The Impact of Value Added Tax on Nigerian Economic Growth (1994-2012): An Investigation

Abstract

Taxation as an instrument of fiscal policy is a critical contributor to revenue generation capacity of government and by extension a stimulator of growth and development. This study merely added to the vast literature on VAT – a component of taxation. By employing the Error correction model, the study ascertained how VAT has impacted on Nigerian economic growth. The result was further re-enforced by assessing the performance of the different sectors in the Nigerian economy in contributing to VAT revenue, with a view to showcase their effect on economic growth in the new millennium. The causal relationship is tested using Granger Causality. A positive and insignificant correlation exists between VAT Revenue and real GDP as there are some problems inhibiting its potency. Both economic variables fluctuated greatly over the period though VAT Revenue was more stable .Granger Causality Test also revealed that the relationship between VAT and real GDP is unidirectional and a lag period of four years exists. That is real GDP granger causes VAT revenue; hence policy makers should favour all economic growth determinant factors for VAT to contribute significantly. This study also recommends that all identified problems and administrative loopholes should be plugged for VAT Revenue to contribute significantly to economic growth of the country. This should be done on the realization that any action taken on either VAT Revenue or the GDP will take four years to become effective.

Keywords: Granger Causality, Value Added Tax, Economic Growth