VALUE ADDED TAX (VAT) AND PRICE STABILITY IN NIGERIA

VALUE ADDED TAX (VAT) AND PRICE STABILITY IN NIGERIA

ABSTRACT

Value Added Tax (VAT) is a consumption tax on the value added to a product in the process of production. Like all other indirect taxes, it is a tax that targets the final consumer of goods and services. The main purpose of VAT in Nigeria is to increase government (state and Local) revenue from the non-oil sector thereby reducing the government’s dependence on oil sales and the budget deficits. In this research work my aim is to determine the stabilizing roles of Value Added Tax in the Nigerian economy. The study employed multiple regression analysis as a method of study using the ordinary least square (OLS) regression technique in estimation. Result of the analysis revealed that price level is not stimulated by Value Added Tax in Nigeria.

CHAPTER ONE

1.1 BACKGROUND OF THE STUDY

The introduction of value added tax (VAT) in Nigeria came from the report of the study group set up by the federal government in 1991 to review the entire tax system in the set up to carry out feasibility studies on its possible implementation. In January 1993, the federal government agreed to introduce VAT by the middle of the year. But due to some logistic reasons for the relevant legislation to be made and proper ground work done. It was shifted to January 1st 1994. Value added tax replaced the former existing sales tax carried out by the different state governments, the wages first implemented in 1986 and operated under the federal government legislated degree no.7, of 1986. Value added tax replaced the sales tax because of the following reasons.

Value Added Tax (VAT) is neutral in that a considerable part of the new tax is to be realized fr5om imported goods unlike the sales tax that targets only locally produced goods based on the general consumption behavior.

Value Added Tax (VAT) is a consumption tax on all economic operation in the country including imports and has a zero rate for export. The federal Inland Revenue service (FIRS) is the main body charge with the administration of VAT in Nigeria custom service (NCS) for the collection of VAT on imports and the help of VAT on the locally produced goods and services. VAT has a single low rate of 5% with a zero rate for exports and is borne sole by the final consumers of Value Added Tax able goods and services like any other indirect tax, some essential goods and services are exempted from value added tax that is they are not Value Added Tax able The main reasons that led the introduction of value added tax are to be referred to as the main gains of Value Added Tax and they included.

I. Need for increased government revenue due to increased public expenditure.

II. Reduction in the over dependence on sales of crude oil with its attendant uncertainties in the international market.

III. Making the tax equitable for all the masses by curbing the rice, thereby reducing the gap between the very rich and the very poor.

IV. Reducing the rich’s materialistic tendencies for unnecessary luxury goods.

1.2 STATEMENT OF THE PROBLEM

In terms of contributions the total federal collection revenue, Value Added Tax 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 Value Added Tax contributes at least 20% of total government revenue . While the performance of value added tax 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 Value Added Tax should be interested in the macroeconomic impact, especially on price, output, income and consumption. Economically, one expect the price of value added tax 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.

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 OBJECTIVE OF THE STUDY

The study seeks to examine the following specific objectives.
I. To ascertain if any significant relationship exist between VAT and price stability in Nigeria.
II. To determine the impact of VAT on price level in Nigeria.

1.4 HYPOTHESIS

Ho1: There is no significant relationship between value added tax and price level in Nigeria. Ho2: The impact of value added tax on price level in Nigeria cannot be determined.

1.5 SCOPE OF THE STUDY

The study intends to focus on the Nigeria economy with the period 1994 to 2010. 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.

1.6 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.

CHAPTER TWO

2.0 LITERATURE REVIEW
2.1 CONCEPTUAL FRAMEWORK

VALUE- ADDED TAX (VAT). This is an indirect tax levied on goods or services as a percentage of their value added. The customer pays price the seller then pays the VAT they have paid on purchased inputs. VAT is levied in the UK in 1973. Goods may bear VAT at different rates. Some goods, for exampled food in the UK are exempt, and VAT is not payable by business with turnover below some minimum level.