Effect of Value-added Tax on the Growth of Nigeria’s Economy
Chapter One
OBJECTIVES OF THE STUDY
The objective of this study is to
- Establish the amount of VAT Revenue generated by the Government from 1994 to 2012.
- Evaluate the contribution of VAT to the revenue diversification drive of Nigeria from 1994 to 2012, as reflected in its contribution to Government Revenue during the period,
- Evaluate the contribution that VAT has made to economic growth of Nigeria from 1994 to 2012, and
- Evaluate the contribution that VAT has made to the economic development of Nigeria from 1994 to 2012, as reflected in its relationship with the Gross Domestic Product (GDP) of the country for the period.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
An empirical study like this one would not be successfully carried out without taking a look into the past (immediate and distant), with a view to laying a solid foundation, of research and write ups already carried out on the subject matter by relevant authorities.
This chapter shall undertake a review of relevant literature related to the subject matter of this study. Commentaries, opinions, positions and concerns by authorities in the area of the study shall be reviewed with a view to putting the researcher in a better position to be able to undertake the study.
HISTORICAL BACKGROUND OF VALUE ADDED TAX (VAT) IN NIGERIA
Value Added Tax (VAT) has a long history. This section of the review shall consider the evolution and development of VAT worldwide and in Nigeria.
Worldwide History of Value Added Tax
Citing Ebrill et al (2001) and Keen and Lockwood (2007), James (2011) said “from relatively inauspicious beginnings in the early 20th century, the VAT has been adopted in more than 140 countries and accounts for approximately 20 percent of worldwide tax revenue”.
According to James (2011) the origins of the VAT have never been decisively settled. She said attribution is variously accredited to one of two sources: the German businessman Wilhelm Von Siemens in 1918, or the American economist Thomas S. Adams in his writing between 1910 and 1921. She further said that Von Siemens’s VAT was seen as a technical innovation that brought a key improvement to the turnover tax. VAT allowed for the recovery of taxes paid on inputs and therefore avoided the cascading problems that arise with a turnover tax. On the other hand, she said Adams saw the VAT as an alternative to the business income tax. He was focused on federal tax policy, and since there was no national sales tax his concern was not with technical modification to an extant regime but with a major alteration of the existing federal income tax system.
The VAT was first introduced at a national level in France in 1954 with its original coverage limited and moving to a full VAT that reached the broader retail sector in 1968. The first full VAT ACT in Europe was enacted in Denmark in 1967, although the country did not join the European Economic Community (EEC) until 1973 (James, 2011).
VAT adoption progressed in two major phases. The first occurred mostly in Western Europe and Latin America during the 1960s and 1970s. The rise of the VAT in Western Europe was accelerated by a series of EEC directives requiring member states to adopt a harmonized VAT upon entry to the European Union. The second phase of VAT adoption occurred from the late 1980s with the introduction of VAT in some high-profile industrialized countries outside the EU, such as Australia, Canada, Japan, and Switzerland. This phase also witnessed the massive expansion of VAT in transitional and developing economies, most notably in Africa and Asia, with the IMF and the World Bank identified as playing key influences in the rapid adoption of VAT among these countries (James, 2011). Incidentally, the United States of America has remained the only advanced country to have refused to implement the VAT.
Other notable countries that have introduced the VAT include Germany in 1968, Sweden and Netherlands in 1969, Norway and Luxemburg in 1970, Belgium in 1971, Ireland in 1972 and United Kingdom in 1973.
History and Development of VAT in Nigeria
The history of VAT in Nigeria dates back to 1991 when the Federal Government felt there was a need to review the entire system of taxes in the country with a view to expanding the financial base for revenue generation (FIRS, 1999; Abdul-Rahman, Joshua & Ayorinde, 2013). Abdul-Rahman, Joshua and Ayorinde (2013) further argued that this became necessary because sales tax could not guarantee wider and better tax administration, as many states were resentful of its uniform nature due to differences in their political orientation. Sanni (2012), in his own contribution, said “before the advent of VAT, sales tax was under the jurisdiction of the States and generally poorly administered with marginal contribution in terms of revenue”. The rationale, Abdul-Rahman, Joshua and Ayorinde (2013) argued, behind the adoption of VAT in Nigeria can be summarized as the need to achieve:
- Simplification of indirect tax system
- Enhancement of tax neutrality in international trade
- Reduction in tax evasion, and
- Expansion of tax base promotion and investment.
A committee was set up and charged with the responsibility of carrying out the review (Soyode & Kajola, 2006; Gyang, 2012; Unegbu & Irefin, 2011). The committee completed its work on November 15, 1991 and made the following recommendation, among others:
CHAPTER THREE
MATERIALS AND METHODOLOGY
INTRODUCTION
This chapter discusses the methods adopted in conducting this research. It explains the target population, sample size, sampling technique adopted, instrumentation, sources of data and method of data analysis.
RESTATEMENT OF RESEARCH QUESTIONS
- How much has Government generated as VAT Revenue over the years 1994 to 2012?
- Has VAT made any significant contribution to Government Revenue (GR) in Nigerian from 1994 to 2012?
- Has VAT any significant relationship with the economic growth of Nigeria from 1994 to 2012?
- Has VAT any significant relationship with the Gross Domestic Product (GDP) of Nigerian from 1994 to 2012?
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents and analyzes data. Data was collected from CBN annual reports and statistics and NBS annual extracts of statistical data. This shall be presented in tables and analyzed using percentage changes.
The test of hypothesis shall be carried out using the Ordinary Least Squares (OLS) Model along with the student “t” statistic as stated in chapter three. The result shall provide the basis for drawing conclusions and making recommendations.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
INTRODUCTION
This chapter is the concluding part of this study. Here, findings of the research are presented and conclusions are drawn. It also makes recommendations for policy improvement and suggests areas for further research.
SUMMARY OF FINDINGS
This study started with, as statement of the problem, the intention to investigate whether VAT has made any significant contribution to the development of the Nigerian economy, with a view to forming an opinion as to whether the VAT can become a veritable alternative source of revenue for the Government, in her search to diversifying revenue sources in a viable and sustainable way.
To further clarify the above, two statements of hypothesis were postulated:
HO: Value Added Tax does not have any significant relationship with the economic growth and development (GDP) of Nigerian from 1994 to 2012.
HI: Value Added Tax has a significant relationship with the economic growth and development (GDP) of Nigerian from 1994 to 2012.
The analysis of data and test of the hypothesis revealed the following, which shall serve as the basis for drawing conclusions:
- Government has generated a total of N4.216 Trillion over the years 1994 to 2012.
- Value Added Tax (VAT) also has a significant statistical relationship with the economic growth and development (GDP) of Nigeria over the period under review.
- Income generated from VAT revenue over the period covered by the study has significantly grown which is an indication that given the right atmosphere, VAT has the capacity to serve as a veritable alternative source of revenue for government in Nigeria.
- Nigeria, with a VAT rate of 5%, is among the countries that charge the least rate of VAT in the whole world, no matter what approach is used to perform the comparison. This is so even among the oil rich countries of the world.
CONCLUSION
From the above findings, this research concludes that Value Added Tax (VAT) has contributed to the economic growth and development of Nigeria. This is evident in the significant relationship it has with the Gross Domestic Product (GDP) of the country, as well as the phenomenal growth in revenue that it has generated for government over the period under study. This is in agreement with the findings of Moses (2013); Ogbonna & Ebimobowei (2012); Adereti, Adesina & Sanni (2011); Okoye and Ezugwu (2012) and Onaolapo, Aworemi & Ajala (2013).
Given the above, it is clear that if the right atmosphere is provided and government policies are directed at improving the situation, creating awareness and blocking the loopholes, the VAT has the potential to generate significant revenue for government and help in the diversification of her revenue source. This is also coupled with the fact that Nigerians are good spenders.
RECOMMENDATIONS
Based on the findings and conclusions drawn from this study, the following recommendations are made with a view to ensuring a more effective and robust Value Added Tax system in Nigeria that can better contribute to revenue generation and diversification of the revenue base of the government towards national development:
- Government should keep abreast happenings in other countries and review the VAT rate upwards to between 10% and 12.5%. The 5% currently being charged is the least worldwide, even among oil producing countries.
- More stringent penalties should be imposed on individual and corporate bodies that indulge in any form of VAT malpractice, not withstanding their status.
- Government should review the VAT Act, to bring it up to date with current economic realities in the world. The exempted items should be reviewed to cover only essential items like foodstuff, education, health and agriculture.
- Governments, at all levels, should make their presence more felt and seen by the citizens, through dividends of democracy that citizens enjoy. When citizens do not see the benefits accruing to them, tax payment is always a burden that must be carried. They are bound to seek ways of evading or avoiding the taxes.
- Government officials and tax administrators should exhibit a high sense of accountability and discipline in the conduct of government affairs. Corrupt officers should not only be shown the way out, they should be handed over to the law for justice to prevail. This will encourage citizens to pay their taxes joyfully.
- Corporations that are enjoying pioneer status, and by implication tax holiday, should not be exempted from the Value Added Tax. They should charge VAT and remit appropriately.
- Government should evolve a better means of capturing and maintaining data with respect to taxpayers in the country, with special emphasis on the informal sector which makes up the bulk of the private sector and the economy by extension. It is the humble opinion of this writer that huge amounts of revenue are lost due to lack of registration for VAT by this section of the Nigerian economy.
- VAT audits should be intensified to help fish out those organizations and individuals that have not complied with or are disregarding the provisions of the VAT Act. Government is loosing huge revenue due to these malpractices.
- The Federal Inland Revenue Service (FIRS) and all States Internal Revenue Services (SIRS) should also intensify effort in enlightenment campaigns to sensitize Nigerians on the need to comply with tax laws.
- Bearing in mind the limitations of the study further research may be carried out to investigate the effect of the VAT on the development of Plateau State or the Local Government Areas in the State. This will help citizens realize what impact the VAT is having on their lives as citizens of the State.
REFERENCES
- Adereti, S.A., Adesina, J.A. & Sanni, M.R. (2011). Value Added Tax and Economic Growth in Nigeria. European Journal of Humanities and Social Sciences. 10(1). 455-471.
- Moses, O.L. (2012). The Impact of Value Added Tax on Nigerian Economic Growth: 1994 – 2010. Unpublished B.Sc. Project, Department of Economics, Caritas University Amorji-Nike Enugu.
- Ogbonna, G.N. & Ebimobowei, A. (2012). Impact of Tax Reforms and Economic Growth of Nigeria: A Time Series Analysis. Current Research Journal of Social Sciences.4(1). 62–68.
- Okoye, E.I. & Ezugwu, C.I. (2012). Explaining the Imperatives of Value Added Tax (VAT) in National Development. The Nigerian Accounting Horizon.5(1). pp 12 – 27.
