CHAPTER ONE INTRODUCTION 1.1          BACKGROUND TO THE STUDY

The primary responsibility of every government all over the world is to ensure security, freedom and welfare of its citizen. For instance, Section 16(1b) of the 2011 Constitution of the Federal Republic of Nigeria states that “the government has the responsibility of ensuring the maximum welfare, freedom and happiness of its citizens” (Federal Government of Nigeria, 2011). To effectively carry out its primary function and other subsidiary functions, governments need adequate funding. Unfortunately, Government responsibilities continue to increase over time especially in developing countries, as a result of the growing population of citizens, and technological advancement. In Nigerian, the government has depended so much on oil revenue for execution of its primary functions and economic development programmes. Presently, there is a general fall in the price of crude oil which has adversely affected the Nigerian economy (Anyaehie and Areji, 2015; Uzonwanne, 2015). This situation has necessitated the various call for the nation’s economic to be diversified. No wonder, the former Minister of Finance, Ngozi Okonjo-Iweala and other concerned citizens have called on governments at various levels to look for other means of revenue generation for the sustainable economic development of Nigeria. Kiabel and Nwokah (2009) corroborate this idea by saying that the dwindling revenue and increased cost of running government require all tiers of Nigeria government to look for alternative means of improving their revenue base. Hence a concerted efforts for the improvement of the country independent revenue base through taxation become imperative. It is obvious that the country’s revenue from oil can no longer support and sustained its development objectives admist the ever increasing population growth and increased government responsibilities.

Kusi (1998) states that many countries of the world depend mainly on taxation for generating required income to meet their financial needs. The tax provides a predictable and stable flow of revenue to finance development objectives (Pfister, 2009). Bird and Zolt (2003) opine that, effective and efficient tax system can assist the government generate enough revenue to take care of its estimated expenditure, meet the needs of the people, and effectively participate in the world economy. The quality of life of people of a state is the focus of any development objectives. Access to education, improved healthcare delivery, employment opportunities, clean air, safe drinking water and security of life and property determine the people’s quality of life or standard of living (The World Bank Group, 2004).

Before the introduction of VAT in Nigerian economy, the Federal Government has been working relentlessly on how to revamp the Nigeria economy. To this effect, a lot of economic measures have been introduced. Among the economic measures introduced included the Second-Tier Foreign Exchange Market (SFEM), Structural Adjustment Programme (SAP), and Foreign Exchange Market (FEM) etc. All these efforts at revamping the economy were to no avail as the economy seems to be an ailing child that has defied all economic therapy or fiscal measures. Prompted by its avowed position to revamp the Nigerian economy at whatever cost, the Federal Military Government under the leadership of General Sani Abacha introduced a fiscal policy, the Value Added Tax (VAT) in January 1994. VAT is a consumption tax at each stage of the consumption chain and is borne by final consumer. It requires a taxable person upon registering with the Federal Board of Inland Revenue to charge and collect VAT at a flat rate of 5% on all vatable goods and services. Where the supply is not subject to VAT, the VAT liability will either be Zero-rated or exempted. Zero-rated goods and supplies are all export goods and supplies. Supplies that are zero-rated are still taxable but no actual tax is payable to the government. The important difference between Zero-rated and exempt items is that any input VAT relating to Zero-rated supplies is recoverable, whereas that relating to exempt supplies are not recoverable.

1.2          STATEMENT OF THE PROBLEM

In Nigeria, value added tax 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. After its adoption into the Nigeria tax system, it has become a controversial issue that generates debate among several authors like Naiyeju and (2009) that the purpose of introducing value added tax as one of the methods of taxation in Nigeria economy has not yet known.

Despite the contributions and huge revenue generated through VAT, the federal, state and local governments complain of insufficient fund to embark on projects and the citizens have always lamented of poor infrastructural facilities, unemployment, low capita income etc which have resulted to poor standard of living, crime rate and other social ills has been on the increase. Nigeria is still listed and regarded as a third world country. A situation of this nature entails asking what is the relationship between VAT and Gross domestic product and total consolidated revenue of the government.

In view of the above, this study is tailored to examine value added tax and economic growth in Nigeria. The result of our investigation will help to provide reasonable solutions and recommendations that will put us in a better position to ascertain the contribution or otherwise of VAT as a Federal Government revenue source.

1.3          OBJECTIVES OF THE STUDY

The general objective of this study is to examine value added tax and economic growth in Nigeria. However, the specific objectives are:

1. To examine the relationship between value added tax revenue and the total tax revenue in Nigeria
2. To examine the contribution of VAT to the total tax revenue in Nigeria.
3. To investigate the relationship between VAT and economic growth in Nigeria

1.4          RESEARCH QUESTIONS

The following research questions are formulated to pilot this research work:

1. Are there any relationships between value added tax and total tax revenue in Nigeria?
2. Would there be any relationship between VAT and the Nigerian economic growth?
3. Would VAT improve the tax revenue of the Nigerian economy?

1.5          RESEARCH HYPOTHESIS

Ho1:       There is no significant relationship between VAT revenue and the Nigerian economic growth.

Ho2:       There is no relationship between total tax revenue and the Nigerian economic growth.

1.6          SIGNIFICANCE OF THE STUDY

This study is significant because of dearth of work in this tax system since it was introduced about two decades ago. This is because extensive studies have been done on various aspect of tax generally and VAT in particular but not much has been done on the contribution of value added tax system and its contribution to government total revenue and gross domestic product. This study therefore intends to focus and address the level of impact VAT has on government total revenue and economic growth as proxy by GDP.

The study will also be of significant importance to students and researchers as it will serve as a reference material for further research in this subject area.

1.7          SCOPE AND LIMITATION OF THE STUDY

SCOPES

This is a macro economic phenomenon, therefore, the study covers the period of 1994 when VAT was introduced to date.

LIMITATIONS

This research work was faced with some constraints that hinder the investigation ot the outcome of this study. Paramount among this constraint is the time frame within which the work was expected to be completed. Beside, the cost of embarking on this project work considering the volume of work as the research was not financially buoyant enough to carry out the investigation deem necessary for the work.

1.8          ORGANIZATION OF THE STUDY

The study is arrange in five chapter. Chapter one introduce the study by presenting its context with a clear indication and its objectives, also describing the specific problems addressed in the study and its scope and limitation.

Chapter two talks about the literature review by providing knowledge on the effect of VAT revenue on the growth of Nigeria economy, its theoretical foundation on tax and economic growth, including empirical studies.

Chapter three deals with research methodology which examined the research design, population of the study, source of data collection, method of data analysis in order to analysis the contribution of VAT revenue to economic growth (GDP) and total tax revenue using simple E-view regression.

Chapter four is on data presentation, analysis and its discussion and finds in order to answer the research question.

Chapter five is made up of summary, conclusion and recommendation on the effect of VAT revenue to Nigeria economy growth showing that VAT contributes significantly to the total tax revenue by extension the economic growth of of Nigeria and thereby increasing VAT rate to boost tax revenue.

1.9          DEFINITION OF TERMS

Dearth: An inadequate supply; scarcity; or lack.

Revamp: To renovate or remake.

VAT:      Is an indirect tax on the consumption of goods and services in the economy.

Tax Revenue:    The revenues collected from taxes on income and profits, social security contributions, taxes levied on goods and services, payroll taxes, taxes on the ownership and transfer of property, and other taxes.

Consumption tax: It is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption.