CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Value Added Tax (VAT) has become a major source of

revenue in many developing countries like Nigeria. In sub

Sahana Africa for example VAT has been introduced in

Benin Republic Cote d‟Ivore Guinea Kenya Madagascar

Mauritius Niger Republic Senegal Togo. Evidence suggests

that in these countries VAT has become an important

contribution to total government tax revenue; (Ajakaiye

2000) the value Added Tax decree was established in 1993

and was imposed on 1994. Value Added Tax (VAT) in an

ideal form of taxation in Nigeria tax system and has

significantly contributed to resources mobilization as well as

capital formation to the economy. It has positive and

significant impact on revenue mobilization in Nigeria; it also

has positive relationship with consumption.

VAT is a consumption tax that is relatively easy to

administer and difficult to evade and it has been embraced

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by many countries worldwide (Federal Inland Revenue

Service 1993). Evidence so far supports the view that VAT

revenue is already a significant source of revenue in Nigeria.

For example actual VAT revenue from 1994 was N8.189

billion which is 36.590 higher than the projected N6 billion

for the year. Similarly actual VAT revenue for 1995 was N21

billion compared with the projected N12 billion. In terms of

contribution to total federally collected revenue VAT

accounted for about 4.06% in 1994 and 5.93% in 1995. As

much as N404.5 billion was collected on VAT (5.1%) of total

revenue in 2008.

VAT revenue is generated for distribution to the state

and local government in Nigeria. Unlike the oil revenue

whose market government has no control over. This helps to

reduce over dependence on oil revenue this assures a

sustainable economic growth and development. While the

performance of VAT as a source of revenue in Nigeria is

encouraging it means difficult to find attempts to

systematically assess the impact on VAT on the economy.

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Recent research work on the impact of taxation on the

Nigeria economy impact up all the various taxes together

without isolating VAT. How and in what direction VAT has be

affecting the Nigeria economy? And the relationship of VAT

on economic growth? Findings answers to these and other

similar questions is the main trust of this paper.

1.2 STATEMENT OF THE PROBLEM

The attitude of Nigerians towards taxation is worrisome

as many prefer not to pay tax if given the opportunity. The

economy continues to lose hung amount of revenue through

the unwholesome practice to tax avoidance and tax evasion

this loss of revenue can change the fortune of many

economies. Particularly developing countries like Nigeria.

This problem has been lingering for so long which urgent

attention and solution is over due to 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 or value derived from such operation and that

will not the appropriate for the system. In Nigeria VAT is

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one of the instruments the federal government introduced to

generate additional revenue. Yet most prominent Nigerians

and interest groups had spoken against its introduction. It

would appear that VAT is froth with some problems. For the

purpose of this paper work we shall examine the implication

of VAT on revenue generation in Nigeria and how VAT affect

the economic growth in Nigeria.

1.3 RESEARCH QUESTIONS

This research work is set to answer the research question

below.

1. What is the impact of VAT on economic growth?

1.4 OBJECTIVE OF THE STUDY

The following are the objectives of the study:

1. To know the impact of value added tax on economic

growth.

1.5 STATEMENT OF HYPOTHESIS:

The following assumptions which are subject to testing are

made for the purpose of this research work.

HO

1

: O

1

VAT has no Impact on economic growth.

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1.6 SIGNIFICANCE OF THE STUDY:

The study will assist the government in policy formulation as

it relates to value added tax. It will also help to broaden the

nation‟s revenue base thereby making it less dependent on

oil export.

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