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This study is aimed at empirically analyzing the impact of Value Added Tax (VAT) on economic growth (GDP) in Nigeria from 1998 – 2016. Relevant data were collected from Central Bank of Nigeria (CBN) statistical bulletin and Federal Inland Revenue Service (FIRS) reports. The Ordinary Least Square techniques were used to estimate three models in line with the formulated hypotheses. The results from the models revealed a strong positive significant impact of VAT on economic growth as proxy by GDP in Nigeria. It also revealed that there is positive relationship or impact of VAT on total tax revenue over the period studied. Consequently, it was recommended among other things that government should put in place measures to effectively utilize generated VAT revenue for infrastructural and economic development. It also recommends the review of tax incentives to attract both local and foreign investors in order to boost economic growth in Nigeria.



1.1 Introduction
Taxation is one of the most important revenue generation mechanisms in any given economy. In fact, one of the main sources of government revenue is tax which is obtainable from different sources. Government has the mandate to impose tax via its various regulations. An efficient and effective tax system is capable of ensuring the basic necessities and services in the country. Taxes are used to achieve economic growth, achieve equity in income and wealth distribution and maintain equilibrium in the economy. Taxes are not only the most traditional means through which governments generate revenue; they are also the most reliable and predictable. One of these taxes is Value Added Tax (VAT). The Value Added Tax, is a special type of indirect tax in which a sum of money is levied at each stage of production and distribution of a product or service. Referring to history, Okoye and Gbegi (2013) reported that in 1954 the Value Added Tax system was initiated by the then Joint Director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April 1954; although, a German Industrialist Wilhelm Van Siemens proposed the concept in 1918 the value added tax system has been adopted by different nations across the world. 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, and Togo. Evidence suggested that in these countries, VAT has become an important contributor to total government tax revenues (Adereti et al., 2011). In 1994, the revenue profile of the federal government and by extension sub-national governments increases. This is because, in addition to oil revenue and other taxes such as company income tax, government receives revenue at each stage of production.
VAT was introduced in Nigeria following a study group set up by the federal government in 1991 to review the nation’s tax system. It was this group that proposed VAT and in that same manner, a committee was set up to conduct feasibility study on the implementation of the VAT. The introduction of VAT in Nigeria through Decree 102 of 1993 marks the phasing out of the Sales Tax Decree No. 7 of 1986. The Decree took effect on 1st December, 1993 and became operational in Nigeria on the 1st of January 1994. VAT is administered centrally by the federal government using the existing tax machinery of Federal Inland Revenue Services (FIRS) in close cooperation with the Nigeria Customs Service (NCS) and the State Internal Revenue Service’s (SIRS). Evidence so far supports the view that VAT revenue is already an important source of revenue in Nigeria. For instance, actual VAT revenue for 1994 was =N=8.189 billion, which is 36.5% higher than the projected N6 billion for the year. In terms of contributions to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995 (Ajakaiye, 2000). While the performance of VAT as a source of revenue in Nigeria is encouraging, it remains difficult to find attempts to thoroughly assess the impact of VAT on the economic growth. Various studies on the impact of government revenue on economic growth hardly consider VAT as a separate variable; hence, the study intends to test the following
1.2 Background to the Study
The introduction of Value Added Tax (VAT) in Nigeria was greeted with widespread criticisms by people of Nigeria. This arose from the fear of grand design by the government to further milk the already poor masses of Nigeria. There was usually the suspicion that Nigerians would end up contributing money into private pockets.
After it had taken off, there was a little problem of implementation. People appeared not to know what goods and services should attract the VAT and those on which VAT should not be paid.
However, after those initial problems VAT seems to have found its stand if anything after its implementation about 10 years ago the programme appears not to be the ‘monster’ that many Nigerians thought it was meanwhile, it has turn out to be another major revenue source for government after oil.
The need to enhance the efficiency and revenue yield of the Nigeria tax system informed the setting up in 1991 of two study groups to review the tax system. The Committee on Indirect Taxation now recommended the introduction of Value Added Tax (VAT). VAT will be paid on imports also.
The main body responsible for VAT is the Federal Inland Revenue Service (FIRS) it was already in charged with the responsibility of collecting most taxes in Nigeria on behalf of the federal government.
Some goods were however exempted from VAT decree which include some of the following:
 Medical and pharmaceutical products
 Basic good items and infant foods
 Books, magazines and other educational materials
 Commercial products and spare parts
 Agricultural equipment’s.
 Veterinary medicine equipment’s
 Farming and transport equipment’s
 Sundry diplomatic goods etc.
With these exemption however, the VAT revenue base is still rich and growing. The year 1991 was a major landmark in the tax administration of Nigeria. In that year the Professor Edozun-led study group on the review of the Nigerian tax system first identified the need to transform the out-dated sales tax that was then administered by the State governments.
Within the same year (1991), a parallel study group on indirect taxation led by Dr. Sylvester U. Ugoh was given the responsibility to study the feasibility of introducing VAT in Nigeria as an improvement on the existing sale tax.
The Ugoh study group came up with a firm recommendation in November 1991 that VAT should be introduced in Nigeria after two years of preparatory groundwork. As a follow-up, by 1992 the Ijewere-led Modified Value Added Tax (MVAT) Committee was set up to undertake preliminary work for the introduction of new tax. The committee was later to work in close collaboration with Federal Inland Revenue Service (FIRS) in 1993 for the latter to take over administration of the new tax which was scheduled to come on stream as VAT by September 1993.
According to Ogundele (1991:16) taxation has always been a means by which communities provide themselves with common facilities such as access road; health facilities water security etc. from time immemorial. In the North taxes were in forms of ‘JANGALI’ (tax levied on livestock), ‘KUDIN KASA’ (development levy). Modern and well regulated taxation in Nigeria stated in 1940 with the introduction of Direct Taxation Ordinance No. 29 (Cap 54 of that year) it replaced the Native Direct Taxation Ordinance No. 41 of 1927 whose provision it incorporated.
In the Eastern part of the country there was no form of tax on citizens because of equilateral system of government colonial masters appoints paramount chiefs for easy administration of taxes in the areas.
The need to mobilize resources (revenue intensive) is as ancient as when human beings learnt to organize themselves into communities in order to achieve some goals such as security welfare etc. in these process all the three tiers of government (federal, State and local) attempts to mobilize adequate revenue for the purpose of governance and as such begins to innovate various levies to generate much revenue.
Value Added Tax (VAT) needs to be over as it provides revenue to the federal government and other tiers of governments. It is against this background that the importance of this study cannot be over emphasized.
1.3 Statement of the Problem
Value added tax (VAT) has become a major source of revenue in many developing countries. In sub-Saharan Africa, for example, VAT was introduced in Benin, Côte d’Ivoire, Guinea, Kenya, Madagascar, Mauritius, Niger, Senegal, Togo and Nigeria in the 1980/90s. Today, evidence suggests that in these countries VAT has become an important contributor to total government tax revenues (Ajakaiye, 2009). Governments however need to consider the effect of VAT on the economy alongside its contribution to total tax revenues. Globally, several studies have been undertaken to this end, for instance, Michael & Ben (2007) explore the causes and consequences of the spread of value added tax (VAT). The result shows that VAT has a significant but mixed impact. Saeed, Ahmad & Zaman (2012) analyzed the revenue effect of the value added tax (VAT), in the SAARC region. The result shows that most of the SARRC countries that adopted value added tax have gained a more effective tax instrument to upgrade their GDP to revenue ratio. In Nigeria several studies on VAT have been undertaken, for instance, Asirigwa (2011) undertook a study whose objective was to evaluate the determinants of VAT revenue and come up with a model for predicting VAT revenue in future. The analysis showed that the determinants of VAT revenue have a significant effect on the responsiveness of VAT revenue. Ndambuki (2014) did a study that discussed critical literature on value-added tax (VAT) in Nigeria relating to its contributions to economic growth rate. The analysis showed that regressive tax reforms revenue had a considerable contribution for the improvement of the welfare of citizens under the period of study for their inclusion in the VAT model resulted to be significant. However, this significance can also negatively impact on consumer prices and government revenue, for instance, according to PWC (2014) when a commodity is exempt from VAT, it means that the manufacturer incurs VAT on the raw materials yet they can’t recover VAT on the sales. The manufacturer is therefore forced to adjust prices of the commodities to compensate for the irrecoverable VAT. This has in effect caused an increase in the prices of the basic consumer commodities such as milk, bread and tea leaves and medicaments since the enactment of the Nigerian VAT Act of 2013. The argument against zero rating of the basic consumer commodities has been that this leads to an increased administrative and financial burden of VAT refunds and that it eats into government revenue. Consequently, governments need to develop tax policies and tax systems that are guided by certain tenets. Since taxation affects incomes and prices of goods and services, individuals and businesses react differently in response to changes in income, and in relative prices, emanating from taxation. Therefore, analysis of the effects of tax policy is critical for government decision makers and the public to make informed policy decisions. This concern over the economy wide impact of VAT is all the more important because of the possibility that the tax may cause consumers to reduce their consumption of certain commodities that have direct and/or indirect effects on labor productivity.
1.4 Objectives of the Study
The main objective of this study is to examine what impact VAT has on the economy taking into consideration, the VAT payers, those responsible for the administration of VAT and the extent to which VAT has replaced sales tax.
Besides the aforementioned, other objectives of this research include:
1) To find out the desirability of Value Added Tax, this objective relates to obtaining a measure of understanding the extent to which ‘VAT’ is socially needed for revenue purpose.
2) To determine what rating system could be considered appropriate for the Nigerian politico-economic system.
3) To determine how to enhance the collection of VAT in Nigeria.
4) To contribute to the existing literature on Value Added Tax (VAT) management and economic development of Nigeria.
5) To advise and proffer solution to some problem encountered in administration tax in Nigeria.
1.5 Research Questions
Following the statement of the problem, the study seeks to find answers to the following basic questions:
1. To what extent does Value Added Tax (VAT) impact on the economic development of Nigeria?
2. What is the effect of Value Added Tax on the economic growth and development in Nigeria?
3. How and in what direction has VAT been affecting the Nigerian economy as proxy by Gross Domestic Product (GDP)?
4. How does VAT affect total revenue in Nigeria?
1.6 Statement of the Hypothesis
For the purpose of this research work, three hypotheses are proposed:
Hypothesis One:
H0: Value added tax (VAT) has not made any significant impact on the Economic growth as proxy by GDP in Nigeria
H1: Value added Tax (VAT) has made significant impact on Economic growth as proxy by GDP in Nigeria.
Hypothesis Two:
H0: Value added Tax (VAT) has not made significant impact on total revenue in Nigeria
H1: Value added tax (VAT) has made significant impact on total revenue in Nigeria.
Hypothesis Three:
H0: Total revenue has not made any significant impact on the Economic development as proxy by GDP in Nigeria
H1: Total revenue has made significant impact on Economic development as proxy by GDP in Nigeria.
1.7 Significance of the Study
It is hoped that the findings of this study would be beneficial and of great importance to the Federal Inland Revenue Service which is saddled with the statutory responsibility of collecting VAT. It will also benefit the federal government whose resources are channeled towards the collection of VAT and also the general public, who consumes VATABLE goods and services.
In general, this study will broaden the knowledge people have on VAT and the level of how responsive are the general public in the settlement of VAT and areas which may lead to improvement in the general collection and remittance of VAT. This study will also go a long way to fill the missing links in the analysis of VAT vis-à-vis sales tax in the existing tax literature.
1.8 Scope of the Study
The Nigeria tax system is known to be prone to continual changes which in itself necessitate changes in the administration of the tax.
This study considers the factors that aid the collection of VAT and its contribution to the economic development of Nigeria. The analysis of investigation will focus on Lagos State Government. Development Mobilization, Allocation and Fiscal Commission as well as the office of the Economic Adviser in the Presidency. The study will pay particular attention on the VAT as well as economic development of the country.
1.9 Definition of Terms
i. Value Added Tax: This is a multi-stage consumption tax collected on sales at all stage of sales and distribution in the operation VAT each seller issues an invoice going the amount of VAT paid which become a credit for further set off it item is used as input in the chain of production or distribution.
ii. Input Tax: The input is what is changed on business purchase and expenses. These include goods and services supplied in Nigeria or imported.
iii. Output Tax: Is the tax that is due on VATABLE supplied. It is derived by multiplying the tax of the aggregate supply derived by the tax rate.
iv. Consumption VAT: This type of VAT is where capital purchase is treated the same way as the purchase of any input. This treatment of capital input is equivalent to expensing.
v. The Income VAT: Under the income VAT the tax paid on purchase of capital input as amortized, that is credited against the firm VAT liability as inputs.
vi. The Gross Product VAT: Under the gross product purchases are allowed against the firm output tax in other words the taxable firm is treated as a final consumer of all its capital input.
vii. Economy: Is defined as a process whereby the real per capita income overtime coupled with changes in structure attitude development in administrative system qualitative distribution of income conducive to normal integration.
viii. Economic Development: Economic development is concerned with the ability to raise and maintain the productive capability of a country. A country can achieve economic development of the following factors are available: Political stability, Investments, Abundance of capital, Human resources.
ix. Federal Inland Revenue Service: FIRS is the body that is responsible for collection of taxes on behalf of the federal government.


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