This study examines the impact of indirect tax revenue on the growth of Nigeria economy. The study uses value added tax revenue and custom and excise duty revenue as independent variables and economic growth was proxy with real gross domestic product as the dependent variable. The study employ secondary data collected from Central Bank of Nigeria statistical bulletin for the period covering 1993 to 2013 for the empirical analysis using the convenient sampling techniques. The research design is time series and the data were analyzed using descriptive statistics, correlation, unit root test, co-integration test and error correction model regression. The result revealed that value added tax had a negative and significant impact on real gross domestic product. In the same


vein, past custom and excise duty had a negative and weakly significant impact on real gross domestic product. The Error Correction Model (ECM (-1)) coefficient had a correct negative and statistically significant sign. This shows that short-run deviation can be quickly corrected. The Durbin-Watson positive value indicates the absence of autocorrelation in the model. The study therefore 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.



















1.1 Background to the Study


Taxation is a way of raising revenue for the day to day running of government activities. Government activities involve generating funds and using same to provide security, social amenities, infrastructural facilities, etc, for the inhabitant of the country. Base on this, it is worthy of note that the objective of taxation is in tandem with the functions of government (Akhor, 2014). However, over the years, it has been observed that the Nigerian tax system has inherent problems in its structure. Odusola (2006) opined that the Nigerian tax system is concentrated on Petroleum Profit Tax (PPT) and Company Income Tax (CIT) while broad-based indirect taxes like the



Value-Added Tax (VAT) and Custom and Excise Duty (CEXD) are neglected. Thus, the tax system lacks the potential of diversifying the revenue portfolio for the country to safeguard against the volatility of crude oil prices and to promote fiscal sustainability and economic viability at lower tiers of government (Azaiki & Shagari, 2007).


In Nigeria, revenues have been allocated according to the formula recommended by Ad-hoc Fiscal Commissions or based on a principle chosen by the state. According to Taiwo, 2008, from 1946 to date, a total of thirteen revenue allocation Commissions had been set up. Each Commission recommended a formula for revenue sharing depending on the economic fortunes and purposes, which the government wanted the revenue sharing formula to serve. More so, the revenues are raised mainly through taxation to finance government expenditure and to influence other activities in the economy. In addition, tax revenue mobilization as a source of financing developmental activities in less developed economies has been a difficult issue primarily because of various forms of resistance, such as evasion, avoidance and other corrupt practices can easily be perpetuated within the direct taxes bracket. These activities are considered as sabotaging the economy and are readily presented as reasons for the underdevelopment of the country. Government collects taxes in order to provide an efficient and steadily expanding non-revenue yielding services, such as infrastructure, education,



health, communications system, employment opportunities and essential public services like the maintenance of laws and order, irrespective of the prevailing ideology or the political system of a particular nation. The very act of taxation has profoundly beneficial effects in fostering better and more accountable government (Tax Justice Network [TJN], (2012).


Akhor (2014) stated that the economic effects of tax include micro effects on the distribution of income and efficiency of resource use as well as macro effect on the level of capacity output, employment, prices, and growth. Therefore, the use of tax as an instrument to achieve economic growth in most less develops countries cannot be reliable because of dwindling level of revenue generation.


Consequently, changing or fine-tuning tax rates has been used to influence or achieve macroeconomic stability. Critical examples of governments that have influenced their economic development through revenue from tax are: Canada, United States, Netherland and United Kingdom. They derive substantial revenue from Value Added Tax, Import Duties and have used same to create prosperity (Oluba, 2008). A significant share of the tax revenue increase in Africa stems from natural resource taxes. This included income from production sharing, royalties, and corporate income tax on oil and mining companies (Pfister, 2009). Nigeria is a developing country whose major export is mainly crude oil. Also endow with other natural resources such as; natural gas, tin, iron ore,


coal, limestone, lead, zinc and arable land (Economy Watch, 2011). Most economists, especially development and international economists have argued that over dependent on the direct taxes revenue (e.g PPT; due to the fluctuation in the oil price and CIT; because of the sharp practices like evasion, avoidance, etc, that can easily be perpetrated) may adversely affect a nation’s economic growth and development (Okafor,2012).


1.2 Statement of the Problem


In Nigeria, people, especially the rich and the elites, deliberately dodge this civic responsibility of paying tax and sometimes employ the service of tax specialists in order to pay less tax to the government. There is also the problem of falsification of ages and the number of children and dependents one has in order to reduce the amount of tax payable. Emanating from these factors, the sub-national governments (state and local governments) contend that their currently assigned taxes are poor in terms of their bases and, therefore, accruable revenues are not enough to meet their expenditure targets. Also the statutory allocation from the federation account has been grossly inadequate as a result of a fall on gross domestic product. This invariably reduces their overall performance, considering their expenditure profiles.


Taiwo (2008) observed that the distribution of government revenue is skewed in favour of one tax base or the other (eg oil


revenue) in Nigeria. Nevertheless, the overwhelming evidence of positive impact of oil revenue on economic growth in Nigeria cannot be overemphasized (Odusola, 2006). However, the first question is, are other forms of taxes not important for consideration? Emanating from the above, there are some questions to ask: what relationship exists between Nigeria’s tax revenue and her economic growth? And what is the contribution from other tax base to the overall tax revenue of a nation. Against these backdrops, this research seeks to find answers to the following research questions:


  • What is the impact of value added tax on economic growth in Nigeria?


  • What is the impact of custom and excise duties on economic growth in Nigeria?


1.3 Objectives of the Study


The broad objective of this study is to provide empirical evidence on the impact of tax revenue on economic growth in Nigeria. The specific objectives include; to:


  • determine the impact of value added tax on economic growth in Nigeria; and


  • evaluate the impact of custom and excise duties on economic growth in Nigeria.


1.4 Research Hypotheses


In line with the research problems and objectives, the following hypotheses were formulated and tested.



  • HO1: There is no significant relationship between value added tax and economic growth in Nigeria.


  • HO2: There is no significant relationship between custom and excise duties and economic growth in Nigeria.
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