Economics Project Topics

Developmental Impact of Indirect Tax on Nigeria Economy

Developmental Impact of Indirect Tax on Nigeria Economy

Developmental Impact of Indirect Tax on Nigeria Economy

Chapter One 

Objective of the study

The objective of the study is to find out the developmental impact of indirect tax on Nigeria economy. The specific objectives are;

  1. To determine the impact of value added tax on economic growth in Nigeria
  2. To evaluate the impact of custom and excise duties on economic growth in Nigeria.



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 an unprecedented 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 revenue generating 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.

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.





The design of this study is structure to use time series data. In fact, this enables the researcher to determine the development impact of indirect tax on Nigeria economy in Nigeria for the period ranging from 2000 to 2020. In addition, the principal method common to this kind of research is empirical method. This method entails the use of quantitative, statistical or regression techniques in evaluating the research issues or problems.

The population of the study covered the period of 1987 to 2020 and the sample size covered the period of 2000 to 2020 based on the convenient and systematic sampling techniques. This period is adopted because of the non-availability of data on value added tax before 2000.

The major sources of these data are the publications of the Central Bank of Nigeria, Nigerian Investment Promotion Commission (NIPC) and Securities and Exchange Commission (SEC)

Model Specification

In light of the above research methodology and theoretical framework deduced to adequately capture and empirically examine the impact of tax on Nigeria economy, a multiple econometric model for this study was specified. Multiple econometric regression model is one that seek to explain variation in the values of the dependent variable on the basis of changes in the independent variables. The assumption is that, the dependent variable is a linear function of the independent variables. This study adapted the model of Okafor (2012).



Descriptive Statistics

The descriptive statistics shows the description of the mean, standard deviation and normality test. The below is the descriptive statistics of the variables for the time period.



Summary of Findings and Conclusion

In this study, we examine the impact of indirect tax on Nigeria economy. The empirical analysis from the error correction model regression result revealed that value added tax (DVATt-1) had a negative and significant impact on real gross domestic product (RGDP) at 1% level of significance. This negates the finding of Enokela (2010) that current value added tax has significant positive impact on economic growth in Nigeria (RGDP). This therefore suggests that we should accept the null hypotheses (H2) which states that current value added tax has no significant positive impact on economic growth in Nigeria. In addition, past custom and excise duty (CEXDt-1) had a negative and weakly significant impact on real gross domestic product (RGDP) at even more than 10% level of significance. This therefore suggests that we should accept the null hypotheses (H3) which states that current custom and excise duty has no significant positive impact on economic growth in Nigeria.

The Error Correction Model (ECM) coefficient had a correct negative sign and it is statistically significant. This shows that short-run deviation can be quickly corrected. This result clearly shows that long-run real gross domestic product (RGDP) is quickly adjusted to equilibrium in the short-run. Also, we found that there is absence of autocorrelation in the Durbin-Watson model.


  • The study recommended that tax administrative loopholes should be plugged for tax revenue to contribute immensely to the development of the economy since past value added tax and custom and excise duty had a significant impact on economic growth.
  • The study also recommended that the tax agencies/authorities should establish good relationship with the professional associations involved in tax matters in order to reduce tax malpractices perpetrated by tax payers with the connivance and often active support of external auditors and tax consultants.


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