Value Added Tax Vat And Price Stability

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54 Pages
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Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production and distribution. This taxation system plays a crucial role in economic dynamics by influencing price stability. VAT contributes to price stability by spreading the tax burden across multiple stages of production and distribution, fostering a more equitable distribution of costs. By doing so, it helps mitigate the impact of sudden price fluctuations in specific sectors. Furthermore, VAT encourages fiscal discipline and revenue generation for governments, providing a stable economic foundation. The correlation between Value Added Tax and price stability underscores the intricate connection between fiscal policies and economic equilibrium, emphasizing the importance of strategic tax structures in maintaining a balanced economic environment.

ABSTRACT

Value Added Tax (VAT) is a consumption tax on the value added to a product in the process of production. Like all other indirect taxes, it is a tax that targets the final consumer of goods and services. The main purpose of VAT in Nigeria is to increase government (state and Local) revenue from the non-oil sector thereby reducing the government’s dependence on oil sales and the budget deficits. In this research work my aim is to determine the stabilizing roles of VAT in the Nigerian economy. The study employed multiple regression analysis as a method of study using the ordinary least square (OLS) regression technique in estimation. Result of the analysis revealed that price level is not stimulated by VAT in Nigeria.

TABLE OF CONTENT

Title Page
Approval Page
Dedication
Acknowledgement
Abstract
Table of Content

 

CHAPTER ONE:
1.0 INTRODUCTION

1.1 Background of the Study
1.2 Statement of Problem
1.3 Objective of the Study
1.4 Statement of Hypothesis
1.5 Scope of the Study
1.6 Significance of the Study

CHAPTER TWO:
2.0 LITERATURE REVIEW

2.1 Conceptual Framework
2.2 Inflation Rate
2.3 A Review of the Taxation System in Nigeria Historical Review
2.4 Economic Stability in Nigeria
2.5 Theoretical literature
2.6 Summary of Literature and Justification of the Study

CHAPTER THREE:
3.0 RESEARCH METHODOLOGY

3.0 Methodology and data
3.1 Methodologies

CHAPTER FOUR:
4.0 PRESENTATION AND ANALYSIS OF DATA

4.0 Presentation and Discussion of Results

CHAPTER FIVE:
5.0 CONCLUSION AND POLICY RECOMMENDATION

5.1 Conclusion
5.2 Recommendations
Bibliography

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY
The introduction of value added tax(VAT) in Nigeria came from the report of the study group set up by the federal government in 1991 to review the entire tax system in the set up to carry out feasibility studies on its possible implementation. In January 1993, the federal government agreed to introduce VAT by the middle of the year. But due to some logistic reasons for the relevant legislation to be made and proper ground work done. It was shifted to January 1st 1994. VAT replaced the former existing sales tax carried out by the different state3 governments, the wages first implemented in 1986 and operated under the federal government legislated degree no.7, of 1986. VAT replaced the sales tax because of the following reasons.
VAT is neutral in that a considerable part of the new tax is to be realized fr5om imported goods unlike the sales tax that targets only locally produced goods based on the general consumption behavior.
VAT is a consumption tax on all economic operation in the country including imports and has a zero rate for export. The federal Inland Revenue service (FIRS) is the main body charge with the administration of VAT in Nigeria custom service (NCS) for the collection of VAT on imports and the help of VAT on the locally produced goods and services. VAT has a single low rate of 5% with a zero rate for exports and is borne sole by the final consumers of VAT able goods and services like any other indirect tax, some essential goods and services are exempted from VAT that is they are not VAT able The main reasons that led the introduction of VAT are to be referred to as the main gains of VAT and they included.
I. Need for increased government revenue due to increased public expenditure.
II. Reduction in the over dependence on sales of crude oil with its attendant uncertainties in the international market.
III. Making the tax equitable for all the masses by curbing the rice, thereby reducing the gap between the very rich and the very poor.
IV. Reducing the rich’s materialistic tendencies for unnecessary luxury goods.

1.2 STATEMENT OF THE PROBLEM
In terms of contributions the total federal collection revenue, VAT revenue at the time of inception in 1994 was anticipated to be much larger, indicating that Nigeria then may soon join the growing list of developing countries here VAT contributes at least 20% of total government revenue . While the performance of VAT as a source of revenue in sub-Sahara Africa and Nigeria in particular is clearly encouraging, it remains difficult to find attempts to systematically asses the impact of VAT on these economies (Ajakaiye, 1999). Nevertheless, include (1989) opines policy makers considering the adoption of VAT should be interested in the macroeconomic impact, especially on price, output, income and consumption. Economically, one expect the price of VAT able goods to rise, however beyond this expected rise, business are taking advantage of the existence of VAT the increas4e price of goods and services arbitrarily.
The excessive price increase according to Aruwa (2008) has further led to higher inflation in Nigeria. Given the foregoing seeks to asses the macroeconomic impact at VAT on price level in Nigeria.

1.3 OBJECTIVE OF THE STUDY
The study seeks to examine the following specific objectives.
I. To ascertain if any significant relationship exist between VAT and price stability in Nigeria.
II. To determine the impact of VAT on price level in Nigeria.

1.4 HYPOTHESIS
Ho1: There is no significant relationship between VAT and price level in Nigeria. Ho2: The impact of VAT on price level in Nigeria cannot be determined.

1.5 SCOPE OF THE STUDY
The study intends to focus on the Nigeria economy with the period 1994 to 2010. The choice of range of period is informed by the fact that VAT policy implementation in Nigeria began by 1994. Quarterly data will be employed to
extend the sample size, but where this is not available; we will have no choice than to use annual data for the study.

1.6 SIGNIFICANCE OF THE STUDY
Finding from the study will be of immense benefit to policy makers in assessing the performance of VAT on the stability of price level in Nigeria. Secondly, it will serves as a reservoir of knowledge for further studies.

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Value Added Tax Vat And Price Stability:

Value Added Tax (VAT) and price stability are two important economic concepts that are often discussed in the context of fiscal and monetary policy. Let’s explore how Value Added Tax can impact price stability:

  1. VAT Basics: Value Added Tax is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is typically borne by the end consumer, but businesses collect and remit it to the government. Value Added Tax is designed to generate revenue for the government and promote economic efficiency.
  2. Price Stability: Price stability is a macroeconomic goal aimed at keeping inflation at a stable and low rate. Inflation refers to the general increase in the prices of goods and services over time. Central banks often target a specific inflation rate, such as 2%, as a means of promoting economic stability.

Now, let’s discuss how VAT can influence price stability:

1. Revenue Generation: Value Added Tax is a significant source of government revenue. When governments collect more revenue through Value Added Tax, they may have greater fiscal stability, which can help support price stability. By having adequate funds to manage their budgetary needs, governments can avoid excessive borrowing, which can contribute to inflation.

2. Incentives for Compliance: Value Added Tax encourages businesses to operate within the formal economy and report their transactions accurately to claim input tax credits. This formalization can reduce tax evasion and the shadow economy, which can help stabilize prices by ensuring a fair distribution of the tax burden.

3. Impact on Consumer Spending: Value Added Tax can influence consumer spending patterns. When VAT rates are high, it may reduce consumer demand for certain goods and services, leading to lower demand-pull inflation. Conversely, reducing or exempting Value Added Tax on essential goods like food and healthcare can help lower the cost of living for consumers and stabilize prices in those sectors.

4. Fiscal Policy and Inflation: The revenue generated from Value Added Tax can be used by governments to implement countercyclical fiscal policies. During periods of economic downturn, governments can reduce Value Added Tax rates to stimulate consumer spending and boost economic activity. Conversely, during periods of overheating and inflationary pressure, they can increase Value Added Tax rates to cool down the economy.

5. Transmission to Inflation: The impact of Value Added Tax changes on overall inflation depends on various factors, including the size of the Value Added Tax change, the elasticity of demand for goods and services subject to Value Added Tax, and the overall economic conditions. Small changes in VAT rates may have a limited impact on inflation, while large increases can contribute to higher inflation if not managed properly.

In conclusion, Value Added Tax can play a role in achieving price stability when integrated into a broader fiscal and monetary policy framework. Its impact on prices is complex and depends on various factors, but when used effectively, it can help governments manage their finances, reduce tax evasion, and influence consumer spending in ways that contribute to economic stability and price stability. However, it’s essential to consider the broader economic context and coordinate VAT policies with other fiscal and monetary measures to achieve desired price stability outcomes.