ABSTRACT
The study investigated the effect of value added tax on nigerian economic performance. It utilized time series data from 2000-2016 extracted from CBN statistical bulletin, National Bureau of Statistic and various reports of the Federal Inland Revenue Service. It extracted real gross domestic product, inflation rate and unemployment rate as proxies for economic performance while value added tax revenue was used as the independent variable. It adopted ex post facto research design to establish the relationship of the variables. The ordinary least squares method of simple regression technique was engaged to analyze the data. It was found that there is positive significant effect of value added tax revenue on economic growth of Nigeria. Value added tax revenue has significant effect on economic growth of Nigeria at less than 5% level of significance. It also established that there is no significant effect of value added tax revenue on inflation rate in the economy of Nigeria and that there is positive significant relationship between value added tax revenue and unemployment rate in Nigeria. The study found that the effect of value added tax revenue is significant on unemployment rate in Nigeria at 5% level of significance and therefore concluded that the is long run equilibrium relationship between value added tax and economic performance of Nigeria. The study therefore recommends that Government should engage the revenue collected from value added tax for specific programmes that would yield benefit for the economy so as to enhance its growth rate, Government should differentiate the value added tax rate of some consumables such as tobacco and alcohol by increasing the rate on the products and that they should provide the enabling business environment to enhance growth in the private sector to provide job opportunities.
TABLE
OF CONTENTS
Title
page i
Declaration ii
Certification
iii
Dedication iv
Acknowledgements
v
Table
of Contents vi
List
of Tables x
List
of figures xi
Abstract
xii
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of Problem 4
1.3
Objectives of the Study 6
1.4 Research
Questions 6
1.5
Research Hypotheses 5
1.6 Significance of the Study 6
1.7 Scope
of the Study 9
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1
Conceptual Framework 10
2.1.1 Meaning
of taxation 10
2.1.2 Sources
and forms of taxes 13
2.1.3 Principles of taxation 13
2.1.4 Value
Added Tax 14
2.1.4.1 Zero rated goods and services (S.4, schedule
111) 18
2.1.4.2 Exempted Goods (S.3, schedule 1) 18
2.1.4.3 Exempt services (S.3, schedule 1) 18
2.1.4.4 Recoverable input VAT (S. 17) 19
2.1.4.5 VAT refund/carry forward [S. 16 VAT Act, S. 23
FIRS EA] 20
2.1.4.6 Registration (S. 8, 10) 20
2.1.4.7 Due date for filing (S. 12) 20
2.1.5
Objectives and features of Value Added Tax 20
2.1.6 The
administration and structure of Value Added Tax in Nigeria 22
2.1.7 Types
of Value Added Tax (VAT) 24
2.1.8 Alternatives
in VAT computation 25
2.1.9
Problems of Value Added Tax 26
2.1.10 VAT policy in Nigeria 27
2.1.10.1 Scope of imposition 28
2.1.10.2 Taxable person registration for VAT 28
2.1.10.3 Rendering of account 29
2.1.10.4 Computation of tax due 30
2.1.10.5 VAT on exports 30
2.1.10.6 Distribution of VAT proceed 31
2.1.10.7 Recovery 31
2.1.10.8 Offences 32
2.1.11 Penalties and offences 33
2.1.12 VAT and its challenges 34
2.1.13 Productivity of Value Added Tax in Nigeria 35
2.1.14 Inflation 36
2.1.14.1 Types of inflation 38
2.1.14.2 Measures to control inflation 39
2.1.15 Unemployment
41
2.1.15.1 Causes of unemployment 43
2.1.15.2 Consequences of unemployment 43
2.1.16 Economic
growth and taxation 45
2.2
Theoretical Framework 46
2.2.1 Ibn
Khaldun's theory of taxation 46
2.2.2 Theory
of Laffer curve 47
2.3
Empirical Review 47
2.4 Gap
in Literature 55
CHAPTER 3: METHODOLOGY
3.1
Research Design 56
3.2 Area of
the Study 56
3.3 Method
of Data Collection 57
3.4 Model
Specification 57
3.5 Data
Analysis Technique 59
3.5.1 Unit
root test 59
CHAPTER 4: DATA
PRESENTATION AND DISCUSSION OF RESULTS
4.1 Presentation of Data 60
4.1.1. Presentation of data on value added tax revenue 60
4.1.2
Presentation of data on inflation rate 63
4.1.3. Presentation of data on unemployment rate 64
4.1.4.
Presentation of data on percent rate change on real gross domestic
Product 65
4.2 Stationarity Test 67
4.3 Analysis
of Results 70
4.3.1 Effect of Value Added Tax Revenue on change in
real gross domestic
product 70
4.3.2 Effect
of Value Added Tax Revenue on Inflation rate 72
4.3.3 Effect
of Value Added Tax Revenue on Unemployment rate 75
4.4 Hypotheses
Testing 76
4.5 Discussion of Results 78
CHAPTER 5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
of Findings 81
5.2 Conclusion
83
5.3 Recommendations 84
5.4 Contribution
to knowledge 85
References
Appendices
LIST OF TABLES
Page
4.1:
Augmented Dickey-Fuller unit root test 68
4.2:
Regression Analysis of RGDP and LogVAT 71
4.3:
Regression Analysis of Inflation rate and LogVAT 73
4.4: Regression Analysis of
Unemployment rate and LogVAT 75
LIST
OF FIGURES
Page
4.1: Graph indicating absolute value added tax
revenue from
year
2000-2016 61
4.2: Graph indicating annual percent rate of
value added tax
revenue
from 2000-2016 62
4.3:
Graph indicating inflation rate from
2000-2016 64
4.4: Graph indicating unemployment rate from
2000-2016 65
4.5: Graph indicating data on percent rate
change on real gross
domestic
product 66
4.6: Graph indicating data on real gross
domestic product 66
CHAPTER
1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Many nations in the world have been striving to attain
rapid economic development through optimum tax collection and expanded revenue
base. It has become pertinent for
governments all over the globe to devise appropriate means of generating
revenue to finance their expenditure which rise based on increase in population
with its demand for social infrastructural and economic development (Okorie,
2011).
A
major challenge facing Nigeria’s economy is how to broaden its revenue other
than crude oil earnings because reliance on crude oil revenue cannot sustain
public expenditure and run other government programmes. The economy of Nigeria
may encounter hard times if proactive measures are not made towards enhancing
the revenue base (Dickson & Rolle, 2014).
Ihendinihu,
Jones and Ibanichuka (2014), posit that taxation is a veritable fiscal policy
and offers to be a major source of revenue to government and a mechanism for
regulating economic and social policies.
The tax system needs to be robust through the principles of fairness;
equitability effectiveness and efficiency for it to generate sufficient revenue
and impact on economic growth of a country.
Tax policies in Nigeria are directed towards attaining
some specific objectives which include revenue generation and enhancing
economic performance of the economy (Owolabi, 2012). However, successive
governments had encountered various challenges in the administration of the tax
system and achieving a tax payment culture in Nigeria. One of the efforts made to expand the tax net
with minimum resistance and reduce tax evasion and boost tax income revenue in
Nigeria was the replacement of sales tax with Value Added Tax (VAT) in
1993. This tax reform actually came into
operation in January 1994 to replace the old sale tax which was narrow in scope
in terms of tax revenue from goods and services (Wilson, 2015).
Value Added Tax is also called goods and services
tax. The idea of VAT in Nigeria is
traceable to a committee led by Dr. Sylvester Ugoh in November, 1991. The
committee was set up under the chairmanship of Mr. Emmanuel Ijewere to conduct
extensive research and make recommendations (Omesi & Nzor, 2015). Value
Added Tax was introduced in Nigeria in 1993 by the VAT Act No. 102 of 1993 as a
replacement of the sales tax which had been in operation under federal
government legislated decree No. 7 of 1986 (Ugwa & Embuka, 2012).
Olatunji
(2009) states that value added tax was introduced in France in April 10, 1954,
it has been embraced by well over seventy countries all over the world. Many
developing countries have adopted the Value added Tax system because of the
perceived advantages inherent in the collection process. Value Added Tax has
become one of the major sources of revenue in any developing countries. In
sub-Saharan Africa and parts of West Africa for example, Benin, Cote d'ivore, Ghana,
Guinea, Kenya, Madagascar, Mauritius, Niger, Senegal, Togo and lately Nigeria
(Aruwa, 2009).
Evidence
suggests that in these countries, Value Added Tax has become an important
contributor to total government tax revenues and that VAT accounted for about
30% of total tax revenue in Coted'ivore, Kenya and Senegal in 1982 (Ajakaiye,
2000, Naiyu, 1994, Shalizi & Squire, 1988). This impressive performance of
VAT in other countries where it has been introduced influenced the decision to
introduce VAT by the Nigerian government in January 1994 (Ajakaiye, 2000). The
yield from VAT is indeed a fairly accurate measurement of the performance of an
economy since purchasing power increases with economic performance.
The
Nigerian government estimated that as much as N6
billion would be the target revenue; this means that the value Added Tax was
projected to achieve in its first year about 150% of what the general sales tax
achieved in four years (Ajakaiye, 2000).
Alade
(1994) states that according to Central Bank of Nigeria (CBN) report of
government finance, revenue streams from VAT was N7.260 billion and N20.436
billion for 1994 and 1995 respectively. Since 1994, VAT proceeds have had
steady increase and are now one of the major sources of revenue for the
government after Petroleum Profit Tax (PPT) and Company Income Tax (CIT). VAT collected by Federal Inland Revenue
Services (FIRS) rose from N60.68
billion in 2000 and N767.33 billion in
2015, thus justifying government's action in the adoption of Value Added Tax in
Nigeria. Value Added Tax is the result of federal government's decision to
revamp the economy and start a deliberate low tax regime through the
reorganization of the then tax administration in Nigeria so as to make it more
efficient.
This study therefore investigates the
effect of value added tax on Nigerian economic performance.
1.2 STATEMENT OF THE PROBLEM
There is need for diversification of
the economy from oil to enhance growth in a macroeconomic environment. The
Nigerian economic system is lopsided and dominated by oil revenue and with the
recent fluctuations in oil prices that make national revenue unpredictable and
inimical to budgeting and planning.
Value Added Tax (VAT) in Nigeria was
introduced in 1993 to replace sales tax because of its neutrality and
progressive nature. Other goals for its introduction were aimed at increasing
the revenue base, achieving economic stability through growth in gross domestic
product and sustain unemployment rate.
The country had through the Federal
Inland Revenue Service put in place measures to secure substantial revenue from
this source, yet the ability of government to efficiently collect the proceeds
from companies and other agencies has been observed by economic analysts and
researchers. The economy had presumably lost substantial amount of
revenue through the unsavory practices of tax avoidance and tax evasion by
companies. There have also been issues where corrupt tax officials collude with
tax payers deliberately to reduce the tax liability through the manipulations
of value added tax inputs and outputs. The
machinery for effectively monitoring the remittance of the revenue has also not
been efficient particularly with some small and medium scale enterprises. This
has made the cost of collection for value added tax proceeds to be expensive.
If not checked, it would deplete the collectable revenue from the source.
There has been incessant complains of
decay in social infrastructure in Nigeria which has arouse doubts as to whether
government had effectively utilized tax revenue generated or whether there has
been reckless spending or misappropriation of tax revenue.
It is against this backdrop that this work
sought to determine whether value added tax has effect on Nigerian economic
performance.
1.3 OBJECTIVES OF THE STUDY
The
broad objective of this study is to assess the effect of Value Added Tax revenue
on Nigerian economic performance. The specific objectives of the study are to:
I.
determine the effect of Value
Added Tax revenue on percent rate change of real gross domestic product;
II.
establish the effect of
Value Added Tax revenue on the inflation rate; and
III.
assess the effect of
Value Added Tax revenue on the unemployment rate.
1.4 RESEARCH QUESTIONS
This
research work will provide answers to the following questions:
a. What
has been the effect of Value Added Tax revenue on percent rate change of real
gross domestic product?
b. To
what extent does Value Added Tax revenue affect inflation rate?
c. What
is the effect of Value Added Tax revenue on unemployment rate?
1.5 RESEARCH HYPOTHESES
Following the above stated objectives the under listed
hypotheses were formulated and tested.
Ho1: Value Added Tax revenue has no significant effect
on percent rate change of real gross domestic product.
Ho2: There is no significant effect of Value
Added Tax revenue on inflation rate in the economy.
Ho3: The effect of Value Added Tax revenue is
not significant on unemployment rate in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This
study will no doubt be of great importance to the majority of the
populace. Specifically, it will be
beneficial to the following:
Government:
Value Added Tax revenue as one of the
non-oil sources of revenue in Nigeria is base on the general consumption
behaviours of the people, thus, the yield from it will enhance government
revenue generation.
Findings
of this study may assist the government of Nigeria on revenue policies in
relation to VAT. The downward trend in
oil revenue to the government occasioned by the reduction in production and its
prices has made the government to diversify to non-oil revenue sources like the
VAT.
This
study could add to existing knowledge not only by determining the extent of VAT
revenue has contributed to total government and total tax revenue in Nigeria
but also evaluating the performance and challenges of VAT administration in
Nigeria.
The
Federal Inland Revenue Services (FIRS) would no doubt have leverage on this
study to enhance its administration and collection procedures of VAT by
following the recommendation of this study.
The
government would also utilize the findings and recommendation for efficient and
effective utilization of the revenue from VAT on the basis of derivation to
boast the state that generates the revenue and the nation at large.
Business organization: This
study will help business organization to acquire an in-depth knowledge of the
factors that impede the smooth running of the operations of VAT and its
consequent effects on the business and the entire Nigeria economy.
Also,
the consumers who bear the tax burden will find this study beneficial because
the findings and recommendations contained on this study will enlighten them on
the importance of proper tax system like VAT, the effect of no payment of VAT
and it processes.
Stakeholders: The
findings of this study could be of great importance to many interested group or
stakeholders. The stakeholders in VAT system include the-vatable persons, tax authorities,
the populace, the government, researchers and students. VAT affects the general
public because it is a consumption tax and there is a great need for the
populace to understand and appreciate
the VAT system so as to comply fully with the regulation bodies.
Academics: This
study will add to existing literature which may be used by researchers and
students as reference materials for research work.
Policy makers: This
study may be of great importance to the policy makers in appraising the
possibility of amending the current VAT policy if need be in future. The
amendment of the policy may be in area of VAT rate change on all taxable goods
and services and this will contribute significantly to the total government
revenue. Also, the result of this work will
be useful to the policy makers during policy formation.
Consumer and Investors: This
study will provide both parties with proper and adequate information on the
rates, its computations, remittance and cost implication on consumables.
1.7 SCOPE OF THE STUDY
This study is restricted to the aspect of Value Added
Tax that falls under the jurisdiction of the Federal Inland Revenue Service
(FIRS) which is the relevant tax authorizes for the administration of value
added tax in Nigeria. It covers a period of sixteen (16) years from 2000-2016
with emphasis on revenue generated by the federal government through VAT, inflation
rate, unemployment rate and the percent rate change of real Gross Domestic
Product (GDP) for the period.
Within the period under study, Nigeria experienced
economic recession and instability in the major economic aggregates; unemployment
rate, real gross domestic product and inflation rate.
The choice of the period is based on finding out the
relevance of Value Added Tax revenue on the economic indices during the present
political dispensation. This period has brought to the fore changes in the tax
administration and collection.
1.8 LIMITATIONS OF THE STUDY
The study was constrained by number of factors;
a) Finance:
Finance is a constraint to the research, especially at this moment of economic
crunch, with high cost of both transportation and materials.
b) Time
Constraint: Availability of time and other resources also limited the scope of
this study.
c) During the period of this study, I lost my
beloved elder brother and his death affected my determination, zeal and
concentration during the program
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