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.
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.
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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.
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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.
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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
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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