EFFECT OF VALUE ADDED TAX ON THE GROWTH OF NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

Value Added Tax (VAT) is a consumption tax, levied at each stage of the consumption chain and borne by the final consumer of the product or service. The administration of VAT is relatively easy, unselective and difficult to evade. Countries all over the world, look for ways to boost their revenue, this facilitated many nations to introduce value added tax on goods and services. For instance in Africa, VAT has been introduced in Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Senegal, Togo, Nigeria. Evidence suggests that in these countries VAT has become an important contributor to government revenue (Ajakaiye, 2000; Shalizi and Square, 1988; Adereti, Adesina and Sanni, 2011).

Nigeria introduced VAT in 1993, however its full implementation began on 1st January, 1994. This has attracted the attention of researchers and academia on its benefit on the economic growth of Nigeria. Economic growth as measured the increase in the national income or total volume of production of goods and services of a country accompanied by improvements in the total standard of living of the people (Chinwuba and Amos, 2011 as cited in Ihendinihu and Onwuchekwa, 2012). Related works on this topic focused on the impact of VAT on economic growth, measured with GDP. Our objective here is to investigate the growth pattern of VAT on GDP, the effect of the changes in VAT and target and VAT actual on the economy, and also the effect of VAT revenue on Tax revenue.

The value Added Tax decree 102 of 1993 was established and was imposed on 1994 to replace sales tax in Nigeria. The Value Added Tax in Nigeria were created as replacement for the sales taxes that were in operation before they were imposed on all goods that were manufactured in the country and goods produced outside the country and were sold in Nigeria. The Value Added Tax (VAT) in an ideal form of taxation in Nigeria tax system, has significantly contributed to resources mobilization as well as capital formation to the economy. It has positive and significant effect on revenue mobilization in Nigeria; it also has positive relationship with consumption. It has positive and significant effect on revenue mobilization in Nigeria.

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 36.59% 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 federal revenue collection, 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. 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 effect 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 this 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 huge 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 project work, we shall examine the implications of VAT on revenue generation in Nigeria and how VAT affects the economic growth in Nigeria.