Value Added Tax (VAT) And Price Stability In Nigeria

Project and Seminar Material for Economics

Project and Seminar Material for Economics


Value Added Tax (VAT) is a consumption tax on the value added to a product in the process of production. Like all other indirect taxes, it is a tax that targets the final consumer of goods and services. The main purpose of VAT in Nigeria is to increase government (state and Local) revenue from the non-oil sector thereby reducing the government’s dependence on oil sales and the budget deficits. In this research work my aim is to determine the stabilizing roles of VAT in the Nigerian economy. The study employed multiple regression analysis as a method of study using the ordinary least square (OLS) regression technique in estimation. Result of the analysis revealed that price level is not stimulated by VAT in Nigeria.

Chapter One


1.1 Background of the Study

The introduction of value added tax(VAT) in Nigeria came from the report of the study group set up by the federal government in 1991 to review the entire tax system in the set up to carry out feasibility studies on its possible implementation.

In January 1993, the federal government agreed to introduce VAT by the middle of the year. But due to some logistic reasons for the relevant legislation to be made and proper ground work done. It was shifted to January 1st 1994.
VAT replaced the former existing sales tax carried out by the different state3 governments, the wages first implemented in 1986 and operated under the federal government legislated degree no.7, of 1986. VAT replaced the sales tax because of the following reasons.

VAT is neutral in that a considerable part of the new tax is to be realized fr5om imported goods unlike the sales tax that targets only locally produced goods based on the general consumption behavior.

VAT is a consumption tax on all economic operation in the country including imports and has a zero rate for export. The federal Inland Revenue service (FIRS) is the main body charge with the administration of VAT in Nigeria custom service (NCS) for the collection of VAT on imports and the help of VAT on the locally produced goods and services.
VAT has a single low rate of 5% with a zero rate for exports and is borne sole by the final consumers of VAT able goods and services like any other indirect tax, some essential goods and services are exempted from VAT that is they are not VAT able

The main reasons that led the introduction of VAT are to be referred to as the main gains of VAT and they included.

  1. Need for increased government revenue due to increased public expenditure.
  2. Reduction in the over dependence on sales of crude oil with its attendant uncertainties in the international market.
  3. Making the tax equitable for all the masses by curbing the rice, thereby reducing the gap between the very rich and the very poor.
  4. Reducing the rich’s materialistic tendencies for unnecessary luxury goods.

1.2 Statement of the Problem

In terms of contributions the total federal collection revenue, VAT revenue at the time of inception in 1994 was anticipated to be much larger, indicating that Nigeria then may soon join the growing list of developing countries here VAT contributes at least 20% of total government revenue . While the performance of VAT as a source of revenue in sub-Sahara Africa and Nigeria in particular is clearly encouraging, it remains difficult to find attempts to systematically asses the impact of VAT on these economies (Ajakaiye, 1999). Nevertheless, include (1989) opines policy makers considering the adoption of VAT should be interested in the macroeconomic impact, especially on price, output, income and consumption.

Economically, one expect the price of VAT able goods to rise, however beyond this expected rise, business are taking advantage of the existence of VAT the increas4e price of goods and services arbitrarily.
The excessive price increase according to Aruwa (2008) has further led to higher inflation in Nigeria. Given the foregoing seeks to asses the macroeconomic impact at VAT on price level in Nigeria.

1.3 Objective of the Study

The study seeks to examine the following specific objectives.

  1. To ascertain if any significant relationship exist between VAT and price stability in Nigeria.
  2. To determine the impact of VAT on price level in Nigeria.

1.4 Hypothesis

  • Ho1: There is no significant relationship between VAT and price level in Nigeria.
  • Ho2: The impact of VAT on price level in Nigeria cannot be determined.

1.5 Scope of the Study

The study intends to focus on the Nigeria economy with the period 1994 to 2010. The choice of range of period is informed by the fact that VAT policy implementation in Nigeria began by 1994. Quarterly data will be employed to
extend the sample size, but where this is not available; we will have no choice than to use annual data for the study.

1.6 Significance of the Study

Finding from the study will be of immense benefit to policy makers in assessing the performance of VAT on the stability of price level in Nigeria.

Secondly, it will serves as a reservoir of knowledge for further.

Chapter Five

5.0 Conclusion and Recommendation

5.1 Conclusion

The result of extensive investigation carried out under the study revealed that contrary to the view by private firm owners that VAT raised the prices of their products, which genders inflationary outcome, Value Added Tax (VAT) actually has no inflationary consequence in Nigeria as speculated.


  • Inflation in Nigeria is stimulated to a very high extent by openness
  • Increased tax revenue from VAT does not give rise to inflation in Nigeria.

5.2 Recommendation

Based on the above stated findings from the investigation carried out, the study makes the following recommendations.

  • Although openness is inevitable in today’s global economy, sequencing of faces of liberalization is necessary to check possible inflationary consequences in Nigeria
  • The study advocate for relative increase in the overall share of VAT within the framework of fiscal policy whenever expansionary fiscal measures is adopted for achieving the goal of economic growth.

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