IMPACT OF VALUE ADDED TAX ON ECONOMIC GROWTH OF NIGERIA

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Product Category: Projects

Product Code: 00004770

No of Pages: 122

No of Chapters: 5

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ABSTRACT

This research examined the impact of value added tax (VAT) on economic growth of Nigeria. The aim of this study is to examine the contributions of the VAT in the economic growth of Nigeria. Data used in this study was mainly from secondary source principally the Central Bank of Nigeria and the Bureau of Statistics. The study employed a time series date for a twenty year period 1995 – 2014. The data was analyzed using the regression statistical model. The model assisted in testing the statistical significance of the variables under study. At the end of the analysis, we found that VAT has positive and significant impact on economic growth in Nigeria. We also found that value added tax has a Positive impact on federally collected revenue. We thus conclude that the value added tax has influences the pattern of federal collected revenue and the economic growth of Nigeria. Based on these findings, we recommend that there is the need for policy impact assessment before tax policy is carried out in Nigeria.

 

Key Words:  Value Added tax, Economic Growth, Gross Domestic Product, Economic Development, Tax Planning, Tax Exemption. 

 

 

 

 

 

 

 

TABLE OF CONTENTS

CHAPTER ONE

1.1 Background of the study                                         1

1.2 Statement of the problem                                                3

1.3 Objectives of the study                                            4

1.4 Statement of Hypotheses                                                 4

1.5 Significance of the study                                         5

1.6 Scope of the study                                                 5

1.7 Limitations of the study                                           5

1.8 Organization of the study                                                6

 

CHAPTER TWO

LITERATURE REVIEW

2.1 Conceptual Frame work                                           7

2.1.1 What is VAT                                                                7

2.1.2 Evolution of Value Added Tax in Nigeria                  8

2.1.3 Objectives of Value Added Tax                                       9

2.1.4 Services Exempted        10

2.1.5 Features of the Value Added Tax in Nigeria   11

2.1.6 Advantages and Disadvantages of VAT    12

2.1.7 Types of Value Added Taxes      14

2.2 Economic Effects of Taxation      15

2.3. Problems of Tax Planning, Administration and 

Collection in Nigeria                                                      25

2.3.1 Value Added tax as a Tool for Poverty Reduction  44

2.4 Key Issues in Fiscal Federalism     45

2.4.1 Justification of Fiscal Federalism      50

2.5 Vertical and Horizontal Fiscal Imbalance    53

2.6 Evolution of Fiscal Federation in Nigeria    54

2.7 Assignment of Revenue Taxing Powers in Nigeria  57

2.8 Revenue Allocation in Nigeria      57

2.9 Revenue Allocation Formula and Principles    62

2.10 Sharing of Vat Revenue      63

2.11 Economic Development      63

2.12 Preconditions for Development     64

2.13 Theoretical Frame Work      65

2.14 Harrod-Domar Model       66

2.15 Structural Change Theory      66

2.16 Empirical Studies        80

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design        82

3.2 Data Collection        82 

3.3 Data Analysis        82

3.3.1 Regression  Analysis       82

3.3.2. Correlation Analysis       84

3.3.3 Coefficient of Determination      84

3.4 Model Specification        85 CHAPTER FOUR

DATA PRESENTATION ANALYSIS AND DISCUSSION 

4.1 Data Presentation                                                   86

4.2 The Results of the Analysis                                      88

4.3 Test of Hypotheses                                                          90

4.3.1 Test of Hypotheses One                                                 90

4.3.2 Test of Hypotheses Two                                                92

4.3.3 Test of Hypotheses Three                                              93

4.4 Discussion of Findings                                             93

 

CHAPTER FIVE

SUMMARY OF FINDINGS/CONCLUSION AND RECOMMENDATIONS

5.1 Summary of Findings                                              97

5.2 Conclusion                                                             97

5.3 Recommendation                                                    98

References

Appendices

 

 

 

 

 

 


CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In any country, well articulated economic policies influences a whole range of economic activities embarked upon in such country. Such policies includes fiscal policy, which refers to the raising of revenue through taxation and deciding on the level and pattern of expenditure of a country for the purpose of influencing economic activities or attaining some desirable macroeconomic goals. Such fiscal policy goal s can be used for allocation, stabilization and distribution effect of a country.

In Nigeria, the Federal Ministry of Finance has the responsibility of formulating and executing fiscal policy based on the state of the economy. In this regard, the fiscal policy goals are the gross national product (GNP), prices, employment, incomes, the exchange rate stability, the inflationary rates. 

The role of fiscal policy in ensuring the securing stability and growth of an economy is of fundamental importance. Perhaps the impact of fiscal policy upon capacity output is through its effects on savings and capital stock. Capital formation raises productivity. The larger the share of incomes saved and invested, the higher the level of output. By influencing this aggregate share, fiscal policy has an important impact upon economic growth. However economic growth has its cost. When the share of incomes, which is currently used for capital formation, is increased, consumption will be reduced. The policy problem is therefore one of choosing between present and future consumption. The terms on which this choice can be made have been the subject of much controversy analysis during the past decade. Here our concern is with the immediate question of how savings and investment in the private sector are affected by fiscal measures. The effects of tax policy upon savings in the private sector matter a lot because they effect bear on the division of resources and the consumption output.

The effects of taxation refer to all the changes in the economy as a result of the tax imposition. The presence of tax distorts the pattern of production, consumption, investment, employment in the macro-economy. These distortions are collectively viewed as the effects of taxation. Here, the effects are examined on the macro-aggregate level (the economy as a whole).

The introduction of the value added tax as a fiscal tool in Nigeria came from the report of the study group set up by the federal government in 1991 to review the entire tax system. VAT was proposed and a committee was set up to carry out feasibility studies on its implementation. It however became operational in January 1994. VAT is a consumption tax imposed on certain categories of goods and service. Since is a consumption tax, it is relatively easy to administer and difficult to evade. VAT has become a major source of government revenue. VAT is believed to encourage economic growth through its positive impact on savings and investment while at the same time discourages excess consumption.

Indeed, the central problem of tax policy in developing countries is how to obtain necessary revenue while at the same time provide the basis for correcting the inequality in the distribution of income, but without interfering unduly with private savings and investment.

Economic growth has been simply defined as the increase in the economy’s output overtime. The best measure is the gross national product (GNP). While development is generally thought of as involving more than a command of income, it also includes an accumulation of physical and human capital.

Nigeria operates a federal system of government, with a Federal Government, State and Local governments. In such a multilevel system, fiscal responsibilities are rested in both the central and lower level government – Federal, state and Local. This gives rise to Fiscal Federation. Okigbo (1965) refers to fiscal federalism as the existence in one country of more than one level of government, each with different expenditure responsibilities and taxing powers. In essence, the study inquired at a macro level, the effect of value added tax (VAT) on economic development in Nigeria.

1.2 STATEMENT OF THE PROBLEM

The central problem of tax policy in developing countries centre around how to obtain necessary revenue to finance growth while at the same time providing some correction for a of inequality in the distribution of income, but without interfering unduly with private savings and investment. 

At the structural level, it has argued that the tax provisions do not adequately reflect the peculiar socio-economic character, goals and problems of the nation. On the other hand, at the administrative level, it is argued that the machinery and procedures followed in implementing the tax system are inadequate, and hence account for the consistent low yield of some taxes and inner group inequities. Any change in tax law is usually designed in adhoc manner and is based on expediency rather than on long-term studies. Since small taxpayers are numerous in developing countries and administrative facilities so limited, the treatment of small taxpayers required special attention.

The difficulty of imposition of taxes has led most developing countries to omit all but a few services from taxes. Administrative constraints are the main reasons why VAT that prevails in developing countries is usually very different from the broad-based and neutral tax. 

The informal structure of the economy in many developing countries and the financial limitation, creates difficulty in generating reliable statistics. The lack of data prevents policy makers from assessing the potential impact of the tax system. 

From the discussions above, this study seeks to provide answers to the following questions.

        Is there any relationship between values Added Tax and Gross Domestic Product.

        Is there any relationship between Value Added Tax and Federally Collected Revenue.

        Is there any relationship between a Value Added Tax, Federally Collected Revenue and Inflation in Nigeria.

 

1.3 OBJECTIVES OF THE STUDY

The major objective of this study is to examine empirically the relationship between Value Added Tax and economic growth in Nigeria.

The objectives pursued in the study include:

        Investigation of the relationship between Valued Added Tax and    Federally collected Revenue in Nigeria.

        Investigation of the relationship between Gross Domestic Product and Value Added Tax, Federally Collected Revenue and Inflation in Nigeria.

 

1.4       STATEMENT OF THE HYPOTHESES

The following hypotheses shall form the major focus of this study.

HO1 There is no relationship between Value Added Tax, Federally collected Revenue, Inflation and Gross Domestic Product

HO2 There is no relationship between Value Added Tax and Economic Growth of Nigeria.

HO3 There is no relationship between Value Added Tax and Federally Collected Revenue.

 

1.5       SIGNIFICANCE OF THE STUDY

The gains of VAT to the economy need not be overemphasized. It is certain that one of the objectives of VAT is to reduce consumption so as to increase savings and investment, which leads to economic growth. The study sought to examine the effects of VAT on economic growth in Nigeria and to provide a basis for suggesting ways of minimizing the adverse effects, while consolidating on the beneficial aspect. It is hoped that the insights to be gained from this research will consequently serve as aid to future policy formulations in order to arrive at a well-articulated and optimally beneficial policy to the economy.

This research is intended not only to fill the gap of academic research in this subject, but also to serve as a basis for further research on VAT. 

 

1.6       SCOPE OF THE STUDY

The study was not restricted to any state in Nigeria in particular because of the national perspectives of the study. For effective analysis, this research covers the period 1995 – 2014. This duration captured the major periods of fiscal reforms in Nigeria and the changes in the fiscal relations in the country 

 

1.7       LIMITATIONS OF THE STUDY

In carrying out this study, the researcher anticipated a number of difficulties, which actually manifested. They include finance, inadequate information, time and the uncooperative attitude of relevant authorities and institutions these issued placed limit on the coverage of this study but did not hindered or hampered the successful completion of this work. The effective strategies we put in place ensured that these limitations were resolved in a way that we achieved our objectives.

 

1.8       ORGANIZATION OF THE STUDY

This study is organized into five chapters. We presented the background of the study, the statement of the problem, the objectives of the study, the hypotheses, the scope and limitation in the first chapter of the study.

Chapter two is the literature review, while chapter three contains the methodology used in the study. In chapter four, we presented the data for the analysis,the analysis and the discussion of findings. Chapter five contain the summary of finding the conclusion and the recommendations of the study. 

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