THE EFFECT OF TAX REVENUE ON ECONOMIC GROWTH AND DEVELOPMENT IN NIGERIA

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ABSTRACT
The contribution of taxation to any economy globally cannot be overemphasized. Apart from the
revenue function it performs for the government, it is also used to assist the national government
to achieve the country’s macro-economic objectives in the areas of fiscal and monetary policies.
Over the years, it has been observed that a substantial part of revenue generated in Nigeria is
from taxes, yet the role of taxation in promoting economic activities and growth is not felt,
mainly because of feasible evidences which cannot be seen nor perceived by the citizens in terms
of infrastructure and basic amenities. Past documentations have revealed that revenue from taxes
in developed nations have high impact on its economic growth which clearly seen by the
amenities provided by such nations. Thus the main objective of this study is to explore the
relationship between tax revenue and economic growth and development in Nigeria. Multiple
Linear Regression analysis was used to analyze the data by employing the use of Microsoft
Excel package. The findings revealed that petroleum profit tax, company income tax and value
added tax have a positive impact on Nigeria’s economic growth while custom excise and duties
impacted negatively but overall, a significant relationship between tax revenue and the Nigerian
economic growth exists. The utilization of the generated revenue from taxes calls for serious
concern, and requires a special attention of policy makers, non-compliance with tax laws on the
part of the tax payers is a hindrance and ineffective administration of tax has given enough loop
holes for tax evasion, the consequence of which is poor revenue. It is recommended among
others that only skilled and professionals and trustworthy hands should be responsible for tax
administration and the general public should be educated right from the grass root on the
importance of taxes to the entire nation.

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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification …………………………………………………………………………………..iii
Dedication……………………………………………………………………………………..iv
Acknowledgements……………………………………………………………………………..v
Abstract ……………………………………………………………………………………….vi
Table of Contents……………………………………………………………………………..vii
List of tables…………………………………………………………………………………..ix
List of figures………………………………………………………………………………….ix
CHAPTER ONE: INTRODUCTION
1.1 Introduction…………………………………………………………………………….1
1.2 Background to the study……………………………………………………………….2
1.3 Statement of the problem……………………………………………………………….4
1.4 Objectives of the study…………………………………………………………………..5
1.5 Research questions……………………………………………………………………..6
1.6 Statement of the hypotheses……………………………………………………………6
1.7 Significance of the study………………………………………………………………6
1.8 Justification of the study………………………………………………………………7
1.9 Scope of the study……………………………………………………………………..8
1.10 Definitions of terms …………………………………………………………………..8

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CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction……………………………………………………………………………10
2.1 Conceptual frame work…………………………………………………………………10
2.2 Theoretical frame work…….……………………………………………………………13
2.3 Literature on subject matter……………………………………………………………..15
CHAPTER THREE: METHODOLOGY
3.0 Introduction…………………………………………………………………………..30
3.1 Area of study…………………………………………………………………………30
3.2 Research design and sources of data…………………………………………………30
3.3 Instrumentation………………………………………………………………………31
3.3 Procedure for data collection and data analysis……………………………………..31
3.4 Limitations of the study……………………………………………………………..33
CHAPTER FOUR: DATA ANALYSIS FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………34
4.1 Data presentation…………………………………………………………………….34
4.2 Data Analysis………………………………………………………………………..36
4.3 Findings of the study…………………………………………………………………38
4.4 Discussion of the findings……………………………………………………………39
CHAPTER FIVE: CONCLUSION AND RECOMMENDATION
5.0 Summary of findings…………………………………………………………………43
5.1 Conclusion..………………………………………………………………………….45
5.2 Recommendations..………………………………………………………………….46
References……………………………………………………………………………48
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Appendix…………………………………………………………………………….51

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LIST OF TABLES
4.1.1 Tax Revenue and GDP in Nigeria………………………………………………35
4.2.1 Summary Output…………………………………………………………………36
4.2.2 Anova ……………………………………………………………………………37
4.2.3 Residual Output………………………………………………………………….38

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LIST OF FIGURES
4.1.1 Residual Output…………………………………………………………………41

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CHAPTER ONE
1.1 INTRODUCTION
Tax is described as a compulsory fee or levy imposed on the goods, services and incomes of
individuals and organizations. Taxes levied on incomes are widely regarded as direct taxes while
those taxes imposed on goods are services are known as indirect taxes. Some of the reasons for
the introduction and imposition of taxes is to generate revenue by the government for the
purpose of financing certain projects which will ensure reliable and functional economic growth
and development. Through the imposition of taxes, there will be redistribution of incomes and
provision of essential services to the citizens there by promoting standard of living. A country‘s
tax system is a major determinant of other macroeconomic indices, specifically, for both
developed and developing economies. There exists a relationship between tax structure and the
level of economic growth and development. Tax policy objectives vary with the stages of
development. Similarly, the economic criteria by which a tax structure is to be judged and the
relative importance of each tax source vary over time Vincent, (2001). For example, during the
colonial era and immediately after the Nigeria‘s political independence in 1960, the sole
objective of tax revenue was to raise revenue. Later on, emphasis shifted to the infant industries
protection and income redistribution objectives.
Tax revenue is a powerful tool of economic reform and a major player in every economy of the
world. It is never static but dynamic and should reflect current realities prevailing in the
economy. The tax system is an opportunity for government to collect additional revenue besides
other sources of income, which is needed in discharging its pressing obligations. A good system
of tax offers itself as one of the most effective means of mobilizing a nation’s internal resources
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and it lends itself to creating enabling and conducive environment to the promotion of economic
growth and development Ogbonna, (2010).
Furthermore, the rudimentary nature of the economy precludes retail form of taxes. At this stage
also, taxes are difficult to collect because of the lack of skills and facilities for tax administration
Kiabel, (2009). Given this, a complicated tax structure is not feasible and the amount of revenue
from income tax will depend on taxpayers’ compliance and the efficiency of the tax collectors.
1.1 BACKGROUND TO THE STUDY
The Nigerian Tax System has undergone significant changes in recent times. The Tax Laws are
being reviewed with the aim of repelling obsolete provisions and simplifying the main ones.
Under current Nigerian law, tax revenue is enforced by the 3 tiers of Government, which are
Federal, State, and Local Governments with each having its sphere clearly spelt out in the Taxes
and Levies Act, 1998. The whole essence of tax revenue is to generate revenue to advance the
welfare of the people of a nation with focus on promoting economic growth and development of
a country through the provision of basic amenities for improved public services via proper
administrative system, and structures. Tax revenue plays a crucial role in promoting economic
activities, growth and development. Through tax revenue, government ensures that resources are
channeled towards important projects in the society, while giving succor to the weak. The role of
tax revenue in promoting economic activity and growth may not be felt if poorly administered.
This calls for a need for proper examination of the relationship between revenue generated from
taxes and the economy, to enable proper policy formulation and strategy towards its efficiency.
According to Olashore, (1999), the Nigerian economy has remained in a deep slumber with
macroeconomic indicators reflecting an economy in serious need of rejuvenation, revival and
indeed radical reform. Also in the view of Oni, (1998), tax administration needs to be revamped
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and refunds of taxes as well as duty drawbacks administration are inefficient. In his discussion of
the relationship between tax structure and economic development, Vincent, (2001) divided the
period of economic development into two, the early period when an economy is relatively
underdeveloped and the later period when the economy is developed. During the early period,
there is limited scope for the use of direct taxes because the majority of the populace resides in
the rural areas and is engaged in subsistence agriculture. Because their incomes are difficult to
estimate, tax assessment at this stage is based on presumptions prone to wide margins of error.
A critical challenge before tax administration in the 21st century Nigeria is to advance the
frontiers of professionalism, accountability and awareness of the general public on the
imperatives and benefits of tax revenue in our personal and business lives which include:
promoting economic activity; facilitating savings and investment; and generating strategic
competitive advantage. If tax administration does not for any reason meet the above challenges,
then there is a desperate need for reform in the area of the tax regime, and in the administration
of taxes. Tax revenue mobilization as a source for financing development activities in Nigeria
has been a difficult issue primarily because of various forms of resistance, such as evasion,
avoidance and corrupt practices attending to it. These activities are considered as sabotaging the
economy and are readily presented as reasons for the underdevelopment of the country. Adegbie,
(2010). Government exists in order to effectively collect taxes from available economic
resources and make use of same to create economic prosperity such that available and willing
human and other resources are gainfully employed, infrastructures provided, and essential public
services (such as the maintenance of law and order) are put in place etc. Tax resistance only
makes the development process unattainable. Onairobi, (1998). It could be deduced that
changing or fine-tuning; tax rates are used to influence or achieve macroeconomic stability.
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Some of the most recently cited examples are the governments of Canada, United States,
Netherland, United Kingdom, who derive substantial revenue from Company Income tax, Value
Added Tax, Import Duties and have used same to create prosperity Adegbie, (2010). Thus it can
be said that the economic development of a country depends on various reasons one of which is
the presence of an effective and efficient tax revenue policy. In Nigeria the contribution of tax
revenue has not met the expectations of Government. Government has equally expressed this
disappointment and has accordingly vowed to expand the non-oil tax revenue. Eguaghide,
(2007). It is in the light of the foregoing that this study examines the extent to which the tax
system has contributed to economic growth of Nigeria.
1.3 STATEMENT OF THE PROBLEM
There is a general lack of consensus among scholars on the contribution of tax revenue to the
economic growth of nations. And there has been series of diverse postulation and assumptions of
relationship between tax revenue and economic growth and economic development in Nigeria.
For instance, Ariyo, (1997) in his study on productivity of the Nigerian tax system documented a
satisfactory level of productivity of the tax system before the oil boom (i.e. before 1970s).
Eguaghide (2007) established that the role of tax revenue in promoting economic activities and
growth is not felt in Nigeria (between 1970s to date). The emergence of oil as a major tax
revenue and other taxes such as personal income tax, company income tax, etc. are supposed to
be means through which Nigerian government solves the economic problems of the nation and to
also enhance government expenditure which is expected to be beneficial to its citizens through
the provision of social infrastructures Adereti, (2011). However, in Nigeria, this has not been the
case because despite the tax revenue and expenditure reported year in year by the government,
the physical state of the nation in terms of social amenities, capital development, economic
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growth and development appear backward. This is evident in the lack of electricity supply,
portable drinking water, basic health care delivery, bad roads, just to mention but a few. It was
observed that the advent of the oil boom encouraged some laxity in the management of non-oil
revenue sources like the company income tax, personal income tax, value added tax, capital gain
tax, custom and excise duties Ogundele, (2008).
The essence of this research work is to examine the unresolved problems of low tax revenue in
Nigeria and the consequence of this effect on the low economic growth and development in the
Nigeria. This study is aimed at contributing to resolving the contending level of inadequacies
associated with the administration of tax revenue in Nigeria which has denied the country of
significant economic growth and development.
1.4 OBJECTIVES OF THE STUDY
The main objective of this study is to assess the impact of tax revenue on economic growth and
development in Nigeria
Other specific objectives includes
i. To assess the impact of Petroleum Profit Tax on the economic growth and development
in Nigeria.
ii. To investigate the impact of company income tax on the economic growth and
development in Nigeria.
iii. To investigate the impact of custom and excise duties on the economic growth and
development in Nigeria.
iv. To investigate the impact of value added on the economic growth and development in
Nigeria.

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1.5 RESEARCH QUESTIONS
The study would attempt to provide answers to the following questions:
1. What is the effect of Petroleum Profit Tax on the economic growth and development in
Nigeria?
2. What is the effect of Company Income Tax on the economic growth and development in
Nigeria?
3. What is the relationship between Customs and excise Duties and the development of the
economy of Nigeria?
4. What is the effect of Value Added Tax on the economic growth and development in
Nigeria?
1.6 STATEMENT OF HYPOTHESES
From the objectives of this study, the following hypotheses have been formulated:
H01: Petroleum Profit Tax has no significant impact on economic growth and development
in Nigeria
H02: Company Income Tax has no significant impact on economic growth and development
in Nigeria
H03: Custom and Excise Duties have no significant impact on economic growth and
development in Nigeria
H04: Value Added Tax has no significant impact on economic growth and development in
Nigeria
1.7 SIGNIFICANCE OF THE STUDY
Tax revenue is one of the sources of revenue to the government. This can be used to achieve
economic growth and development, maintain equilibrium in the economy by combating elements
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of depression, inflation or deflation, achieve equity in income and wealth distribution and
address issues of poverty and promote socioeconomic development. One of the significance of
this research study is to establish at which tax revenue has effect on the economic growth and
development in Nigeria.
The research findings would be of importance to policy makers at both state and federal level in
the country as they formulate and implement tax and revenue policies. This will provide an
insight on how to ensure that tax revenue meets the purpose it intended to achieve. Policy
makers, especially the Federal Inland Revenue Service will use the outcome of the study to
gauge its performance, and determine the level of input it would have to make to impact
positively to the Nigerian economy.
This study will also be of great important to students at various level of learning especially those
that intend to carry out further research on this subject. It will students to understand the present
effect of Capital Gain Tax revenue on the total revenue of the government of Nigerian and on the
economic growth and development.
Also this study will be of great importance to further researchers, scholars and academicians will
find the literature arising from the research work to be of great value as it will be added to the
existing literature.
1.8 JUSTIFICATION OF THE STUDY
A study on the effect of tax revenue on economic growth and development in Nigeria is justified
based on the need for the various level of government in Nigeria to ensure continuous economic
growth and development through the utilization of tax revenue from various taxes ranging from
Petroleum Profit Tax, Company Income Tax, Custom and Excise Duty and Value Added Tax. .
The need for this research work can be explained through the unresolved inherent problems
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associated with administration and collection of capital gain Tax revenue as an instrument for
economic growth and development in Nigeria. This research work will go a long way providing
an insight to the policies makers in Nigeria on how to ensure the adequate and efficient
administration and collection of taxes towards ensuring economic growth and development.
1.9 SCOPE OF THE STUDY
The scope of this study covers the effect of tax revenue on the Nigerian economic growth and
development over a period of 20 years (from 1996 to 2016). The trend of Company Income Tax,
Petroleum Profit Tax, Customs and Excise Duty and Value Added Tax are examined for the
period to determine their correlation with the Nigerian economy growth and development which
will be captured as Gross Domestic Product (GDP). The focus will be based on data obtained at
the Federal Inland Revenue Service (FIRS) and State Revenue Service.
1.10 DEFINATION OF TERMS
1.10.1 Taxation: This is a process whereby charges are imposed on the incomes of individual
and organizations by the government and her agencies to raise funds for public purposes.
1.10.2 Revenue generation: This is a tool for receiving money from members of the public by
the government to finance its projects and to render essential services like roads,
electricity, and bridges in return to the taxpayers (citizens)
1.10.3 Tax system: this is a legal system for assessing and receiving tax from individuals, and
cooperate organizations of a country.
1.10.4 Tax evasion: tax evasion is an illegal practice where a person, organization or
cooperation intentionally avoids paying his/her/ true tax liability to the government.
1.10.5 Tax avoidance: tax avoidance is the use of legal methods and platforms to modify an
individual’s financial situation in order to lower the amount of income tax owed.
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1.10.6 Economic Growth: it is described as a measure of increase in the value of outputs
(goods and services) in terms of Gross Domestic Product (GDP)
1.10.7 Economic Development: this is a measure of improvement in the general welfare and
standard of living due to more equitable distribution of incomes, goods and services
1.10.8 Tax Authorities: these are the bodies scheduled with the administration an
implementation of tax laws and principles in relation to specific jurisdictions.
1.10.9 Value Added Tax: this is described as a type of indirect tax levied on goods and services
purchased by individuals and organizations.
1.10.10 Petroleum Profit Tax: this is a type of tax paid by organizations that are involved in the
extraction (downstream) and the marketing of petroleum (upstream) in Nigeria.
1.10.11 Personal Income tax: This is a type of tax levied on the income of individuals such as
civil servants, self-employed people etc.
1.10.12 Custom Duty: it is a type of tax levied on imported and exported good in Nigeria.