THE RELATIVE IMPORTANCE OF CORPORATE TAX AND VALUE ADDED TAX (VAT) AND THEIR EFFECTS ON THE ECONOMIC GROWTH IN NIGERIA
1.1 Background to the
all over the world demand or impose one type of tax or the other. The main purpose of imposing any type of tax
has been for the government concerned to use the proceeds of the taxation to
run the government and to provide some essential services. It is being noted that the aims and
objectives of taxation differ from one country to the other.
A Tax is a fee charged or levied by a government on a
product, income, or activity. If it is levied directly on personal or corporate
income, it is called a direct tax. If it is levied on the price of a good or
service, then it is called an indirect tax. The main reason for taxation is to
finance government expenditure and to redistribute wealth which translates to
financing development of the country (Ola, 2001, Jhingan, 2004, Musgrave and
Musgrave, 2004, Bhartia, 2009). Whether the taxes collected are enough to
finance the development of the country will depend on the needs of the country
and, countries can seek alternative sources of revenue to finance sustainable development
(Unegbu and Irefin, 2011). Tax revenue is the receipt from tax structures.
Revenues accruing to an economy, such as Nigeria, can be
divided into two main categories, which are; Oil Revenue (includes revenue from
royalties, Petroleum Profit Tax (PPT), gas tax) and Non-Oil revenue (includes
trade, loans, direct and indirect taxes paid by other sectors of the economy,
Aids, agriculture etc). The importance of taxation in promoting economic growth
and development as well as the survival of many nations cannot be
overemphasized. Through it, government ensures that resources are channelled
towards important projects in the society.
According to Emmanuel (2010), many developed and
developing economies around the world had experimented and proven that no
nation can truly develop without developing its tax system. Consequently, many
countries have embarked on tax reforms and restructuring with a view to
developing a tax system that maximizes government revenue without creating
disincentiveness for investment.
According to Kiabel and Nwokah (2009), within the last
decade, the issue of domestic resource mobilization has attracted considerable
attention in many developing countries due to unabating debt difficulties
coupled with domestic and external financial imbalances. It is not surprising
that many developing nations have been forced to adopt stabilization and
adjustment policies which demand better and more efficient methods of
mobilizing domestic financial resources with a view to achieving financial
stability and promoting economic growth. A critical challenge of tax
administration in the 21st century is how to advance the frontiers of professionalism,
accountability and awareness of the general public on the imperatives and
benefits of taxation in our personal and business lives which include: promoting
economic activity; facilitating savings and investment; and generating strategic
competitive advantage (Kiabel and Nwokah, 2009). If tax administration does not
for any reason meet the above challenges, then there is a desperate need for reform.
The importance of taxation in the activities of any
government cannot be overemphasized. The world over, taxes is one major source
of government revenue, however, not every national government have been able to
effectively exploit this great opportunity of revenue generation. This can be
attributed to a number reasons including the system of taxation; tax
legislation; tax administration and policy issues; over reliance on other
sources of revenue (such as foreign aid and grants); corrupt practices in the
system – especially as it relates to the system of tax collection and behaviour
of citizens towards tax payment; and ease of tax payment.
essential common feature of tax has been the dynamic nature in every system to
reflect the economic and policy needs of that nation. Another common feature of
tax is that it has always been a compulsory levy.
government to achieve her laudable objectives, it has been successively trying
all techniques in the pass which include grouping and segregating tax and those
who pay it and even varying methods and time of payment. It has been the view that the sole objectives
of these grouping, segregation and variations have been the same to enable
government generate enough revenue without really inconveniencing the tax
payers. It is this idea of trying to collect tax efficiently on the part of
government and pay tax conveniently on the part of the tax payer and together
with the fact that the existing monetary policy in Nigeria is not generating
the much needed revenue to meet up with government expenditures and the need to
review the entire Nigerian Tax System which is the major non-oil source of
revenue that has promoted the introduction of Value Added Tax (VAT) in Nigeria.
The effect of corporate taxes on any economy vis-à-vis
investment and entrepreneurship is one of the central questions in both public
finance and development. This effect matters not only for the evaluation and
design of tax policy, but also for thinking about economic growth (see Barro
1991, DeLong and Summers 1991, and Baumol, Litan, and Schramm 2007).
Company income tax (CIT) was introduced in 1961. The
original law (Company Income Tax) has been amended many times and is currently
codified as the Company Income Tax Act 1990 (CITA). The Federal Board of Inland
Revenue, whose operational arm is the Federal Inland Revenue Services (FIRS),
is empowered to administer the tax. CITA policy regimes can be divided into two
phases, namely, pre-1992 and post-1992. The CIT policies in the pre-1992 era
were narrowly based and characterized with increasing tax rates and
overburdening of the taxpayers, which induced negative effects on savings and
investment. Since 1992, however, measures have been taken to address these
structural problems. For instance, excess profit tax was eliminated in 1991,
and the capital transfer tax scrapped in 1996. Tax rates on company profits,
payable on trade profits and investment income, fell from 45 per cent during
1970 to 1986 (when SAP was introduced) to 40 per cent between 1987 and 1991,
further to 35 per cent for the period 1992-95 and to 30 per cent from 1996 to
date. There is, however, a 20 per cent tax concession for certain companies:
i.e., those engaged in agricultural production or mining of solid minerals with
a maximum turnover of N 0.5 million and those in manufacturing or the export
promotion sector with a turnover not exceeding N 1 million.6 The rates on
capita allowances have been reduced continually to reflect the economic reality
of the country.
The idea of
introducing 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. VAT was proposed and a committee was set up
to carry out feasibility studies on the implementation. In January 1993, government agreed to
introduce VAT by the middle of the year.
It was later shifted to 1st September 93 by which time the
relevant legislation would have been made and proper groundwork done. VAT is a replacement of the existing sales
tax, which has been in operation under Federal Government Legislated Decree N0.
7 of 1986 but is operated on the basis of residence. Since VAT is based on the
general consumption behaviour of the people, the expected high yield from it
will boost the formers of the state government with minimum resistance from the
payers of the tax.
VAT by its
nature is a consumption tax that has been embraced by many countries
worldwide. Because it is a consumption
tax, it is relatively easy to administer and difficult to evade.
from VAT is a fairly accurate measurement of the growth of an economy since
purchasing power (which determines yield) increases with economic growth. Vat is a self-assessment tax that is paid
when returns are being rendered. In
built in the new tax is the refund or credit mechanism which eliminates the cascading
effect that is a feature of the retail sales tax. The input-output mechanism in VAT also makes
it self-policing because of the need to obtain receipts at each stage of the
1.2 Statement of
In Nigeria the contribution of tax revenue has not been
expectations of government are being cut short.
Corruption, evasion, avoidance and tax haven indicators are strongly associated
with low revenue (Attila, Chambas, and Combes, 2008) and indeed, corruption
functions like a tax itself. According to Adegbie and Fakile, 2011), the more
citizens lack knowledge or education about taxation in the country, the greater
the desire and the opportunities for tax evasion, avoidance and non-compliance
with relevant tax laws. In this respect, the country will be more adversely
affected because of absence of tax conscience on the part of individuals and
the companies and the failure of tax administration to recognize the importance
of communication and dialogue between the government and the citizens in
matters relating to taxation.
In the face of resource deficiency in financing long term
development, Nigeria has heavily resorted to foreign capital, such loans and
aid as the primary means to achieve rapid economic growth. Thereby accumulate
huge external debt in relation to gross domestic product and serious debt
servicing problems in terms of foreign exchange flow and, as such majority of
the populace live in abject poverty. Government has expressed concern over
these and has vowed to expand the tax revenue in order to meeting its mandate.
Kiabel and Nwokah (2009) argue that the increasing cost of running government
coupled with the dwindling revenue has left all tiers of government in Nigeria
with formulating strategies to improve the revenue base. Also, Ndekwu (1991)
noted that, more than ever before, there is now a great demand for the
optimization of revenue from various tax sources in Nigeria.
Nigerian tax system is
concentrated on petroleum and trade taxes while direct and broad-based indirect
taxes like the value-added (VAT) are neglected. This is a structural problem
for the country’s tax system. Although direct taxes and VAT have the potential
for expansion, their impact is limited because of the dominance of the informal
sector in the country.
Objectives of the Study
The main objective of the study is
to analyze the relative importance of corporate tax and value added tax (VAT)
and their effects on Nigerian economic growth.
specific objectives are as follows:
To assess the relative
importance of corporate tax in the Nigerian economy.
To assess the relative
importance of value added tax (VAT) in the Nigerian economy.
To determine the
effect of corporate tax on Nigerian economic growth.
To determine the
effect of value added tax (VAT) on Nigerian economic growth.
1.4 Research Questions
In the light of the
objectives of the study stated above, the researcher raised the following
questions, which the study seeks to answer:
Has corporate tax any
relative importance in the Nigerian economy?
Has value added (VAT)
tax any relative importance in the Nigerian economy?
What is the effect of
corporate tax on Nigerian economic growth?
What is the effect of
value added tax (VAT) on Nigerian economic growth?
research work is guided by the following hypotheses:
H01: There is
no significant effect of corporate tax on Nigerian economic growth.
H02: There is
no significant effect of value added tax (VAT) on Nigerian economic growth.
of the Study
relevance of the study lies in its attempt towards the understanding of the relative
importance of corporate and value added tax (VAT) and their effects on Nigerian
economic growth and so is particularly relevant in the followings areas:
The findings of the study will enable us understand
the relative importance of corporate tax and VAT in the Nigerian economy.
Again, the findings of the study will enable us ascertain
the effects of corporate tax and VAT on Nigerian economic growth.
The findings of the study will also help us to
assess the effectiveness of the Nigerian tax administration system.
Finally, the findings of the study will add to
existing literature on the subject of corporate tax, value added tax and
Nigerian economic growth.
1.7 Scope and
Limitation of the Study
The study is
empirical in nature and covers the relative importance of corporate tax and
value added tax (VAT) and their effects on Nigerian economic growth. The study covers
a period of thirteen years (2000-2012). The study is however limited to corporate
tax, value added tax, Nigerian economic growth, the data used and the findings
of the study.
1.8 Definition of
Economic growth: This measured in terms of gross domestic product (GDP) and refers to the money value of the
goods and services produced in an economy within a year.
Corporate tax: This is the tax levied on the income of companies
after the deduction of operating costs, interest, capital allowances and tax
Tax: This is compulsory levies on private individuals and
organizations made by government to raise revenue to finance expenditure on
public goods and services, and to control the volume of private expenditure in
Tax administration: This is the process of implementing tax
policies and collection of revenue from tax in a country.
Tax yield: This refers to the revenue collected by government from
VAT: Value added tax. Conceptually this is a tax based on the value
added in a country.
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