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This study examined the impact of Value Added Tax (VAT) on Nigeria Economic Growth within a period of ten years (2007 – 2016). The study specifically evaluates the effect of VAT on Nigeria economic growth using GDP as surrogate within the study period. It examines the significance of VAT as a revenue base of the Federal Government in Nigeria. It also assesses the influence of VAT on Nigeria Human Development Index.

The study made use of secondary data which were obtained from published annual report of selected commercial banks for the period of 2007 – 2016. Both descriptive and inferential statistical tools were employed in this study. Descriptive tools include means, standard deviation, maximum and minimum values. The inferential statistics employed the use of multiple regression model and Pearson pairwise correlation to analyse the secondary data.

Findings from the study revealed that a significant relationship exists between VAT and Revenue Base of the Federal Government,  given a P-value of 0.0086, F-value of 48.52, R-Squared of 0.8720 and adjusted R2 of 0.7697. Furthermore, the study shows that VAT exhibits positive effect and relationship with GDP given a P-Value of 0.000 and F-value of 138.11, R2 of 0.9910 and adjusted R2 of 0.9839. Lastly, Findings from the study indicates that a significant relationship exists between VAT and Human Development Index (HDI) given a P-value of 0.000, F-value of 45.29, R-Squared of 0.6877 and adjusted R2 of 0.4622. In the light of the findings, it can be deduced that if the collection of VAT should be stopped, it will seriously have a negative effect on the Nigeria economy growth.

It is therefore recommended that the Government should endeavour to provide social amenities to all nooks and crannies of the country as this will boost the level of tax compliance in Nigeria. Also the Value Added Tax  collection  mechanism  used  by  tax  officials  must  be  free  from corruption and embezzlement. If this is not done the revenue collected may not reach the desired point. The government should also engage in a complete re-organization of the tax administrative machineries in order to reduce tolerable problems of tax evasion and avoidance.




  • Background to the Study

Taxation is one of the most important revenue generation mechanisms in any given economy. In fact, of the main sources of government revenue is tax which is obtainable from different sources. Government has the mandate to impose tax via its various regulations. An efficient and effective tax system is capable of ensuring the basic necessities and services in the country. Taxes are used to achieve economic growth, achieve equity in income and wealth distribution as well as maintain equilibrium in the economy. Taxes are not only the most traditional means through which government generate revenue; they are also reliable and predictable means. One of these taxes is Value Added Tax (VAT).

 Value Added Tax (VAT) was introduced in Nigeria, in 1993 as one of the attempts to expand the tax net with minimum resistance as well as to reduce tax evasion so that most of the tax income revenue would get to the government. This tax reform came into operation in January 1994 to replace the old sales tax which was narrow in scope in terms of tax revenue from goods and services. In other words, VAT has a broader tax system structure to raise revenue for the government. This government includes the three tiers of government which are the federal, state and local governments.

            Many developing countries adopted the Value Added Tax (VAT) system because of the perceived advantage inherent in the collection process. Thus, in the Sub-Sahara Africa such as Benin Republic, Cote d’Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic,  Senegal and Togo, taxation is perceived as a brake on growth. Taxes rules are insufficiently tailored to the taxpayer’s specificity, and very often do not take into account the weak administrative capacity available in the countries of the region. Faced with this situation, countries in the region have embarked on reforms aimed at alleviating the burden of tax structures that are hampering economic growth. These reforms are generally aimed at creating a tax environment that encourages savings, investment, entrepreneurship and labour.     The impressive performance of VAT in other countries as well as the intention of the Nigerian government to increase her non-oil revenue base principally accounted for the introduction of the VAT tax system. The Value Added Tax system is a consumption levy on the supply of goods and services that is easy to administer which is also difficult to evade both by the rich and the poor, by small or large companies.

            Over the decades around the globe especially in the developing economies, Value Added Tax revenue has been recognised as accounting for a significant percentage of the total government revenue. Value Added Tax (VAT) has been adopted by several countries of the world because of the growing concern about economic efficiency and tax simplicity in a competitive and integrated world economy (Jekins and Kuo, 1995).

            The undisputed contribution of VAT to government revenue in countries where it has been in existence influenced the government decision in 1993 in Nigeria to introduce VAT to replace the Sales Tax which has been in existence prior to the time. The Federal Inland Revenue Service (FIRS) stated that VAT is easy to administer and of course very difficult to evade. Also, the result of a study conducted by IMF to ascertain whether countries with VAT system had higher tax revenue to GDP ratio proved more tantalizing as the study revealed that VAT system generates higher revenue to the government. The introduction of VAT assisted immensely to diversify the revenue base of the nation as VAT revenue in 1994 accounted for about 36.5% of the budgeted revenue and 4.06% of the total government revenue and 5.93% in 1995. VAT at present contributes higher to total government in Nigeria as it provides the government with expected revenue to embark on developmental project to fasten economic development in the country. Through VAT as a consumption tax, the government can control the production and consumption of certain goods and services, control adverse economic conditions, inflational rates and help sharpen the economy and curb the level of unemployment through building of industries, skill acquisition centers, encourage local manufacturer which in turn will help curb the level of unemployment in the country.

            Value Added Tax (VAT) is an ideal form of taxation in Nigeria tax system and has significantly contributed to resources mobilization as well as capital formation in the economy. It has positive and significant impact on revenue mobilization in Nigeria. It also has positive relationship with consumption. The tax is charged on the supply of goods and services. The vendor has the responsibility to collect VAT from the purchasers of goods and services (individuals or companies), on behalf of the Federal Inland Revenue Service (FIRS). The tax is charged and payable on the supply of all goods and services, other than those exempted. The honourable minister of finance may by order of the Federal government to publish in gazette amend the rate chargeable and also modify the list of exempted goods and services.

            From the perspective of the seller, VAT is a tax on the value added to a product or service while from that of the buyer; it is a tax on purchase price. The producer or the service provider remits to the government the difference between the VAT output and VAT input and retains the rest to offset the taxes they have previously paid on the inputs. VAT has become a major source of revenue in Nigeria.

            Each time goods are passed from one stage to the other, intermediary value is added to it, it is this value that is being taxed and borne by the final consumer. In this country, VAT is a gross product type of tax imposed on the destination principle. At the moment, there are seventeen categories of goods and twenty-four categories of services that attract VAT. The goods and services exempted by the Act are purely those that bother on people welfare and whose requirements are necessary for improving human development. These include medical and pharmaceutical products, basic food items, educational materials, agricultural services and equipment etc. However, there is much confusion over which goods or services should be in exemption list.

            Furthermore, Nigeria adopts the same 5% VAT charges on all goods and services, either domestic or imported since inception. It was increased to 10% on May 23, 2007. But Nigerians rejected the hike in the VAT rate and the Nigerian Labour Congress; NLC went on a five day strike which eventually jeopardised the economy. This made the Federal government to reverse to the old VAT rate of 5%. Nigeria also imposes a zero rate on export commodities with a view to encouraging favourable balance of trade. It would seem, however, that the benefits of VAT outweigh its demerits. What is only required is a measure of commitment and transparency in the mobilization and allocation of VAT proceeds.

            According to United States Agency for Industrial Development (USAID) (2014), Economic growth can be said to be a situation of increase in per capital national output or net national product over a long period of time. Growth depicts that the rate on increase in total output must be greater than the rate of population growth. They further explained that economic development is the development of economic wealth of countries or regions for the well-being of their citizens. That is to say that economic development seeks to improve the economic well-being and quality of life for a community by creating jobs and supporting or growing incomes. Economic development implies improvements in a variety of indicators such as literacy rates, life expectancy and poverty rates. This is to say that economic development encompasses policies that governments undertake to meet broad economic objectives such as price stability, high employment, expanded tax base and sustainable growth. GDP is a specific measure of economic welfare (Abata, 2014). Abata further explained that economic growth is the growth of an economic output of goods and services which is sometimes referred to as the Growth National Product (GNP). When the growth rate of GNP declines, unemployment results and the income generally falls. When this happens, the government has a duty to set policies that will set up the economy output to achieve sustained economic growth.VAT revenue is generated for distribution to the state and local government in Nigeria. This is unlike the oil revenue whose market government has no control over. This has helped to reduce over dependence on oil revenue and has thus encouraged a sustainable economic growth and development.

            VAT is an indirect tax system designed in the form of a final tax liability on the final consumer of goods and services. This topic centers on what extent the revenue collected from value added tax system has affected the growth of the Nigeria economy as proxy by Gross Domestic Product (GDP). This is because the tax revenue is supposed to be used to grow and develop an economy.

1.2       Statement of the Problem

In Nigeria, value added tax is one of the instruments the Federal government introduced to generate additional revenue. While the performance of VAT as a source of revenue in Nigeria is encouraging, it remains difficult to measure the effectiveness and efficiencies of tax especially with regards to the economic and social goals, benefits received because of the clear problem of record keeping of tax paid or levied due to corrupt practices.

The attitude of Nigerians towards taxation is worrisome as many prefer not to pay tax if given the opportunity. The economy continues to lose huge amount of revenue through unwholesome practice of tax avoidance and tax evasion, this loss of revenue can change fortune of many economies.

However, another problem perceived by enterprises or businesses in Nigeria is that of increase in the cost of raw materials, semi-finished goods (WIP) as well as finished goods and services caused by VAT. This has also affected the consumption of goods and services resulting from increase via their prices, thereby increasing the cost of living of the consumers. Poor relationship between tax payers and tax authorities is a serious concern as well. The issue of not remitting VAT collection promptly is equally worrisome since it needs to be done within 30 days of collection by business ventures. Thus, reducing the amount of revenue generated. For the purpose of this paperwork, we shall examine the impact of VAT on the economic growth of Nigeria.

  • Objectives of the Study

The main objectives of this study are to;

  1. Examine whether the significance of Value Added Tax (VAT) as a revenue base of the Federal Government in Nigeria.
  2. To evaluate the effect of VAT on Nigeria economic growth using GDP as surrogate.
  • Assess the influence of VAT on Nigeria Human Development Index (HDI).


  • Research Questions
  1. Is there any relationship between VAT and revenue generation in Nigeria?
  2. What are the impacts of VAT revenue on the Nigeria economic growth using GDP as a proxy?
  • Does the incidence of VAT influence the Nigeria Human Development Index?



  • Research Hypotheses

Three hypotheses stated in the null form are formulated in this study

Ho1- There is no significant relationship between VAT and revenue generation

Ho2- There is no significant impacts of revenue from VAT on the Nigeria economic growth over the years

Ho3- VAT does not have a significant influence on the Nigeria Human Development Index

1.6       Significance of the Study

The significance of this study cannot be over emphasised. This study is significant because much has not been done on the contribution of value added tax system and its contribution to government total revenue although extensive studies have been done on various aspects of tax generally. This study therefore, intends to focus and address the impact VAT has on government total revenue and economic growth.

  • Scope of Study

The scope of this study covers the period from 2006 to 2016. This period is considered long enough to provide useful result to ascertain the level of impact which VAT has on revenue generation and economic growth.

  • Operational Definition of Terms

Economic Growth: This is a sustainable increase in per capita national output or net national product over a long period of time.

FIRS: Federal Inland Revenue Services

Gross Domestic Product (GDP): This is a monetary measure of the market value of all final goods and services produced in a period. It determines the economic performance of a whole country.

Tax Incidence: This is an economic term for the division of a tax burden between buyers and sellers. It reveals the person that will pay the tax liability.

Tax Invoice: This is the authority to make claims on VAT. It is the invoice or receipt given to the purchaser of vatable goods or services.

Taxable Period: This is the period within which VAT is collected and remitted. The taxable period in Nigeria is made before the 21st day of the following month of collection.

Total Revenue: This refers to the total receipts from sales of a given quantity of goods and services.

Value Added Tax: This is an indirect tax on the supply of goods and services which is eventually borne by the final consumer. It is collected at each stage of production and distribution.

Vatable Goods and Services: These are any goods and services that are subjected to VAT.

Vatable Persons: These are any persons, businesses and organizations that are authorized to collect VAT and trades on vatable goods and services. The organizations collect VAT from customers and remit to VAT office.