Impact of Value Added Tax on Economic Growth of Nigeria

Impact of Value Added Tax on Economic Growth of Nigeria. Download the full project from chapter one to five with reference and abstract.



1.1 Background of the Study

Over the decades around the globe especially in the developing economies, Value Added Tax revenue has been recognised as accounting for a significant percentage of the total government revenue. Value added tax has been adopted by several countries of the world because of the growing concern about economic efficiency and tax simplicity in a competitive and integrated world economy (Jenkins & Kuo, 1995). (VAT) was suggested to the government of the Federation to replace the existing sales tax which though was nationally levied; the proceeds from it are collected and retained by the State Government. Value Added Tax (VAT) is an indirect tax on spending. That is, it is a consumption tax imposed on goods consumed and services rendered. It is borne by the final consumer and it is progressive in nature. The Federal Ministry of Finance and Economic Development was mandated to study and make recommendations on the reforms needed on the direct taxes in Nigeria.
A second study on indirect tax set up by the Federal Ministry of Budgeting and Planning was inaugurated on 26th April, 1991 by then Minister of Finance and Economic Planning. Therefore, the genesis of Value Added Tax can be traced to the report of the 1991 study group on the review of direct taxes in Nigeria under the chairmanship of Dr. Sylvester U. Ugoh. It was this study group that out the feasibility study of the new tax regime which government accepted. A Modified Value Added Tax (MVAT) committee headed by Mr. E. Ijewere was set up to look into the possible modification or simplification of the new tax in 1992. The government adopted what we now have as Value Added Tax (VAT) by promulgating the relevant decree. The Value Added Tax (VAT) came on stream on 1st December, 1993 by Decree No. 102 of 1993, although the actual implementation commenced on 1st January, 1994. The VAT decree automatically abrogated the sales tax (Noko, 2016).

The indisputed contribution of VAT to total government revenue in countries where it has been in existence influenced the government decision in 1993 in Nigeria to introduce VAT to replace the sales tax which has been in existence prior to the time. The Federal Inland Revenue Service (FIRS) stated that VAT is easy to administer and of course very difficult to evade. Also, the result of a study conducted by IMF to ascertain whether countries with VAT system had higher tax revenue to GDP ratio proved more tantalizing as the study revealed that VAT system generates higher revenue to the government. The introduction of VAT assisted immensely to diversify the revenue base of the nation as VAT revenue in 1994 accounted for about 36.5% of the budgeted revenue and 4.06% of the total government revenue and 5.93% in 1995. VAT at present contributes higher to total government revenue in Nigeria as it provides the government with expected revenue to embark on developmental project to fasten economic development in the country. Through VAT as a consumption tax, the government can control the production and consumption of certain goods and services, control adverse economic conditions, inflational rates and help sharpen the economy and curb the level of unemployment through building of industries, skill acquisition centres, encourage local manufacturer which inturn will help curb the level of unemployment in the country.

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

While the performance of Value Added Tax as a source of revenue in Nigeria is encouraging, it remains difficult to find ways to systematically assess and ascertain the true impact of VAT on the economy. Recent research works on the impact of taxation on the Nigeria economy lumped up all the various taxes together without isolating VAT (Adereti et al, 2015). In other words, most researchers have not bothered to enquire into the extent to which Value Added Tax support or contribute to economic growth in Nigeria. Another problem perceived by enterprises or businesses in Nigeria is that of increase in the cost of raw materials, Semi-finished goods (WIP) as well as finished goods and services caused by VAT.

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 Research Questions

In the course of the study, the stated question below is sought to be answered.

  • To what extent has VAT impacted on Nigeria’s economic growth?
  • Is there any observed longrun relationship between VAT and Nigeria economic growth?

1.4 Objective of the Study

The objective of the study is to examine the relationship between exchange rate fluctuations and economic growth of Nigeria. However, the specific goal is to:

  • Evaluate impact of VAT on economic growth of Nigeria.
  • Examine the longrun relationship between VAT and Nigeria economic growth.

1.5 Research Hypothesis

Based on the objectives of the study, the hypothesis was formulated.

Ho: VAT has no significant impact on Nigeria economic growth in Nigeria.

Ho: VAT has no long run relationship on Nigeria economic growth.

1.6 Significance of the Study

The significance of this research work lies in the fact that if the cause of the unstable VAT of the naira is identified and corrected, the economy will rapidly grow and develop into an advance one. 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.

This will definitely enhance growth and development of the economy, the study will also serve as a guide to future researchers on this subject.

1.7 The Scope and limitation of the Study

This research work is designed to cover the period 1994-2016 a period of thirty six years. The study is based on Value added tax on Nigeria economy with its impact on economic growth in the country.

The study is therefore limited to the core economic growth in Nigeria and not the socio- political factors of the foreign exchange rate. The research was further limited by data inconsistency and unavailability, financial constraints, and time factors.

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