THE EFFECT OF VALUE ADDED TAX ON PRICE STABILITY IN NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

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 revenue is Value Added Tax (VAT). 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. VAT as a concept was first introduced by France in 1954, and has over time been embraced by well over 70 countries. It has in recent 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 clearly influenced the decision to introduce VAT in Nigeria in January 1994 as a replacement for the existing sales tax. It was imposed on all goods manufactured in Nigeria, as well as on the goods that were imported and sold domestically. The Federal Inland Revenue Service (FIRS), the agency in charge of tax administration in Nigeria, pointed out that VAT is a consumption tax that is relatively easy to administer and difficult to evade, and has been embraced by many countries (FIRS, 1993a; 1993b; 1993c). In this context, it becomes necessary to empirically examine the likely macroeconomic impact of VAT administration.

Evidence so far supports the view that VAT is already a significant source of revenue 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 for that year (Ajakaiye, 1999). However, the members of the organised private sector have been voicing their reservations in the sense that VAT is taking a toll on the prices of their products. From an economic point of view, one expects the price of goods subject to VAT to rise, however, beyond this expected rise, businesses are taking advantage of the existence of VAT to increase prices of goods and services arbitrarily. According to Aruwa (2008), the resulting price increase has led to higher inflation. This may have prompted Mclure (1989) to state that policy makers should be 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 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 1999 to date, the economic environment in Nigeria has undergone a number of changes. For instance, there was 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 Nigeria

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

Hypothesis 1

H₀: the implementation of VAT has no significant effect on price stability

H₁: the implementation of VAT has significant effect on price stability

Hypothesis 2

H₀: there is no significant relationship between the implementation of value added tax and economic growth in Nigeria

H₁: there is no significant relationship between the implementation of value added tax and economic growth in Nigeria

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 interview).

 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