Value added tax (vat) and price stability in nigeria

Thesis Overview

<p> 1.1 BACKGROUND OF THE STUDY<br>The introduction of value added tax(VAT) in Nigeria came from the report<br>of the study group set up by the federal government in 1991 to review the entire<br>tax system in the set up to carry out feasibility studies on its possible<br>implementation.<br>In January 1993, the federal government agreed to introduce VAT by the<br>middle of the year. But due to some logistic reasons for the relevant legislation to<br>be made and proper ground work done. It was shifted to January 1st 1994.<br>VAT replaced the former existing sales tax carried out by the different state3<br>governments, the wages first implemented in 1986 and operated under the federal<br>government legislated degree no.7, of 1986. VAT replaced the sales tax because of<br>the following reasons.<br>VAT is neutral in that a considerable part of the new tax is to be realized<br>fr5om imported goods unlike the sales tax that targets only locally produced goods<br>based on the general consumption behavior.<br>11<br>VAT is a consumption tax on all economic operation in the country<br>including imports and has a zero rate for export. The federal Inland Revenue<br>service (FIRS) is the main body charge with the administration of VAT in Nigeria<br>custom service (NCS) for the collection of VAT on imports and the help of VAT<br>on the locally produced goods and services.<br>VAT has a single low rate of 5% with a zero rate for exports and is borne<br>sole by the final consumers of VAT able goods and services like any other indirect<br>tax, some essential goods and services are exempted from VAT that is they are not<br>VAT able<br>The main reasons that led the introduction of VAT are to be referred to as the main<br>gains of VAT and they included.<br>I. Need for increased government revenue due to increased public expenditure.<br>II. Reduction in the over dependence on sales of crude oil with its attendant<br>uncertainties in the international market.<br>III. Making the tax equitable for all the masses by curbing the rice, thereby<br>reducing the gap between the very rich and the very poor.<br>12<br>IV. Reducing the rich’s materialistic tendencies for unnecessary luxury goods.<br>1.2 STATEMENT OF THE PROBLEM<br>In terms of contributions the total federal collection revenue, VAT revenue<br>at the time of inception in 1994 was anticipated to be much larger, indicating that<br>Nigeria then may soon join the growing list of developing countries here VAT<br>contributes at least 20% of total government revenue . While the performance of<br>VAT as a source of revenue in sub-Sahara Africa and Nigeria in particular is<br>clearly encouraging, it remains difficult to find attempts to systematically asses the<br>impact of VAT on these economies (Ajakaiye, 1999). Nevertheless, include (1989)<br>opines policy makers considering the adoption of VAT should be interested in the<br>macroeconomic impact, especially on price, output, income and consumption.<br>Economically, one expect the price of VAT able goods to rise, however<br>beyond this expected rise, business are taking advantage of the existence of VAT<br>the increas4e price of goods and services arbitrarily.<br>13<br>The excessive price increase according to Aruwa (2008) has further led to<br>higher inflation in Nigeria. Given the foregoing seeks to asses the macroeconomic<br>impact at VAT on price level in Nigeria.<br>1.3 OBJECTIVE OF THE STUDY<br>The study seeks to examine the following specific objectives.<br>I. To ascertain if any significant relationship exist between VAT and price<br>stability in Nigeria.<br>II. To determine the impact of VAT on price level in Nigeria.<br>1.4 HYPOTHESIS<br>Ho1: There is no significant relationship between VAT and price level in Nigeria.<br>Ho2: The impact of VAT on price level in Nigeria cannot be determined.<br>1.5 SCOPE OF THE STUDY<br>The study intends to focus on the Nigeria economy with the period 1994 to<br>2010. The choice of range of period is informed by the fact that VAT policy<br>implementation in Nigeria began by 1994. Quarterly data will be employed to <br></p>