1.1       Background to the Study

Value added tax (VAT) is a consumption tax that is being charged and embraced by many developed and developing countries which is relatively easy to administer and very difficult to evade. The economic development and growth of any nation depends on the government’s ability to generate adequate revenue in order to effectively provide various infrastructural facilities to satisfy the needs of the population. Chartered institute of taxation Nigeria (CITN) (2002) explained that the idea of introducing VAT in Nigeria came from the report of the study group set up by the federal government in 1991 to review the tax system in Nigeria, hence, VAT was proposed and a committee reviewed its implementation. Value added Tax Act 1993 was passed and thereby repealed sales Tax Act of 1986.

According to Federal Inland Revenue Service FIRS (1995) as cited by Bassey (2013), value Added Tax is a consumption tax payable on the goods and services consumed by any person whether government agencies, business organizations or individuals. The dynamic operating mechanism of VAT is very easy because the yield from VAT is an accurate measurement of the growth of an economy since purchasing power increases with economic growth. Although VAT is a multiple stage tax, it has a single effect and does not add more than the specified value to the consumer price no matter the number of stages at which the tax is paid (CITN, 2002). From the explanations, VAT is levied at each stage at which suppliers change hands. Example is the case of a manufacturing concern which manufacturers’ claims that will pass through the wholesaler to the retailer, it is ultimately borne by the customer who does not register for VAT purpose and is unable to reclaim it. Hence, the incidence falls on the final consumer of the chain.

Value added tax has been criticized widely and persistently for being unfair to the low income earners and families because it is believed that consumption taxes are regressive and since VAT is a consumption tax, hence, are regressive. In other words, VAT tends to absorb a higher fraction of current income at low income levels than in the middle or upper income ranges.

Presently in the global economy, VAT is the most important taxing system of the world, whether the country is developed or developing. James (2011) as cited by Jalata (2014) said VAT as consumption tax was considered and spread globally since it appropriately matched to the revenue needs of states in an increasingly globalized economy even if this depends upon each country’s policy, and recently some commentators of the tax system shows that VAT is directly related to the country’s growth and development.

Historically, the federal government of Nigeria introduced VAT in 1993 to enhance the revenue base of the nation for economic growth and development. According to Izedonim and Okunbor (2014), VAT is already a major source of revenue in Nigeria such that in 1994, it was at N189 billion which is 36.5% higher than the projected N6billion for the year. VAT revenue for 1995 was N21 billion compared with the projected N12 billion. The VAT contribution to Nigeria federal revenue for 1994 and 1995 were 4.06% and 5.93% respectively. N 404.5 billion collected in 2008 was 1% of total revenue. From 1993 to date, VAT value is 5% on purchases. Jalata (2015) stated that in Ethiopia, the adoption of VAT to replace the outdated general sales tax in January 2003 became the central landmark tax reform, which introduced uniform standard rate of 5% VAT system on most goods and services. After the extension of VAT in Ethiopia, the growth rate of GDP which was 2.53% reached 21.9% on average. Sammi (2012) stated that Nigeria adopts the single rate of 5% of the value of all taxable goods and services which is the world lowest VAT rate. The attempt by the National Assembly to increase the rate of VAT to 10% was unsuccessful. He explained that the federal government of Nigeria has not been able to achieve its policy of increasing the VAT rate. The arguments of those who are opposed to the rate increment have always been that federal Inland Revenue service (FIRS) should strive to expand the coverage of VAT to those who are presently out of the tax net and generally increase compliance level. The agitation to increase the VAT has not met the support of the legislative house, even though the argument to expand the coverage is valid, the subject of revenue expansion can only be met if the VAT is reformed in accordance with the pace of development in the global economy.

Among several different tools that governments use in order to boost the economic growth and development (Rias and Amini – Aghale, 2013), VAT is considered as one of the most common ones. Some governments justify the introduction of VAT by saying that the revenue from VAT will be used toward developing the infrastructures.

The financial capacity of any government depends among other things, on its revenue base, the fiscal resources available to it and the way these resources are generated and utilized. It is therefore, the duty of the government to adequately mobilize potential revenue across the country to prevent economic stagnation. This mobilization involves the adoption of economically and politically acceptable taxes that would ensure easy administration accounting, infraction, auditing and investigation based on the equality, mentality in international trade, and reduction in tax evasion.

1.2 Statement of the Problem

The economic development and growth of any nation depends on government ability to generate adequate revenue in order to effectively provide various infrastructural facilities to satisfy the needs of the population and takes its position among the nations in the global village. According to Ogbonna and EbiMobowei (2012:62), a tax system offers itself as one of the most effective means of mobilizing a nations internal resources and it lends itself to creating an environment conducive to the promotion of economic growth. All over the global village, tax is a major source of revenue for the government to provide their statutory roles of creating good living condition for the citizens. Since the introduction of VAT in Nigeria, it has constituted quantitatively to the total income generated by the government but however, this has not translated into any meaningful economic growth. This may be attributable to the meagre 5% charge on value of taxable goods and services as against the rate charged by other countries. For instance, Ethiopia a country in Africa introduced VAT in 2003 with a standard rate of 15% and has achieved a growth rate of 66.27%. Advanced countries in Europe and America charge between 10% and 15% (Jalata, 2014). Various attempts by the Nigerian federal government to increase VAT rate to at least 10% have not been successful because of the politics involved as the thinking effect of the increase on the purchasing power of the people especially the high income earners who believe they would be negatively affected. The opposition however failed to analyze the fact that the main source of revenue for the federation is shaking due to global glut in the oil industry. Another factor which the opposition failed to consider is that majority of developed country derives their internally generated revenue from sales or purchase tax.

This study therefore is to assess if value added tax has any significant impact on economic growth and revenue generation in Nigeria within the time period under review.

Most research work to the best of my knowledge has studied the impact of VAT on economic growth without examining the short-run impact. The stationarity test carried on the variables reveals that the variables drift away from equilibrium i.e. they are not stationary at level. But however, converge in the long-run. As such it will be pertinent to study these short-run dynamics and speed of adjustment. This study intends filling this gap by employing the short-run model and error-correction mechanism.

1.3       Research Questions

  1. Does value added tax have any significant impact on economic growth in Nigeria?
  2. Does value Added Tax have any significant impact on total government revenue generated in Nigeria?
  3. What is the short-run impact of value added tax on economic growth in Nigeria?
  4. Is there a long-run relationship between value added tax and economic growth in Nigeria?
  5. What is the nature of causality between value added tax and economic growth in Nigeria?


1.4 Research Objectives

The major objective of this study is to examine the impact of value added tax on economic growth in Nigeria.

The specific objectives include:

  1. To examine the impact of value added tax on total Government revenue
  2. To investigate the short-run impact of value added tax on economic growth in Nigeria
  • To ascertain if there is a long-run relationship between value added tax and economic growth in Nigeria.
  1. To determine the direction of causality between value added tax and economic growth in Nigeria.

1.5 Research Hypotheses     

Ho:      Value Added Tax has no significant impact on economic growth in Nigeria.

Ho:      Value added tax has no significant impact on total government revenue in Nigeria.

Ho:      There is no long-run relationship between value added tax and economic growth in Nigeria

Ho:      Value added tax has no significant impact on economic growth in the short-run.

Ho:      There is no causality between value added tax and economic growth





1.6 Significance of the Study

This research work will be an invaluable source of literature for researchers, student, manufacturing practitioners, accountants, bankers, companies, government agencies and related field who might be influenced in knowing much about the concept of VAT.

In the light of unsustainable fiscal deficit affecting the Nigerian economy and the urgent need to diversify the revenue base of the economy, this study will be of paramount importance to policy makers as it will enable them devise appropriate measures in curbing this fiscal deficit by seeking different ways to improving the different sources of revenue of the country.

Individuals and organization will also benefit from this study as it will educate them on the importance and benefit of tax compliance.

This work will also be of immense benefit to researchers who intend carrying out a research on this topic as it will serve as a guide to their study.

1.7 Scope of the Study

This study seeks to examine the impact of value added tax on economic growth in Nigeria from 1994-2016 i.e. a period of 22 years. The study relies heavily on CBN statistical bulletin.vol 23 (2015), data from federal Inland Revenue services, World Bank Statistical Indicator and other relevant sources such as journals, books, textbooks, electronic sites etc.





1.8 Organization of the Study

The study is structured as follows;

The first chapter shall contain the background to the study, the statement of the problem, the research questions and objectives, research hypotheses, significance of the study and scope of the study. Chapter two will summarizes the opinions of authorities on the subject matter by reviewing their literatures, theoretical literature, conceptual literature, review of basic theories, other theoretical issues and empirical literature review. Chapter three shall state the method to be adopted in the study; theoretical framework, model specification, explanation of variables, estimation technique the evaluation of estimates and re-statement of hypothesis chapter four shall focus on the presentation and interpretation of the regression results.

In chapter five, the findings would be summarized, conclusion drawn and recommendation made.