Value Added Tax and Economic Growth in Nigeria

Abstract

Tax is a major fiscal policy employed by every nation of the world to generate revenue to implement developmental activities and stimulate the economy towards growth. To further boost government revenue generation in Nigeria Value Added Tax (VAT) was introduced by Act No. 102 of 1993 and it became operational in January, 1994. This study focused on Value Added Tax (VAT) and economic growth in Nigeria. It employed time series survey of data covering a lapse period of twenty years (1994-2013). Data were obtained from Central Bank of Nigeria (CBN) statistical bulletin and Federal Inland Revenue Service (FIRS) data. Diagnostic tests consisted of normality test, Ramsey RESET test for misspecification and Breusch–Pagan-Godfrey Serial Correlation LM test for the presence of auto correlation. The statistical tool employed was simple linear Ordinary Least Square (OLS) regression. Data was estimated with computer software E-views 8.0. The study found that VAT is statistically significant, suggesting that VAT has positive relationship with economic growth in Nigeria. Hence, this paper recommends among others that the government should reform the Value Added Tax system for better effectiveness and increase the present VAT rate of 5% to 10% in line the prevailing rate of others countries in the world. The paper concluded that if the Value Added Tax is reformed, the resultant effect will cushion the impact of the fall in oil revenue on government expenditure and its attendant effect on economic growth of the country.

Keywords: Economic Growth, Expenditure, Nigeria, Revenue, Value Added Tax