Enugu State as a case study. However, the specific objectives included:

i)                   To determine whether the practice of VAT in Enugu State meet its objectives of generating more government revenue and encouraging investment

ii)                 To evaluate VAT's relevance in revenue generation, saving and consumption of the consumers in Enugu State.

iii)               To understand the impact of value added tax on economic growth in Nigeria

iv)               To examine the common problems that hinders the practice of VAT in Enugu State

v)                  To proffer alternative solutions to tackle the identified problem and facilitate the practice of VAT in Nigeria.

1.4       Research Questions

            This study is set to answer the research questions below

i)                   Does the practice of VAT in Enugu State meet its objectives of generating more government revenue and encouraging investment?

ii)                 What is VAT's relevance in revenue generation, saving and consumption of the consumers in Enugu State?

iii)               What is the impact of value added tax on economic growth in Nigeria?

iv)               What are the common problems that hinders the practice of VAT in Enugu State?

v)                  What are alternative solutions to tackle the identified problem and facilitate the practice of VAT in Nigeria?

1.5       Research Hypotheses

            The following assumptions which are subject to testing are made for the purpose of this study:

i)                   There is a significant impact on the practice of VAT in Enugu State to meet its objectives of generating more government revenue and encouraging investment.

ii)                 There is a significant relationship between VAT's relevance and revenue generation, saving and consumption of the consumers in Enugu State

iii)               There is a significant correlation between value added tax and economic growth in Nigeria.

1.6       Significance of the Study

            This study is significant in the sense that it will initiate the authority to give closer attention towards the administration and follow ups as well as conduct awareness creation programs to achieve the desired objectives.

            It can indicate the ways that the authority's officials have to do in the future based on the views of the taxpayers towards Value Added Tax.

The study will assist the government in policy formulation as it relates to value added tax. It will also help to broaden the nation’s revenue base thereby making it less dependent on oil export.

The study will be significant in providing a reference material for those who are interested in conducting further research on the area of Value Added Tax (VAT).

1.7       Scope of the Study

            This study deals with the analysis of problems and prospect of value added tax (VAT) in Enugu State. The data used for the analysis were gathered from the various departments of the Revenue Authority of Nigeria and Enugu State in particular. The purpose of making general analysis is to show how successful is the Enugu State Revenue Authority will practice the VAT and the way to alleviate the problems at the time of implementation. Since it is difficult to cover the whole VAT registered taxpayers and Tax officers of the Enugu State Revenue Authority, the researcher was forced to select representative samples of tax payers and employees of State ministries of transportation, works and sports.

1.8       Limitations of the Study

            It is obvious that adequate and reliable informal ion is important to undertake any kind of survey precautions. However, the reluctance and carelessness of some respondents while filling the questionnaires during data collection were considered as constraints to the study. In addition, since VAT is a current phenomenon, the absence of enough reference materials regarding the VAT practice and its problems in the authority can be cited as one of the limitations of conducting this study.