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

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

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Every patriotic Nigerian citizen wants to see a strong and vibrant economy. Paying taxes on time to the government is one method to demonstrate this intention. Value Added Tax is one method the government uses to boost its own internal revenue (VAT). This is a tax on the provision of goods and services that is ultimately paid for by the end user but is gathered at each link in the manufacturing and distribution process. The idea of VAT was first presented by France in 1954 and has since been adopted by well over 70 nations. It has recently emerged as a significant source of income in many developing nations, notably those in sub-Saharan Africa. According to Shalizi and Squire (1989), VAT made up around 30% of all tax collection in the Ivory Coast, Kenya, and Senegal in 1982. Indonesia implemented VAT in 1983, and by 1988, the ratio of VAT revenue to GDP had increased to 4.5 percent, according to Bogetic and Hasan (1993).

The decision to adopt VAT in Nigeria in January 1994 as a replacement for the old sales tax was undoubtedly inspired by its remarkable track record in nearly all nations where it was implemented. It was levied on all products made in Nigeria as well as those that were imported and offered for sale on the domestic market. The Federal Inland Revenue Service (FIRS), the organization in charge of administering taxes in Nigeria, noted that the value-added tax (VAT) is a consumption tax that is widely accepted because it is relatively simple to administer and challenging to cheat (FIRS, 1993a; 1993b; 1993c). It is vital in this situation to scientifically investigate the anticipated macroeconomic effects of VAT administration.
According to the available data, Nigeria’s VAT is already a sizable source of income.

For instance, VAT revenue in the year of its introduction (1994)was N8.194 billion, which was 36.5 percent more than the predicted N6 billion for that year (Ajakaiye, 1999). Members of the organized business sector have expressed their concerns about the impact of VAT on the prices of their goods, nevertheless. Economically speaking, it is normal to anticipate an increase in the price of goods subject to VAT; nonetheless, firms are going above and above by unilaterally raising prices for both goods and services. Aruwa (2008) asserts that the ensuing price increase has raised inflation. The macroeconomic effects of VAT, particularly on prices, output, and employment, should concern policymakers, according to Mclure (1989) to say that before considering its introduction, policymakers should be mindful about the macroeconomic effects of VAT, particularly on prices, output, income, and consumption.
There are a few empirical studies on the topic that are relevant to the Nigerian economy.
Ajakaiye (1999) completed the most detailed analysis for Nigeria, including an extensive investigation of the influence of VAT on important sectoral macro economic aggregates, by employing a Computable General Equilibrium (CGE) model of the Nigerian economy. Unfortunately, the analysis was conducted before Nigeria’s VAT had been in place for six years, which made it impossible to draw valid conclusions about how it will affect other macroeconomic aggregates. In addition, there have been a lot of changes to Nigeria’s economic landscape since 1999. As an illustration, there was a change from a military to a democratic regime.

1.2 STATEMENT OF THE PROBLEM

Nigeria may soon join the increasing list of emerging nations where VAT provides at least 20% of total government revenue. At the time of its establishment in 1994, the expected VAT revenue was substantially bigger in terms of contributions to the total federal collecting revenue. Although the success of VAT as a source of revenue in sub-Saharan Africa, and Nigeria in particular, is undeniably encouraging, attempts to systematically assess the impact of VAT on these economies remain tough to come by (Ajakaiye, 1999).

Yet, according to Include (1989), policymakers thinking about implementing a VAT should be concerned with the macroeconomic effects, particularly on pricing, output, income, and consumption. Economically speaking, one would anticipate a price increase for VAT-eligible goods; but, businesses are going above and beyond to increase the price of goods and services arbitrarily. 13
The excessive price increase according to Aruwa (2008) has further led to increased inflation in Nigeria. The aforementioned aims to evaluate the macroeconomic effects of the VAT on the pricing level in Nigeria.

1.3 AIMS AND OBJECTIVES OF STUDY

Examining the impact of value added tax (VAT) on price stability in the Nigerian economy is one of the key goals and objectives of the study project.

Other study goals in detail include:
1. To investigate the impact of price variation on Nigeria’s economy in a
2. To examine on the variables affecting the application of VAT in Nigeria
3. To investigate how VAT affects the consumer price index
4. To propose a solution to the aforementioned issue.

1.4 RESEARCH QUESTIONS

What impact does price volatility have on Nigeria’s economy?
What functions does the value added tax (VAT) have in generating income for the Nigerian federal government?
What aspects are influencing the introduction of VAT in Nigeria?
What impact does the VAT have on the CPI?

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

Policy makers will greatly benefit from the study’s findings as they evaluate the impact of the VAT on the stability of the pricing level in Nigeria. Second, it will provide as a knowledge base for additional research.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study plans to concentrate on the Nigerian economy from 1994 to 2015. The selection of the time frame was influenced by the fact that the VAT policy was implemented in Nigeria by 1994. In order to increase the sample size, quarterly data will be used; however, if quarterly data are not available, we will be forced to use annual data for the study.

1.8 LIMITATION OF THE STUDY

Financial constraints – A researcher’s ability to find relevant materials, literature, or information and collect data efficiently is often hindered by a lack of funding (internet, questionnaire and interview).
Time restraint: The researcher will do this investigation together with other academic activities at the same time. As a result, less time will be spent on the research project.

1.9 DEFINITION OF TERMS

VAT: This is an indirect tax on domestic consumption of goods and services, excluding those that are exempt or zero-rated (such food and vital medications) (such as exports).

Price stability: Preventing both lengthy inflation and deflation is implied by this.