Impact Of Value Added Tax On Economic Growth
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production and distribution, with the burden ultimately borne by the end consumer. Its impact on economic growth is significant, as VAT systems provide governments with a stable source of revenue for funding public expenditures and infrastructure development, thereby fostering economic stability. Additionally, VAT implementation encourages formalization of the economy, discouraging tax evasion and promoting transparency. However, excessive VAT rates may curb consumer spending, potentially hindering economic growth. Moreover, VAT policies must be carefully designed to avoid disproportionately burdening low-income households and small businesses. Balancing these factors is crucial for maximizing the positive effects of VAT on economic growth while mitigating its potential drawbacks.
Title Page
Approval Page
Dedication
Acknowledgement
Abstract
CHAPTER ONE:
1.0 INTRODUCTION
1.1 Background of the study
1.2 Statement of problem
1.3 Research Questions
1.4 Objectives of Hypothesis
1.5 Statement of Hypothesis
1.6 Significance of the study
CHAPTER TWO:
2.0 LITERATURE REVIEW
2.1 Theoretical Framework
2.2 Empirical Literature Review
CHAPTERTHREE:
3.0 RESEARCH METHODOLOGY
3.1 Research Methodology
3.2 Model Specification
3.3 Method of Evaluation
3.4 Justification of the Model
3.5 Transformation of the Data
3.6 Data Source
CHAPTER FOUR:
4.0 DATA PRESENTATION AND ANALYSIS
4.1 Presentation of Result
4.2 Interpretation of Result
4.3 Evaluation of Research Hypothesis
CHAPTER FIVE:
5.0 SUMMARY, POLICY RECOMMENDATION AND CONCLUSION
5.1 Summary of Findings
5.2 Policy Recommendation
5.3 Conclusion
Bibliography
Appendix
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Value Added Tax (VAT) has become a major source of revenue in many developing countries like Nigeria. In sub Sahana Africa for example, VAT has been introduced in Benin Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo. Evidence suggests that in these countries VAT has become an important contribution to total government tax revenue; (Ajakaiye 2000) the value Added Tax decree was established in 1993 and was imposed on 1994. Value Added Tax (VAT) in an ideal form of taxation in Nigeria tax system and has significantly contributed to resources mobilization as well as capital formation to the economy. It has positive and significant impact on revenue mobilization in Nigeria; it also has positive relationship with consumption.
VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced
by many countries worldwide (Federal Inland Revenue Service 1993). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example, actual VAT revenue from 1994 was N8.189 billion which is 36.590 higher than the projected N6 billion for the year. Similarly, actual VAT revenue for 1995 was N21 billion compared with the projected N12 billion. In terms of contribution to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1%) of total revenue in 2008.
VAT revenue is generated for distribution to the state and local government in Nigeria. Unlike the oil revenue whose market government has no control over. This helps to reduce over dependence on oil revenue, this assures a sustainable economic growth and development. While the performance of VAT as a source of revenue in Nigeria is encouraging, it means difficult to find attempts to systematically assess the impact on VAT on the economy.
Recent research work on the impact of taxation on the Nigeria economy impact up all the various taxes together without isolating VAT. How and in what direction VAT has be affecting the Nigeria economy? And the relationship of VAT on economic growth? Findings answers to these and other similar questions is the main trust of this paper.
1.2 STATEMENT OF THE PROBLEM
The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose hung amount of revenue through the unwholesome practice to tax avoidance and tax evasion this loss of revenue can change the fortune of many economies. Particularly, developing countries like Nigeria. This problem has been lingering for so long which urgent attention and solution is over due to the cost of collecting tax in Nigeria (both social and economic cost) is too high to the extent that if left unchecked the cost may soon outweigh the benefit or value derived from such operation and that will not the appropriate for the system. In Nigeria, VAT is
one of the instruments the federal government introduced to generate additional revenue. Yet, most prominent Nigerians and interest groups had spoken against its introduction. It would appear that VAT is froth with some problems. For the purpose of this paper work we shall examine the implication of VAT on revenue generation in Nigeria and how VAT affect the economic growth in Nigeria.
1.3 RESEARCH QUESTIONS
This research work is set to answer the research question below.
1. What is the impact of VAT on economic growth?
1.4 OBJECTIVE OF THE STUDY
The following are the objectives of the study:
1. To know the impact of value added tax on economic growth.
1.5 STATEMENT OF HYPOTHESIS
The following assumptions which are subject to testing are made for the purpose of this research work.
HO1: O1 VAT has no Impact on economic growth.
1.6 SIGNIFICANCE OF THE STUDY
The study will assist the government in policy formulation as it relates to value added tax. It will also help to broaden the nation‟s revenue base thereby making it less dependent on oil export.
Impact Of Value Added Tax On Economic Growth:
The impact of Value Added Tax (VAT) on economic growth is a subject of debate among economists, and its effects can vary depending on various factors, including the design and implementation of the Value Added Tax system, the overall tax structure of a country, and the economic context. Here are some key points to consider when assessing the impact of Value Added Tax on economic growth:
- Revenue Generation: Value Added Tax can generate significant revenue for governments, which can be used for public investments in infrastructure, education, healthcare, and other areas that can promote long-term economic growth. This revenue can help reduce budget deficits and contribute to macroeconomic stability.
- Reduced Informal Economy: Value Added Tax can encourage businesses to formalize their operations, as it typically requires compliance with tax regulations. This formalization can lead to increased tax collections and a reduction in the size of the informal economy, which is generally positive for economic growth.
- Consumption and Investment: Value Added Tax is a consumption tax, and its impact on economic growth depends on how it affects consumption and investment. If the Value Added Tax rate is too high, it can discourage consumer spending, which may, in turn, impact businesses and overall economic activity negatively. However, a well-designed Value Added Tax system that exempts essential goods and services and provides credits for business investments can minimize this negative impact.
- Incentives for Savings: Value Added Tax does not directly tax savings or investments, which can encourage individuals and businesses to save and invest, potentially leading to higher capital formation and economic growth.
- Inflation: The introduction or increase of Value Added Tax can lead to short-term price increases, contributing to inflation. High and unpredictable inflation can harm economic growth by reducing purchasing power and creating uncertainty.
- Distributional Effects: Value Added Tax is generally considered regressive, meaning it tends to place a greater burden on low-income households. The impact on income distribution can have implications for social equity and may influence overall economic growth if it leads to increased social unrest or political instability.
- Administrative Efficiency: Value Added Tax is often praised for its administrative efficiency compared to other forms of taxation. Efficient tax collection can reduce the cost of government and improve the overall business environment, which can positively impact economic growth.
- Trade Competitiveness: Value Added Tax is typically applied to domestic and imported goods alike, which can help maintain a level playing field for domestic industries and promote international competitiveness. This can have a positive impact on export-oriented industries and trade.
- Design Matters: The way Value Added Tax is designed and implemented matters significantly. The structure of Value Added Tax rates, the extent of exemptions, and the effectiveness of tax administration can all influence its impact on economic growth.
In summary, the impact of Value Added Tax on economic growth is not uniform, and it depends on various factors. A well-designed Value Added Tax system that balances revenue generation with economic incentives, minimizes distortions, and promotes compliance can have a positive impact on economic growth. However, when Value Added Tax rates are excessively high or not appropriately structured, it can have negative consequences, including reduced consumption and potential inflationary pressures. Therefore, policymakers need to carefully consider the design and implementation of Value Added Tax in the context of their specific economic circumstances and objectives