The Impact Of Value Added Tax On Nigerian Economic Growth (1994-2010)

Project and Seminar Material for Economics

The Impact Of Value Added Tax On Nigerian Economic Growth (1994-2010)

Abstract

This paper analyzed empirically the impact of Value Added Tax (VAT) on economic growth in Nigeria from 1994-2010. Data was collected from Central Bank of Nigeria (CBN) statistical bulletin. Ordinary Least Square techniques was used to estimate the model, which reveals a strong positive significant impact of VAT on economic growth in Nigeria. Therefore, this study recommends that the VAT should not be high on the infant industries, so as to enable them grow.

Chapter One

Introduction

1.1 Background of the Study

Value Added Tax (VAT) has become a major source of revenue in many developing countries like Nigeria. In sub Sahana Africa for example, VAT has been introduced in Benin Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo. Evidence suggests that in these countries VAT has become an important contribution to total government tax revenue; (Ajakaiye 2000) the value Added Tax decree was established in 1993 and was imposed on 1994. Value Added Tax (VAT) in an ideal form of taxation in Nigeria tax system and has significantly contributed to resources mobilization as well as capital formation to the economy. It has positive and significant impact on revenue mobilization in Nigeria; it also has positive relationship with consumption.

VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries worldwide (Federal Inland Revenue Service 1993). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example, actual VAT revenue from 1994 was N8.189 billion which is 36.590 higher than the projected N6 billion for the year. Similarly, actual VAT revenue for 1995 was N21 billion compared with the projected N12 billion. In terms of contribution to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1%) of total revenue in 2008.

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 assures a sustainable economic growth and development. While the performance of VAT as a source of revenue in Nigeria is encouraging, it means difficult to find attempts to systematically assess the impact on VAT on the economy.
Recent research work on the impact of taxation on the Nigeria economy impact up all the various taxes together without isolating VAT. How and in what direction VAT has be affecting the Nigeria economy? And the relationship of VAT on economic growth? Findings answers to these and other similar questions is the main trust of this paper.

1.2 Statement of the Problem

The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose hung amount of revenue through the unwholesome practice to tax avoidance and tax evasion this loss of revenue can change the fortune of many economies. Particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is over due to the cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that if left unchecked the cost may soon outweigh the benefit or value derived from such operation and that will not the appropriate for the system.

In Nigeria, VAT is one of the instruments the federal government introduced to generate additional revenue. Yet, most prominent Nigerians and interest groups had spoken against its introduction. It would appear that VAT is froth with some problems. For the purpose of this paper work we shall examine the implication of VAT on revenue generation in Nigeria and how VAT affect the economic growth in Nigeria.

1.3 Objective of the Study

The following are the objectives of the study:

  1. To know the impact of value added tax on economic growth.

1.4 Research Questions

The questions below are to be answered in the course of this work. If at the end of this research, appropriate answers are provided to these questions, the aim of this research shall have been realized. The questions are: –

  1. What is the impact of VAT on economic growth?
  2. To what extent has VAT curbed tax evasion?
  3. To what extent has the government been able to generate excepted revenue?
  4. Is the administration of VAT in Nigeria preceded to be efficient?
  5. To what extent is VAT a good replacement of sales tax?
  6. Is VAT a fair and equitable tax?
  7. What impact does VAT have on the revenue generation of the government?
  8. Has the institution and implementation VAT affects con consumption habits of consumer.

1.5 Hypothesis

  1. H0: Value Added Tax is not expected tax evasion
    H1: Value Added Tax is expected tax evasion
  2. H02: Tax payers are not perceived to be favoredwith VAT system
    H2: Tax payers are perceived to be favoredwith VAT system
  3. H03: Tax payers do not believe the merits of VAT affect their response to payments.
    H3: Tax payers do believe the merits of VAT affect their response to payments.

1.6 Significance of the Study:

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. Every research work has to be significant. It must either create some form of new knowledge, or add to an already existing body of knowledge. To this end, this study will serve as information to the government to known the perception of the tax payers on VAT. It will also reveal areas in the VAT system that require correction in order to achieve a more effective and efficient tax system

1.7 Scope and Limitation of the Study

The scope of the study covers the impact of value added tax on Nigeria economic growth, but in the cause of the study, there were some factors that hinders the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Finance:

Limited Access to the required finance makes it difficult to get all the necessary and required information concerning the activities.

1.8 Operational Definition of Terms

VAT:

This is a consumption Tax which is charged 5% on goods and services, which are not exampled by the VAT degree of 1993.

Vatable Goods:

These are goods and services, which VAT is paid

Economic Growth

Economic development is the process by which a nation improves the economic, political, and social well-being of its people. The term has been used frequently by economists, politicians, and others in the 20th and 21st centuries

1.9 Organisation of the Study

For the information presented in a research work to be clearly understood and appreciated, a systematic and chronological presentation of the work is of greater importance. In keeping with this, this research has been organized and presented in five chapters;

  1. Chapter One: This is the introduction chapter and it informs the reader on what the entire study is about. According to Ochei C.A. (1994:5) the chapter specifies the problems that prompted the study, the assumptions of the study and the operational definition of terms.
  2. Chapter Two: This contains the review of all related literature, or previously existing materials or the subject. This chapter establishes clearly the nature of the already existing body of knowledge, thoughts, ideas, concepts on the subject thereby highlighting the new knowledge to be generated by the research.
  3. Chapter Three: information on the method employed in the collection of data and their analysis can be found in this chapter. Also in this chapter, justification is provided for the adoption of the methods and analytical techniques employed.
  4. Chapter Four: this involves the presentation and analyses of data findings from the testing of hypothesis are also presented here.
  5. Chapter Five: This is the final chapter and it contains the summary of the entire work done, the conclusions down, and the recommendations made by the researcher based on the findings of the research work.
  6. Appendices: it is usual practice that in the final pages of research work, reproductions of some document such as questionnaire relevant tables, statute, letters and so on attached for a better appreciation of the research work by the reader. This can also serve as a means of verification work done.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was on the impact of value added tax on Nigeria economic growth

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of value added tax on Nigeria economic growth.

5.2 Summary

This paper empirically investigated the contribution of Value Added Tax (VAT) and total revenue to the GDP from the time of its inception to 2010. This was done against the background that it was introduced by the Federal Government of Nigeria in 1993 to replace Sales Tax. The aim was to increase the revenue base of government and make funds available for developmental purposes that will accelerate economic growth. Time series data on both the GDP and VAT Revenue from 1995 to 2010, sourced from Annual Reports and Accounts of the Central Bank of Nigeria (CBN) were analyzed, using COBB DOUGLAS Regression model. Findings showed that VAT Revenue and total revenue account for 92 percent of variations in the GDP. This high explanatory power shows that the model is a good fit, and that these components of VAT revenue and total revenue are important determinants of economic growth in Nigeria. VAT Revenue is making a unique significant contribution to the economic development of Nigeria and composition of the GDP. Based on the findings it is therefore recommended that government should intensify efforts to ensure that all identified administrative loopholes should be plugged for VAT Revenue to continue to contribute more significantly to economic growth of the country.

5.3 Conclusion

The relevant literature reviewed adequately covered the importance of VAT to any economy,but this study went ahead to study and confirm the imperativeness of VAT reform in Nigeria economy in view of the glut in oil income which has been the major source of Nigeria national income. The study has made adequate contribution to knowledge through the discovery of optimal tax theory as a basis for charging VAT relatively on the characteristics of income and taxing of final goods uniformly, which will retrospectively make consumers to pay government bills.

5.4 Recommendations

In the light of the above mentioned and analyzed, the following recommendations become imperative for implementation:

  1. General reform of Value Added Tax and increase in VAT rate from 5% which was introduced in 1994, and exactly twenty two(22) years old. Government should consider the increase of VAT rate from 5% to a minimum of 10%.In facing reality of income objective, VAT should be given priority because from table
    1,countries of the world rely on income from VAT to part- develop their economies. The optimal tax theory adopted in this paper support the agenda of reform to increase the social and economic welfare of the nation.
  2. Steinmo (1993) stated that “Governments need money, modern government needs lots of money. How they get this money and whom they take it from are two of the most difficult political issues faced in any modern political economy”. This statement is applicable to Nigeria today.

To achieve this, government should focus on the following areas:

  1. Integrated Tax Offices should be strengthened for efficiency and effectiveness through capacity building in tax administration and information technology leverage.
  2. Federal Inland Revenue Service should address the challenge of tax evasion, which results into narrow tax payer base and reduction in willingness to pay. The implication is reduction in revenue collected against budgeted income.
  3. Government should account for money collected through VAT by the provision of infrastructural facilities to encourage people’s willingness to pay tax. Bickersteth(2016) stated that one of the greatest incentives to paying tax is for the government to use tax revenue judiciously so taxpayer can see the value created by their tax.
  4. Government should enhance efforts to increase the VAT base, as many businesses are not registered for payment of VAT. The Integrated Tax Offices should reorganize their audit system to visit many entrepreneurs and businesses

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