Value Added Tax Revenue Expenditure on Economic growth of Nigeria

AIM AND OBJECTIVES OF THE STUDY

The study aims to empirically investigate the impact of Value Added Tax Revenue Expenditure on the Economic growth of Nigeria in the length of 2003-2018 specifically, the objectives of the study include;

1. To investigate the effect of Value Added Tax Revenue Expenditure on Per Capital Income (CPI) in Nigeria.
2. To determine the effect of Value Added Tax Revenue Expenditure on Gross Domestic Product (GDP) in Nigeria.

iii.        To ascertain the impact of Value Added Tax Revenue Expenditure on the Human Development Index (HDI) in Nigeria.

CHAPTER ONE: INTRODUCTION

1.1       BACKGROUND TO THE STUDY

The success or otherwise of any economy is the function of the availability of revenue to match the cost of governance. One of the objectives of government involvement in the economy is to achieve high, rapid, and sustained economic growth.

An economy must grow over time. Without economic growth, the average citizen will have fewer goods and services to consume over the years. (Akpakpan, 1999).

To achieve adequate economic growth, the government needs to incur expenditures on internal security, economic services, community services, etc which in turn will lead to an improvement in the standard of living of the citizenry. But governments often complain of a lack of funds to embark on these projects, hence the necessity for an urgent increase in revenue generation by the governments through taxation.

The economic growth and social development of any country depend on the amount of revenue created for the provision of infrastructure in that given country, and one major means of creating the amount of revenue for providing the needed infrastructures is through a well-structured tax system (Ogbonna & Appah, 2012).

Economic growth refers to the increase over time of an economy’s capacity to produce goods and services needed to improve the well-being of the citizen by increasing output.

Dwinvedi (2004) described economic growth as a sustained increase in per capita national output or net national products over a long period. Aguolu (2004) stated that “taxation is the most important source of revenue to the government.

Because of the built-in power of the government to charge taxes, the government is calm and confident at all times of its revenue no matter the facts or conditions that surround someone”.

Azubuike (2009) agreed with the above fact when he stated that for any society to strive it needs to charge tax to discharge its obligations to the citizens.

Appah (2004) defines “tax as a required levy forced on people, on a subject or upon his property by the government to provide security, social amenities and create contributions for the economic wellbeing of the society”.

In the same view, Nightingale (2001) described the tax as a required condition imposed by the government and decided that while taxpayers may receive nothing able to be seen or picked out in return for their contribution, they anyway, have the benefit of living in a relatively educated, healthy and safe society.

She further explains that tax is part of the price to be paid for an organized society and identified six reasons for tax; availability of public products, redistribution of income and wealth, promotion of social and economic welfare, economic strength and stability, harmonization, and regulation.

One of the government’s major forms of improving internally generated revenue is the value-added tax also known as VAT.

According to Ikpe and Nteegaah (2013), this is a tax on the supply of goods and services which is eventually borne by the final consumer, but collected at each stage of the production and distribution chain. Okoye (2009) revealed that value-added Tax was first introduced by France in 1954; it has since been embraced by well over seventy countries all over the world.

These include the entire organization for economic cooperation and development countries, Japan, Canada, Michigan in the USA, and many African Countries Nigeria inclusive.

Olaoye (2013) emphasized that value-added Tax (VAT) in Nigeria today replaced the existing sales tax which had been in operation under Federal Government Legislated Decree No 7 of 1986 but which was operated based on residence.

Apart from the high revenue generation capacity of value-added tax, because it is a consumption tax, it is not easy to avoid nor evade as it is being done easily with other taxes. The introduction of value-added Tax (VAT) in 1994 was one of the means of re-organizing the Nigerian Economic system.

The evidence so far supports the view that value-added tax is already a significant source of revenue in Nigeria. For instance, value Added Tax revenue in the year of its inception (1994) was N8.194 billion, which was 36.5 percent greater than the projected N6 billion for that year (Ajakaiye, 2000).

Chigbu and Ali (2014) observed that Scholars have observed that value Added Tax has become a major source of revenue in Nigeria ever since its introduction in Nigeria in the year 1991 and its effective operation on the 1^st of January 1994. However, others have criticized the regressive nature of Value Added Tax.

Moses (2013) explained that Value Added Tax revenue is generated for distribution to the state and local governments in Nigeria. Unlike the oil revenue whose market government has no control over.

This helps to reduce over-dependence on oil revenue, this assures sustainable economic growth and development. While the performance of Value Added Tax as a source of revenue in Nigeria is encouraging, it means difficult to find attempts to systematically assess the impact of Value Added Tax on the economy.

Therefore recent research work on the impact of taxation on the Nigerian economy impacts upon all the various taxes together without isolating Value Added Tax. How and in what direction has Value Added Tax affected the Nigerian economy? And the relationship between Value Added Tax and economic growth?

It thus becomes imperative to recognize the potential value of Value Added Tax and its effect on Economic Growth in Nigeria by giving clearer and simplified insight into the implication of value-added tax on revenue generation in Nigeria and to examine its empirical impact on economic growth in Nigeria to provide reasonable solutions and recommendations that will be geared to reveal the benefit of Value Added Tax in Nigeria macroeconomy.

As a point of departure, attention needs to be brought to the fact that only a handful of empirical works on the subject exist in the context of the Nigerian economy.

Ajakaiye (1999) undertook the most detailed study in Nigeria, including an extensive investigation of the impact of VAT on key sectoral macroeconomic aggregates, by using a Computable General Equilibrium (CGE) model of the Nigerian economy.

Unfortunately, the study was carried out when VAT was only six years old in Nigeria, too early to get reliable conclusions on its impact on other macroeconomic aggregates. Besides, from 1994 to date, the economic environment in Nigeria has undergone several changes. Also, related variables such as Value Added Revenue were overlooked in other work and the other related kinds of literature failed to employ adequate statistical techniques and relied majorly on theoretical and investigative work. This study thus intends to examine the impact of value-added tax revenue expenditure on economic growth in Nigeria from the period 2003-2018.

1.2       STATEMENT OF THE PROBLEM

At the new dawn of the millennium, Africa in general and Nigeria in particular still face huge underdevelopment like low level of income seen as low per capita income, poor health conditions, low life expectancy, shortcoming education, inflation, poor infrastructure, and human capital development to mention but a few.

The slow growth of the Nigerian economy despite the huge inflow of revenue created from taxes over the years has been rather surprising; as Nigeria presents a paradox, the country is rich but the people are poor.

The Nigerian Economy has remained in a deep sleep with micro-economic indicators reflecting an economy in terrible and serious need of rejuvenation, revival, and radical reformation (Olashore, 1999).

It has also been observed that the point of view of people toward this civil responsibility does not come near expectation as underestimated billions of naira are lost every year due to tax avoidance, evasion, and non-compliance.

Nigeria loses several billions of naira on tax revenue every year to unreformed tax regimes and ineffective tax administrators that have aided the avoidance and evasion of tax by individual and corporate organizations.

Onalapo et al (2013) emphasized that one of the recurrent problems of the three-tier structure of government in Nigeria is the dwindling revenue generation as characterized by yearly budget deficits and insufficient funds for economic growth and development. The primary problem as observed by Akintoye and Tasie (2013) is that the willingness to pay tax which may depend on other aforementioned issues in tax revenue remains a key taxation challenge in Nigeria.

In the case of tax payment, evidence from the World Bank Business Report 2011 and 2012, shows that Nigeria was 109 and 138, respectively out of 183 countries; in sub-Saharan Africa, it ranked 27 out of 46 countries.

This result is poor despite some improvements the government has made to the tax system in the recent past.

In Nigeria, even though Value Added Tax was introduced by the Federal government as an instrument to generate additional revenue, most prominent Nigerians and interest groups had spoken against its introduction.

It would appear that Vat is laddered with some problems. After its adoption into the Nigerian tax system, it has become a controversial issue that generates debate among several authors like Naiyeju (2009) that the purpose of introducing Value Added Tax as one of the methods of taxation in Nigeria is not yet known.

The uncommon nature of this tax system makes the majority of the populace unaware of its existence which makes people scorn the payment and its collection.

The lack of adequate trained personnel, mobility to reach remote areas, low level of literacy as well as poor social and political climate hinder the effective administration of tax.

Furthermore, there is a fear about the Federal Inland Revenue Services (FIRS) administering VAT judging from their performance in administering personal income tax and other relevant taxes over the years.

The major problem affecting Value Added Tax and economic growth in Nigeria according to Okoye and Gbegi (2013) is 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 of value derived from such operation and that will not be appropriate for the system.

The government spends more to realize a miserable pittance. The rate of corruption on the part of tax officials is alarming as most of them connive and collude with supposed – tax-power to evade and avoid tax. Sometimes the tax officials are not properly trained in the modern ways of tax administration.

The inadequate social infrastructures in Nigeria call for attention as to how value-added tax revenue generated is to be expended and accounted for, especially where those in authority continue to spend these hard-earned resources with reckless abandon.

Also, the averagely poor people spend a large portion of their income on purchases, some of which carry VAT. Moreover, in Nigeria, the revenue from VAT is routinely shared out according to agreed percentages while a lot of research has been done to determine the effect(s) of this new revenue source on some aspects of the economy.

Given the above, this study intends to examine the volume to which Value Added Tax Revenue Expenditure impacts Economic growth given the Nigeria scenario for the period of 2003 to 2018.

1.3       AIM AND OBJECTIVES OF THE STUDY

The study aims to empirically investigate the impact of Value Added Tax Revenue Expenditure on the Economic growth of Nigeria in the length of 2003-2018 specifically, the objectives of the study include;

1. To investigate the effect of Value Added Tax Revenue Expenditure on Per Capital Income (CPI) in Nigeria.
2. To determine the effect of Value Added Tax Revenue Expenditure on Gross Domestic Product (GDP) in Nigeria.

iii.        To ascertain the impact of Value Added Tax Revenue Expenditure on the Human Development Index (HDI) in Nigeria.

1.4       RESEARCH QUESTIONS:

From the outlined objectives above, the research questions were formulated.

1. To what extent does Value Added Tax Revenue Expenditure affect Per Capital Income (CPI) in Nigeria?
2. To what extent does Value Added Tax Revenue Expenditure affect Gross Domestic Product in Nigeria?

iii.        How does Value Added Tax Revenue Expenditure affect Human Development Index (HDI)  in Nigeria?

1.5       RESEARCH HYPOTHESES:

The following null hypothesis which is subject to testing is formulated for this research work.

Ho₁:     There is no significant relationship between Value Added Tax Revenue Expenditure and Per Capita Income (PCI) in Nigeria.

Ho₂:     Value Added Tax Revenue Expenditure does not significantly affect Gross Domestic Product (GDP) in Nigeria.

Ho₃:     There is no significant relationship between Value Added Tax Revenue Expenditure and Human Development Index (HDI) in Nigeria.

1.6       SIGNIFICANCE OF THE STUDY:

It is considered by the researcher that this study is significant in many respects which include;

practical significance: This study will serve as a guide to the government in formulating policy and decision-making.

In different phases, the study will permit the government to evaluate its economic growth and development activities and make plans to improve upon the found shortcoming to improve the economic system and grow Nigeria’s score in worldwide development indices.

It will also be of giant gain to financial analysts and investors, as the study will enable them to see truly the effect of Value Added Tax Revenue Expenditure on Nigeria’s Economy. It will as well enable the households to understand the revenue and welfare effect of the Value Added Tax Revenue Expenditure.

Operational Significance: The result of this examination will provide a primary panacea for powerful and green tax administration. It will permit tax officials to be greater orientated, closer to looking for results in tax administration, and with an effective and efficient tax system in place, the economic potentials of a nation become realizable and guaranteed on a fast lane, since tax reforms if properly implemented will increase revenue at both the disposal of government and individual which translate to benefit in terms of social and economic growth. (Musgrave & Peggy: 1989).

Theoretical significance: The study will help to educate the general public on the role of Value Added Tax Revenue Expenditure in shaping the economy of the nation. The study will add to the existing stock of knowledge and literature in the area of Value Added Tax Revenue Expenditure and economic growth.

1.7       SCOPE OF THE STUDY

Theoretical Scope: The study investigates the impact of Value Added Tax Revenue Expenditure on economic growth in Nigeria.

Geographical Scope: It covers economic growth in Nigeria for the period of 2003 to 2018

Unit Scope: The study applies to Value Added Tax Revenue Expenditure and per capita income, Gross domestic product, and Human Development Index as proxies for economic growth.

1.8     LIMITATIONS OF THE STUDY

Several constraints militated against the writing of this study. Most particularly, scarcity of literature on the topic. However, data available and easily receivable from the Central Bank of Nigeria (CBN) statistical bulletin and Federal Inland Revenue Service within the time frame of the study were used. The researcher also encountered the problem of data analysis but was able to manage it with the use of SPSS for policy issues and development programs.