Value Added Tax and Economic Growth of Nigeria

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Value Added Tax and Economic Growth of Nigeria

1.1 Background to the study
The subject of taxation has received considerable intellectual and theoretical attention in the
literature. The major aim of most governments in developing countries is to stimulate and guide economic and social development governments continue to strive towards developmental advancement. Importance of tax lies in its ability to generate revenue for the government, influence the consumption pattern of the people and also regulate the economy through its influence on vital aggregate economic variables such as income, employment, prices of goods and services and host of others. Tax refers to a “compulsory levy by a public authority for which nothing is received directly in return” (James and Nobes, 1992). According to Nightingale (2001), “a tax is compulsory contribution, imposed by government, and while taxpayers may receive nothing identifiable in return for their contribution, they nevertheless have the benefit of living in a relatively educated, healthy and safe society”. She further explains that taxation is part of the price to be paid for an organized society and identified six reasons for taxation: provision of public goods, redistribution of income and wealth, promotion of social and economic welfare, economic stability and harmonization and regulation. The Nigerian tax system has not been able to perform the expected role of revenue generation and regulation of income redistribution. This stemmed from the structural and administrative defects of the tax system. The machinery and procedures for implementing tax systems are inadequate resulting into tax evasion and avoidance by most individuals and institutions. On the other hand, the need for more sources of revenue for the government cannot be over emphasized. Revenue continues to fluctuate due to price fluctuations in the world market. Moreover, revenue from the non-oil sector has been grossly insufficient to meet public needs due to the rise in pressing social and economic needs. It was against the above background that the Edozien – led committee was inaugurated in 1991 to review the Nigerian tax system.The idea of introducing VAT was recommended by a study group that was set up by the federal government in 1991 to review the then exiting tax system as a replacement of sales tax.

After extensive deliberation and consultation on the group submission, VAT was introduced as a federal tax and back by Decree 102, made on 24th August, 1993 in Abuja by the then Head of state and Commander in Chief of Nigeria, General Ibrahim Babangida gave the legal backing for its administration. 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 Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo and Nigeria. Evidence suggests that in these countries, VAT has become an important contributor to total government tax revenues (Ajakaiye, 2000).Value Added Tax (VAT) is “a broad based business tax imposed at each stage of production and distribution process typically designed to tax final household consumption” (Tait,Robert and Tuan, 2005). It is a type of indirect tax that is imposed on goods and services which plays an important role in the economic development of a country by influencing the rate of revenue accruable and consumption (Jayakumar, 2010).The relevance of tax revenues is a core motive for suggesting that emerging economies such as Nigeria must increasingly mobilize their internal resources to enhance economic growth and reduce fiscal deficits through the implementation of an effective tax policy (Wawire, 2006). There is dearth of literature on the revenue performance of state government level VAT in developing countries like Nigeria. The contribution of personal income tax to the government total revenue remained consistently low, hence the need to evaluate alternative taxes such as VAT as done in this study.

1.2 Problem Statement
Evidence so far agreed that VAT has become a major source of revenue in developing countries but its effect is yet to be felt in Nigeria. Taxation as an important instrument of fiscal policy in an economic, has hither- to suffered from some lingering and flummoxing problems in Nigeria, thereby making it difficult to successfully perform the expected the role of revenue generation and regulation of income redistribution, prominent among this problems may be traceable to public attitude towards tax matters in terms of perception, and adherence to tax rules and regulations. Oladipupo and Izedonmi, (2013) affirmed that VAT has failed to in its contribution to revenue generation of the nation. In the same vein, Shop (1989) argued that VAT may cause consumers to reduce their consumption of certain commodities that have direct and indirect effects on labour productivity. Ebeke and Ehrhart (2010) asserted that tax revenue instability in sub – saharan Africa leads to public investment and government consumption instability, which in turn generates a lower public investment ratio, and is therefore detrimental to long-term economic growth.
However, Unegbu and Irefin (2011) has contrary opinion, they found that VAT has a
significant impact on the economic growth. Due to inconclusive evidence of past studies on the
role of VAT on Nigeria economic growth. This study tends to advance knowledge on by
examine the impact of VAT on economic growth of Nigeria for period of 2000 -2013.

1.3 Research Questions
Arising from the statement of the problem, the following research questions were formulated.
i. What is the relative impact of Value Added Tax on Gross Domestic Topic?
ii. Do VAT, Petroleum Tax, Excide Duties, and Company Tax jointly have significant
impact on GDP?
iii. What is the perception of the VAT payers on Value Added Tax since inception of VAT
in Nigeria?
iv. What is the impact of adequate accounting procedures on VAT efficiency?

1.4 Objective of the study
The general objective of this study is to examine the impact of value added tax on Nigeria
economic growth  . While the specific objectives are:
i. to determine the extent to which VAT affect gross domestic product.
ii. to investigate if VAT, Petroleum Tax, Excide Duties, and Company Tax jointly have
significant impact on GDP
iii. to examine the perception of the VAT payers on Value Added Tax since inception of
VAT in Nigeria.
iv. To assess the impact of adequate accounting procedures on VAT efficiency


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