Developmental Impact of Indirect Tax on Nigeria Economy
REVIEW OF RELATED LITERATURE
- Economic Growth in Nigeria
Fiscal policy is one of the most important tools that have significant effect on all economic sectors and have real effect on economic variables like Gross national product, inflation, unemployment and so on. Credit flows and the fiscal stance are found to play a significant role in determining the trade balance. Nigerian government has gradually expanded its controls over the private sector, levying differential taxes and subsidies, increasing industrial prices relative to farm prices, favoring investment in key sectors, providing tariff and tax incentives to vital sectors, protecting favored industrial establishments from foreign competition, awarding import licenses to selected firms and industries, and providing foreign exchange to priority enterprises at below-market exchange rates in order to bring about economic growth and development. Emmanuel (2010) observe that the realization was dawned on Nigeria’s government at a very critical period when its main source of revenue (oil) for decades witnessed anunprecedented crisis and decline due to general fall in the prices of oil at the international market. This affected the overall revenue of the country and the general performance of government at various levels, especially as it concerns execution of capital projects, which to a large extent, is key to national development.
Muriithi and Moyi (2003) observe that a good tax system should be able to generate the needed revenue for government; redistribute income; and investment infrastructure that will provide the guarantee for business to strive and economic growth. The enabling environment created by government encourages the establishment of new business; survival of existing business and the infrastructures provided is a key determinant of political, economic and social well structured tax system provides government the needed fund for capital (infrastructure) and recurrent (administrative) expenditure that would greatly lead to economic growth and development. Therefore, tax can be seen as a fiscal policy, macroeconomic and internal revenue mobilization tool for the attainment of economic growth.
Ogbonna and Ebimobowei (2012) examine the Impact of Tax Reforms and Economic Growth in Nigeria using relevant descriptive statistics and econometric analysis. They found that various tax reforms are positively and significantly related to economic growth and that tax reforms granger cause economic growth. This means that tax reforms improves the revenuegenerating machinery of government to undertake socially desirable expenditure that will translate to economic growth in real output and per capita basis.
Anichebe, (2013) conduct a study on the impact of tax on economic growth in Nigeria for the periods 1986 to 2010. He found out that a significant relationship exist between tax composition and economic growth.
Umoru and Anyiwe, (2013) examine the effect of tax structure on economic growth in Nigeria. They employed co-integration and error correction methods of empirical estimation with an empirical strategy of disaggregation. They found out that direct taxation is significantly and positive correlated with economic growth while indirect taxation has insignificant negative impact on economic growth.
2.2 Taxation in Nigeria
Taxation in Nigeria following the extant laws is enforced by the 3 tiers of government, that is, federal, state, and local governments with each having its sphere clearly spelt out in the Taxes and Levies (approved list for collection) Decree, 1998. However, Nigeria runs a largely centralized revenue collection system, with the federal government collecting the major revenue (petroleum revenue – profit taxes, royalties, crude oil sales; company income tax, value added tax, customs and excise duties) on behalf of the constituent governments (Emmanuel, 2010).
According to Anyanwu (1997), a tax is a compulsory levy imposed by the government on individuals, companies, goods and services to raise revenue for its operations and to promote social equity through the redistribution of income effect of taxation. In line with this frame of thought, taxation is a source of government revenue by which individuals and corporate bodies are mandatorily required to pay certain proportion of their earnings to the government for the course of development. In addition, Bhatia (2003) defined tax as a compulsory levy payable by an economic unit to the government without any corresponding entitlement to receive a definite and direct benefit from the government. Note, the word direct here does not mean a price paid by the tax payer for any definite service rendered or a commodity supplied by the government. Rather it means that the benefits received by tax payers from the government are not related to or based upon the tax paid by the tax payers. This in effect implies that tax is a generalized exaction, which may be levied on one or more criteria upon individuals, groups, or the legal entities.
2.3 Value Added Tax and Economic Growth
Value added tax is another form of indirect tax applied at each stage of production to the value added. VAT is a consumption tax levied at each stage of the consumption chain and borne by the final consumer of the product or service. Each person is required to charge and collect VAT at a flat rate of 5%on all invoiced amounts on all goods and services produced in Nigeria. VAT was introduced by The Federal Government of Nigeria in January, 1993. It was believed by many Nigerians that the tax was introduced as a means of avoiding taking loans from international agencies and came into effect on January 1, 1994 to replace the Sales Tax (Ochei, 2010). Taxable persons are obliged to register under VAT Act. The tax is at a single rate of 5 percent of taxable goods and services. Supply of all goods and services except those specifically exempted are subject to VAT. Nonresident companies, which transact business in Nigeria, are also required to register for VAT and render VAT returns using the address of the company in Nigeria with whom they have subsisting contract. A taxable person, whether Nigerian resident outside Nigeria, who fails or refuses to register for VAT administration within six months of engaging in any economic activity in the territory of Nigeria is liable to pay a penalty of $67.00 for the first month that the failure occurs and a further penalty of $34 for each subsequent month in which the failure continues (Emmanuel, 2013).
Owolabi and Okwu (2011) examined the contribution of Value Added Tax to Development of Lagos State Economy, using simple regression models as abstractions of the respective sectors considered in the study. The study considered a vector of development indicators as dependent variables and regressed each on VAT revenue proceeds to Lagos State for the study period. Development aspects considered includedinfrastructural development, environmental management, education sector development, youth and social development, agricultural sector development, health sector development and transportation sector development. The results showed that VAT revenue contributed positively to the development of the respective sectors. However, the positive contribution was statistically significant only in agricultural sector development. On the aggregate, the analysis showed that VAT revenue had a considerable contribution to development of the economy during the study period. In addition, Unegbu and Irefin (2011) examine the impact of value added tax (VAT) on economic and human developments of emerging Nations from 2001 to 2009 , using regression, discriminant analysis and ANOVA, found out that VAT allocations have a very significant impact on expenditure pattern of the state during the same period. They found that, the perceptions citizens across the administrative areas of the state suggest that VAT has minimum impact level on the economic and human developments of Adamawa State from 2001 to 2009. Emmanuel (2013) examined the effects of VAT on economic growth and total tax revenue in Nigeria using data ranging from 1994 to 2010. He formulated two hypotheses that VAT does not have significant effects on GDP and also on total tax revenue. He found out that VAT has significant effect on GDP and also on total tax revenue. This indicates that increase in value added tax would to increase in tax revenue and economic growth (GDP).
Enokela (2010) conducted a study to explore the relationship between Value Added Tax and economic growth of Nigeria using secondary data and multiple regressions. He found out that Gross Domestic Product (GDP) is positive and statistically significant to Value Added Tax, Government Capital Expenditure (GCE) is positive but insignificant to Value Added Tax, and Gross Domestic Product per Capita (GDPPC) is negative and statistically significant to Value Added Tax. This in other words means that increase in value added tax would lead to a significant increase in economic growth.
2.5 Custom and Excise Duties and Economic Growth
An indirect tax is a tax on expenditure or outlay and it is possible to shift the tax burden (partly or wholly) to someone else (Anyanwu, 1997). Custom duty is an example of indirect tax and it consists of both the export and import duties although the latter is usually emphasized in countries where import predominates. Custom Duties constitute one of the oldest kinds of modern taxation in Nigeria been introduced in 1860 as import duties. They are taxes on Nigeria’s imports charged either as a percentage of the value of the imports or as a fixed amount contingent on quality.
Export Duty is a tax on the goods exported to other countries, while import duty is a tax on the goods coming into a country from other countries. Anyanwu (1997) argues that taxes are imposed to regulate the production and consumptionof certain goods and services, protection of infant industries, control business and commerce, curb inflation, reduce income inequalities etc. However, increased taxation on imported goods and services have affected the level of such goods and services that industrialist within the country are encouraged to produce (Nnadozie, 2003). Due to high import duty on dairy products, textiles, materials, food drinks etc our economic potential are encouraged through industrial investment locally and the multiplier effect on employment and national growth. Meanwhile, excise duties are an ad-valorem tax on the output of manufactured goods and are administered by the country’s custom services (Ekeocha, Ekeocha, Malaolu&Oduh, 2012).
Petroleum Profit Tax and Economic Growth
The role and strategic importance of the petroleum industry to the Nigerian economy cannot be over-emphasized, as it is the main fulcrum around which the entire economy revolves. Petroleum Profit Tax is payable by companies which are engaged in petroleum operations. The fundamental objectives of petroleum taxation is to ensure a fair share of wealth accruing from the extraction of the petroleum resource, while also providing sufficient incentives to encourage investment and optimal economic recovery of the hydrocarbon resource (Saheed, Abarshi&Ejide, 2014). Petroleum operations essentially involve petroleum exploration, development, production and sales of crude oil and gas (PPT Act, 2010). Ogbonna and Appah (2012) investigated the effects of petroleum income on the Nigerian economy for the period spanning from 2000 to 2009, using the Gross Domestic Product (GDP), Per Capita Income (PCI), and Inflation as the explained variables and Petroleum Profit Tax and Royalties (PPTR) and licensing fees as the explanatory variables. Simple regression models were used in this study to evaluate the data collected. Their findings showed that oil revenue had a positive and significant relationship with GDP and PCI, but a positive although insignificant relationship with inflation. Similarly, it was found that Petroleum Profit Tax and Royalties had a positive and significant relationship with GDP and PCI but a negative and insignificant relationship with Inflation. It also found that licensing fees had a positive but insignificant relationship with GDP, PCI and Inflation, indicating that Petroleum Income (Oil Revenue and Petroleum Profit Tax and Royalties) positively and significantly impacted on the Nigerian economy when measured by Gross Domestic Product (GDP) and Per Capita Income (PCI).Saheed, Abarshi and Ejide (2014), also attempted to measure the impact of Petroleum Tax on the economic growth in Nigeria. In their research, a simultaneous equation model was used to establish a relationship between the variables; Domestic Consumption and the production of crude oil, petroleum taxation and government policies. The result obtained from their analysis revealed that a strong positive relationship existed between domestic consumption, Petroleum Profit Tax (PPT), government policy and economic growth (GDP). It was also found in the study that crude oil production had a negative but significant effect on economic growth and other variables. Based on their findings, they recommended that part of the revenue accrued to the government purse from the Petroleum Profit Tax should be directed towards exploration and development of other mineral resources in order to achieve diversification of the economy. Jibrin, Blessing &Ifurueze (2012) ascertained the impact of Petroleum Profit Tax on the growth of the Nigerian economy for the period 2000 to 2010. They made use of the ordinary least square regression technique. They found that Petroleum Profit Tax impacted positively on Gross Domestic Product of Nigeria and that the relationship was statistically significant. Onaolapo, Fasina and Adegbite (2013) empirically examined the effect of Petroleum Profit Tax (PPT) on Nigeria’s economy from 1970 to 2010. Multiple regressions were employed to analyze data, involving the variables as Gross Domestic Product (GDP), Petroleum Profit Tax, Inflation and Exchange Rates. The results of the study showed that the variables were all statistically significant with the economic growth of Nigeria with the adjusted R2 of 86.3%. Following the outcome of the study, they concluded that abundance of petroleum and its associated income had been beneficial to the Nigerian economy.Appah and Ebiringa (2012) investigated the impact of Petroleum Profit Tax on the economic growth of Nigeria. Relevant data were collected from the CBN and FIRS from 1970 to 2010 and analyzed, using a granger causality model. The results showed a long-run equilibrium relationship between economic growth and Petroleum Profit Tax. It also found that petroleum profit tax did granger cause Gross Domestic Product of Nigeria.[email protected][email protected]