Assessment of Value Added Tax on the Growth and Development of Nigeria Economy: Imperative for Reform

Abstract

Value Added Tax (VAT) is a consumption tax that is being charged and embraced by many developed and developing countries, which is relatively easy to administer and very difficult to evade. The economic development and growth of any nation depends on government ability to generate adequate revenue in order to effectively provide various infrastructural facilities to satisfy the needs of the population and takes its position among the nations in the global village. The global oil glut has adversely affected the revenue position of Nigeria. The over 60% drop in oil price to below $40per barrel was unanticipated by the government. This has resulted to over 80% fall in the yield(spread) per barrel of oil produced in Nigeria, steep decline in the country’s revenue,2016 budget deficit of over N2trillion,continuing devaluation of the Naira, slowing Gross Domestic Product( GDP) growth, reduced inflow of foreign direct investment, rising inflation and growing unemployment. The government at the federal level has put a stop on capital projects, while allocation to the states of the federation has reduced resulting in the inability of many states provide relevant infrastructural facilities and pay workers’ salaries ranging from five months to eight months. It is therefore very clear that there is the need to diversify the revenue base of the nation, and Value Added Tax (VAT) is a major revenue source of advanced nations of the world, which much attention is not focused on this area by the federal government of Nigeria. The main focus of this work was to evaluate the impact of VAT on Nigerian economy between its introduction to date to discover the imperativeness of its reform. Ex-post-factor, descriptive and analytical research approach were adopted for the work. Data of VAT and GDP were obtained from 1994-2015, and analyzed to determine the relationship that has been existing between them. It was discovered that VAT has a positive relationship with GDP. The coefficient of the model indicate that a 1% increase in VAT will lead to a 0.88% increase in GDP_.This shows a perfect positive correlation between VAT and GDP.It therefore becomes imperative for a reform in VAT.In conclusion,VAT is due for a total reform in rate and clear definition of exempted goods and services.We recommend that the curent 5% should be review upward to a minimum of 10%,Integrated Tax Offices should be stenghtened to increase efficiency and effectiveness,Federal Inland Revenue Service should address tax evasion,government should use VAT revenue judiciously to encourage tax payers and government should clearly define excempted goods and services so as to charge vatable goods that are currently not vatable.