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. The 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 overemphasized. 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 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 backed 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).

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 for 1994 was N8.189 billion which is 36% 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.

1.2 Statement of the Problem

 The significant impact of VAT or the role played by Value added Tax in the development of the nation cannot be overemphasized. Revenue is raised by the government through taxation for the development of the nation‘s project.

Vat was introduced as a revenue mobilization strategy to cover up the deficiencies experienced with the former sales tax because of its progressive nature. Government ability to adequately and effectively retrieve the proceeds from companies and other agents of collection remains a problem. It does not appear as if there is adequate machinery for effectively monitoring of the remittance of the tax withheld to the relevant tax authorities, this means that the federal inland revenue , the body charged with the administration and implementation of Vat lacks the logistic support , this invariably will give room for tax evasion and avoidance. Secondly, the dishonest practice by some tax officials also posed a serious threat to effective tax administration in Nigeria, especially when such practices are capable of having demoralizing effects on the honest tax payers. Consumers will still want to know how much they are paying as Vat as most of these taxes are not duly reflected on their invoice. it is generally believed that vat is another way of reflecting economic hardship on the consumer to the advantages of the manufacturers and companies. It could be seen as an excuse to raise prices of goods and services arbitrary. For instance, landlords are now charging vat on house rents, some hotels are charging vat on their services without remitting same to the appropriate authorities. These are contrary to the regulation governing the vat system.

The uncommon nature of this tax system, has resulted in unaware of its existence by majority with resultant effects of low credibility by the government, this has made people to scorn the payment. Lack of trained personnel and logistic support from the government and FIRS has contributed immensely to poor vat administration and implementation which invariably has resulted in reduction in revenue generation from vat. It is against these backdrops, that this research seeks to ask certain question to determine if the introduction of VAT is a worthwhile venture or policy.

1.3 Research Questions

This research work is set to answer the research question below.

  1. What is the impact of value added tax on economic growth?
  2. Is there a long run relationship between value added tax and economic growth in Nigeria?

1.4 Objective of the Study

The following are the objectives of the study:

  1. To know the impact of value added tax on economic growth.
  2. Ascertain the possibility of a long run relationship between value added tax and economic growth in Nigeria.


1.5 Statement of Hypothesis:

The following assumptions which are subject to testing are made for the purpose of this research work.

H0: Value added tax has Impact on economic growth.

H1: There is long run relationship between value added tax and economic growth in Nigeria.

1.6 Significance of the study

The study is significant as it will contribute to the existing literature on the VAT structure in Nigeria. It will be used to design growth – oriented programs and implementation of value added tax changes that are growth enhancing. It will equally provide an empirical groundwork on Nigeria’s VAT revenue structures upon which prudent tax measures could be based. The study will be timely, given the current efforts toward changing the constitution, and some government structures privatizing state enterprises, rationalizing the budget, eradicating poverty and reforming tax structure.



1.7 Scope of the study

The study captured the accounting periods of 1997 to 2017 for a number of reasons, this period is long enough to capture the post introduction of VAT in Nigeria. Furthermore, this period had covered twenty one years through which government had the opportunity to devise its own tax policies, regulations and administrations for two decades. Meanwhile, several changes had taken place within the period of study. For instance, the economy has experienced persistent shocks such as the oil price crises of 2008 and 2009 that had far reaching repercussion on growth and fiscal deficits. This period therefore will capture the impact on VAT revenue of such events like trade liberalization, privatization, tax modernization program and the establishment of VAT agencies.

1.8 Organization of the Study

This study shall contain five chapters. The first chapter shall contain the background of the study, the statement of the research problem, the objectives of the study, the research questions etc that would guide the study. Chapter two would summaries the opinions of authorities on the subject matter. Chapter three shall state the methodology to be adopted in the study. Chapter four shall focus on the presentation and interpretation of the regression results. The last chapter-chapter five, would present the summary of the findings, conclusion and appropriate recommendations.