THE EFFECT OF VALUE ADDED TAX ON PRICE STABILITY IN NIGERIAN ECONOMY”
1.1 BACKGROUND TO THE STUDY
The desire of every patriotic citizen of Nigeria is to have a sound and buoyant economy. One way of demonstrating such a desire is through the prompt payment of taxes to the government. One of the means by which government increases its internally generated revenueis Value Added Tax (VAT). This is a tax on the supply of goods and services whichis eventually borne by the final consumer, but collected at each stage of the production and distribution chain. VAT as a concept was first introduced by Francein 1954, and has over time been embraced by well over 70 countries. It has inrecent time become a major source of revenue in many developing countries,including the sub-Saharan African countries. Shalizi and Squire (1989) found that VAT accounted for about 30 percent of total tax revenue in Ivory Coast, Kenya and Senegal in 1982. Bogetic and Hasan (1993) found that Indonesia introduced VAT in 1983, and by 1988, the ratio of VAT revenue to GDP had
risen to 4.5 percent.
This impressive record in virtually all countries where it was introduced clearlyinfluenced the decision to
introduce VAT in Nigeria in January 1994 as areplacement for the existing sales tax. It was imposed on all goods
manufactured inNigeria, as well as on the goods that were imported and sold domestically. TheFederal Inland
Revenue Service (FIRS), the agency in charge of tax administrationin Nigeria, pointed out that VAT is a
consumption tax that is relatively easy toadminister and difficult to evade, and has been embraced by many
countries(FIRS, 1993a; 1993b; 1993c). In this context, it becomes necessary to empiricallyexamine the likely
macroeconomic impact of VAT administration.
Evidence so far supports the view that VAT is already a significant source ofrevenue in Nigeria. For instance,
VAT revenue in the year of its inception (1994)was N8.194 billion, which was 36.5 percent greater than the
projected N6 billion forthat year (Ajakaiye, 1999). However, the members of the organised private sectorhave
been voicing their reservations in the sense that VAT is taking a toll on theprices of their products. From an
economic point of view, one expects the price ofgoods subject to VAT to rise, however, beyond this expected
rise, businesses aretaking advantage of the existence of VAT to increase prices of goods and servicesarbitrarily.
According to Aruwa (2008), the resulting price increase has led to higherinflation. This may have prompted
Mclure (1989) to state that policy makers shouldbe concerned about the macroeconomic impact of VAT,
especially on prices,output, income and consumption, before considering its adoption.
A few empirical works on the subject exist in the context of the Nigerian economy.
Ajakaiye (1999) undertook the most detailed study for Nigeria, including anextensive investigation of the impact
of VAT on key sectoral macroeconomicaggregates, by using a Computable General Equilibrium (CGE) model of
theNigerian economy. Unfortunately, the study was carried out when VAT was only sixyears old in Nigeria, too
early to get reliable conclusions on its impact on othermacroeconomic aggregates. Besides, from 1999 to date,
the economicenvironment in Nigeria has undergone a number of changes. For instance, therewas a transition
from a military to a democratic regime.
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. 13
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 AIMS AND OBJECTIVES OF STUDY
The main aims and objective of the research work is to examine the effect of value added tax (VAT) on price
stability in the Nigeria economy. Other specific objectives of the study include:
1. To examine the effect price fluctuation on the economy of Nigeria
2. To investigate on the roles of value added tax (VAT) in revenue generation for the federal government of
3. To investigate on the factors affecting the implementation of VAT in Nigeria
4. To examine the effect of VAT on the consumer price index
5. To proffer solution to the above stated problem.
1.4 RESEARCH QUESTIONS
1. How does price fluctuation affect the economy of Nigeria?
2. What roles do value added tax (VAT) play in revenue generation for the federal government of Nigeria?
3. What are the factors affecting the implementation of VAT in Nigeria?
4. What effect does VAT have on consumer price index?
1.5 RESEARCH HYPOTHESIS
H0: the implementation of VAT has no significant effect on price stability
H1: the implementation of VAT has significant effect on price stability
H0: there is no significant relationship between the implementation of value added tax and economic growth in
H1: there is no significant relationship between the implementation of value added tax and economic growth in
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.
1.7 SCOPE AND LIMITATION OF THE STUDY
The study intends to focus on the Nigeria economy with the period 1994 to 2015. 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.
1.8 LIMITATION OF THE STUDY
Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and
Time constraint- The researcher will simultaneously engage in this study with other academic work. This
consequently will cut down on the time devoted for the research work.
1.9 DEFINITION OF TERMS
VAT: This is an Indirect tax on the domestic consumption of goods and services, except those that are zero-rated
(such as food and essential drugs) or are otherwise exempt (such as exports).
Price Stability: This implies avoiding both prolonged inflation and deflation.