Impact of taxation as an alternative to dwindling oil revenue in Nigeria

Taxation as an alternative to dwindling oil revenue in Nigeria


The study investigated the effect of taxation as an alternative to the dwindling oil revenue in Nigeria for the period of 24 years covering 1994 to 2017; examine the effect of value added tax on economic growth in Nigeria; investigate the effect of petroleum profit tax on economic growth in Nigeria; determine the impact of company income tax on economic growth in Nigeria. The study employed Johansen cointegration and error correction model technique and specified real gross domestic product (RGDP) on petroleum profit tax (PPT), company income tax (CIT) and value added tax (VAT). The result of unit root test indicated that there is presence of stationarity among the variables at 2nd difference. The Johansen cointegration analysis indicated that there is a longrun relationship between tax variable and economic growth in Nigeria. However, the relationships between the variables were negatively related to economic growth in Nigeria. The ECM result was correctly signed and significant thereby incorporating the shortrun inconsistency in the model. However, the overparameterized error correction model result showed that the variables have short run association which effect can actually be felt in the long run. The result further showed that the short-run dynamics in the model has been corrected; giving the correctly signed and statistically significant ECM coefficient of about 48.73% increase. The result of parsimonious ECM showed that the ECM coefficients of the series is significant and correctly signed, thus validating the presence of long run relationship amidst the variables and that about 57.46% of the short run inconsistencies are corrected and incorporated into the long run dynamics, annually. Based on the result of the longrun cointegration, the study concluded that taxation have negative effects on economic growth in Nigeria but can impact positively if government give possible attention to it thereby serving as an alternative to the dwindling oil revenue. The study therefore recommended that government should ensure that taxation is properly managed in a manner that will accelerate economic growth, reduce inflation rate and generate employment in the country. The study further suggested that government should diversify the economy from being solely oil dependent, to other streams of income generation such as agriculture, solid minerals and gas, otherwise the ripple effect of our over reliance on crude export to the USA, will be devastating to the economy.



It is no longer news that Nigeria’s “oil is depleting”. Furthermore, the reduction in global oil prices and volume has in recent times made diversification of the Nigerian economy from over-dependence on oil a mandatory policy issue (Okeke, Chidi, & Okechukwu, 2017). Unfortunately, Oil Revenue dependence has essentially “milked the cow dry”. Thus, the increasing cost of running government coupled with this dwindling revenue has left various tiers governments in Nigeria-Federal, State and Local Governments with the need to evolve strategies to improve their revenue base. Since the last four year, the near collapse of the national economy has created serious financial stress for all tiers of government but worst affected are the states and local governments (Okeke, Chidi, & Eme, 2017).

Despite the numerous sources of revenue available to the various tiers of government which were specified clearly in the 1999 Constitution of the Federal Republic of Nigeria, it is awesome to note that since the 1970s till date, over 80% of the annual revenue of the three tiers of government came from petroleum as against what was obtainable in the 1960s when agriculture, mining and other sources of revenue account for the lion share of the regions’ and by extension the nation’s annual revenue (Elamah, 2015). The serious decline in the price of oil in recent years has consequently led to the decrease in the funds available for distribution to the states (Adesoji & Chike, 2013). Recent statistics showed that “most state governments generate only 15% of their revenue and depend on federal allocation for further sustenance. Unfortunately, this is no longer sustainable” (Balogun, 2015). With the 2015 general elections the new state governors without being prodded, now have to focus on planned strategies for a miraculous turn-around from oil dependence to self sustainability. There is no doubt that a deliberate plan to stop leakages, wastages and corrupt practices in the system is imperative but this will only make sense where the inflow is certain (Tapang, 2012). This therefore means that there is a greater need for the state governments to consider more alternatives for revenue generation through which they can enhance their internally generated revenue (Okeke, Chidi, & Eme, 2017).

Taxation is a means of generating revenue by government for the purpose of providing social services to the people. Taxation all over the world is a function of reciprocity (Okauru, 2014). While the government owes it as a duty to empower the citizens by providing jobs, infrastructure and other development projects, the citizens are usually expected to reciprocate by performing their own obligations, principal of which is payment of taxes. Revenue generated from citizen’s taxes is usually recycled by the state (government) in the area of provision of basic amenities such as water, roads, electricity, schools, among others (Okauru, 2014).

Considering the present situation in Nigeria, governments at all levels have to raise the bar by embarking on an aggressive tax drive, considering the dwindling revenue profile arising from the fall in oil prices (Dike, 2015). Therefore, Nigerians have to come to terms with the present reality. Taxes come in various forms, ranging from personal income tax, value added tax and companies income tax, among others (Orji, 2013). To bridge the yawning gap in revenue accruals, there arose the need for government to embark on aggressive taxation which is the most recognized and plausible means of generating revenue for social services across the globe. The Vanguard of December 15th, 2015 indicates that revenue accruable from value added tax from January to June 2015 came to about N376 billion, but this figure has doubled since July till December. The reason of course can be attributed to the Federal Government’s commitment towards diversification of revenue sources. With aggressive tax laws and enforcement, there is no doubt that Nigeria can withstand the shocks of the uncertainties in the oil market. What this means is that there will be more revenue available for the government to cater for the needs of the Nigeria people. This is the best time in our history for Nigerians to embrace the tax system. By this, Nigerians can be involved in the contributory social contract by paying their taxes regularly (Ibadin & Oladipupo, 2015).

Statement of the Problem

According to reports that Nigeria has lost its position as the lead supplier of oil to the United States of America, there is need for Nigerian government to diversify its revenue base through taxation as the alternative means of revenue generation in order to keep fit in the face of dwindling revenue from oil. However, there is need to harmonize the tax system and ensure collaboration between government tax agencies and professional tax institutes and consultants. Government needs to practically shift attention from oil to development of other revenue sources especially non-oil exports to support internally generate revenue from taxes. The reliability of the institutional framework for tax processing and enforcement must not be questionable to ensure sustainable development through taxation Considering the existing literature on the effect of taxation as an alternative to dwindling oil revenue in Nigeria, the researcher observed that some major factors such as inflation, inequalities in income, ability to meet proposed government budget and other variables have not been adequately considered. Most researches based their problems on the negligence of tax payers such as tax avoidance, tax evasion, and also on irregularities in government practice such as misappropriation of funds and other common misconducts. However, to the best of the researcher’s knowledge, there is need to check macroeconomic tax variables as an alternative to the dwindling oil revenue in Nigeria. More so, the researcher discovered that most of the studies conducted on the subject matter employed the use of questionnaire as an instrument for their studies while there is little contribution on secondary data. Based on the aforementioned, the study would be employing the use macro-economic variables as such as Real Gross Domestic Product (RGDP), VAT, PPT and CIT for the year covering 1994 to 2017 so as to measure the relationship existing between the dependent and independent variables. The broad objective of the study is to identify the effect of taxation as an alternative to the dwindling oil revenue in Nigeria. Other specific objectives are to; examine the effect of value added tax on economic growth in Nigeria; investigate the effect of petroleum profit tax on economic growth in Nigeria; determine the impact of company income tax on economic growth in Nigeria


Davide and Georgios (2013) investigated the effects of changes in taxes on economic growth using annual data from 1965 to 2007 for a panel of twenty-six economies, the results showed that the effect of an increase in taxes on real GDP per capita is negative and persistent. An increase in the total tax rate by 1% of GDP has a long run effect on real GDP per capita of -0.5% to 1%. Ahmad and Selah (2015) investigated the short-run and longrun relationships between three main macroeconomic variables in Oman using the Johansen multivariate cointegration techniques as well as the stationary VAR for the period between 1971 and 2013. The results indicate that there is a long-run relationship between these three macroeconomic variables; the real GDP, the real government expenditure and the real oil revenues. The estimated coefficients for the real oil revenues and the real government expenditure are correctly signed and statistically significant at 5% level. Both variables depict positive relationship with GDP which are 0.672 and 0.872 respectively. The impulse response functions and the variance decomposition from the stationary VAR show that these variables are very important to the short-run dynamics of the Omani economy. Overall, government expenditure appears to be the main source for economic growth in long-run, and in short run variations in government expenditure are generally derived by oil revenue shocks.


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