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This study investigates the economic development impact of indirect taxes in Nigeria. The study employs value added tax revenue and customs and excise duty revenue as independent variables, while economic growth is proxied by real GDP as the dependent variable. Secondary data gathered from the Central Bank of Nigeria statistical bulletin for the period 2000 to 2020 are used for empirical analysis utilising convenient sampling strategies.

The data were analysed using descriptive statistics, correlation, unit root test, co-integration test, and error correction model regression in a time series study design. The findings demonstrated that value added tax had a negative and considerable impact on real GDP. In the same line, prior customs and excise duties had a negative and marginally significant influence on real GDP.

The Error Correction Model (ECM (-1)) coefficient exhibited the expected negative sign and was statistically significant. This demonstrates that short-run divergence can be remedied fast. The absence of autocorrelation in the model is indicated by the Durbin-Watson positive value.

The study therefore advised that tax administrative loopholes be closed in order for tax revenue to contribute significantly to economic development, since previous value added tax and customs and excise duty had a considerable impact on economic growth.



1.1 Background of The Study

Taxation is a means of obtaining revenue for government activities on a daily basis. Raising funds and using them to offer security, social amenities, infrastructure, and other services to the country’s population are examples of government actions. As a result, it is critical to recognise that the objective of taxation is matched with government functions (Akhor, 2014).

However, it has long been recognised that the Nigerian tax system has inherent structural weaknesses. According to Odusola (2006), the Nigerian tax system prioritises the Petroleum Profit Tax (PPT) and Company Income Tax (CIT), whereas broad-based indirect taxes like VAT and Customs and Excise Duty (CEXD) are overlooked.

As a result, the tax structure lacks the flexibility to diversify the country’s revenue portfolio in order to protect against volatility in crude oil prices and promote fiscal sustainability and economic viability at lower levels of government (Azaiki & Shagari, 2007).

In Nigeria, revenues have been allocated according to a formula recommended by Ad-hoc Fiscal Commissions or a government-established concept. Since 1946, thirteen income allocation Commissions have been constituted, according to Taiwo (2008). Each Commission recommended a revenue-sharing formula based on the government’s economic situation and intentions for the revenue-sharing formula.

More specifically, revenues are primarily gathered through taxation in order to pay government spending and influence other economic activity. Furthermore, using tax money to support development programmes in developing countries has proven difficult due to many forms of opposition, such as evasion, avoidance, and other corrupt practises that can easily be perpetuated within the direct tax bracket.

These actions are regarded as economic sabotage and are commonly identified as contributing factors to the country’s underdevelopment. Regardless of a country’s dominant ideology or political system,

the government collects taxes in order to provide efficient and ever-expanding non-revenue-generating services such as infrastructure, education, health, communications, employment opportunities, and essential public services such as law and order enforcement. Taxation has a profoundly positive impact on the development of better and more accountable government (Tax Justice Network [TJN], 2008). (2012).

The economic implications of taxes, according to Akhor (2014), include micro effects on income distribution and resource efficiency, as well as macro effects on capacity output, employment, price, and growth. As a result of the declining level of income generation, most developing countries’ use of taxation as a tool to achieve economic growth is unreliable.

As a result, tax rates have been altered or fine-tuned in an effort to impact or achieve macroeconomic stability. Canada, the United States, the Netherlands, and the United Kingdom are all examples of governments influencing economic development through tax revenue. They gain a lot of money through VAT and import charges, which they utilise to expand their firm (Oluba, 2008).

Natural resource taxes contribute significantly to Africa’s rising tax revenue. Pfister (2009) included income from production sharing, royalties, and corporate income tax on oil and mining businesses. Nigeria is a developing country whose principal export is crude oil. Natural resources include natural gas, tin, iron ore, coal, limestone, lead, zinc, and fertile land (Economy Watch, 2011).

Most economists, particularly development and international economists, have argued that relying too heavily on direct tax revenue (e.g., PPT; due to oil price fluctuations; and CIT; due to sharp practises such as evasion, avoidance, and others that are easily perpetrated) can harm a country’s economic growth and development (Okafor, 2012).

Statement of the problem

People in Nigeria, particularly the wealthy and elites, consciously avoid their civic duty of paying tax and, on occasion, hire tax experts to assist them in paying less tax to the government. There’s also the question of lying about one’s age and the number of children and dependents in order to reduce the amount of tax owed.

Subnational governments (state and local governments) say that their current tax bases are insufficient, and hence accruable revenues are insufficient to meet their expenditure targets, for these reasons.

Furthermore, as GDP has fallen, the statutory allocation from the federation account has been woefully inadequate. Given their spending habits, this inevitably lowers their overall performance.

According to Taiwo (2008), the allocation of government revenue in Nigeria is biassed in favour of one tax basis or the other (for example, oil revenue). Nonetheless, there is strong evidence that oil wealth has a positive impact on Nigeria’s economic advancement (Odusola, 2006).

The first question, however, is whether other forms of taxation should be examined. As a result of the aforementioned, some questions arise, such as what the relationship is between Nigeria’s tax revenue and its economic growth. How much do other tax bases contribute to a country’s total tax revenue?

Objectives of the study

The study’s goal is to determine the developmental impact of indirect taxes on the Nigerian economy. The precise goals are as follows:

To assess the impact of the value-added tax on Nigerian economic growth.
To assess the impact of customs and excise levies on Nigerian economic growth.

Research Questions

The following research question was developed:

What effect does the value-added tax have on Nigeria’s economic growth?
What effect do customs and excise tariffs have on Nigeria’s economic growth?

research Hypotheses

The research hypotheses listed below were developed:

H0: In Nigeria, there is no substantial association between value added tax and economic growth.

H1: In Nigeria, there is a considerable association between value added tax and economic growth.

H0: In Nigeria, there is no substantial link between customs and excise duties and economic development.

H2: In Nigeria, there is no substantial link between customs and excise duties and economic growth.

The significance of the research

The study will be extremely beneficial to students, lecturers, and the Nigerian government. The study will provide a detailed picture of the indirect tax’s developmental influence on the Nigerian economy.

The study’s findings will be extremely beneficial to the government since they will shed light on the relationship between customs and excise duties and economic growth in Nigeria, as well as the contribution of additional tax to the Nigerian economy. The study will also be used as a resource for other researchers who will be working on a similar topic.

scope of The study

The study’s scope includes the developmental impact of indirect taxes on the Nigerian economy. This study used data on Real GDP, VAT revenue, Customs and Excise Duty Revenue, and inflation from 2000 to 2020 (20 years). The publications of the Central Bank of Nigeria, the Nigerian Investment Promotion Commission (NIPC), and the Securities and Exchange Commission (SEC) are the primary sources of these data.

definitions of Term

Indirect tax: An indirect tax is one that can be levied on another person or entity. In general, indirect taxes are levied on suppliers or producers, who then pass them on to the eventual customer. Indirect taxes include excise duty, customs duty, and Value-Added Tax (VAT).

Nigeria’s economy is a middle-income, mixed economy and rising market, with expanding manufacturing, banking, service, and communications sectors.

VAT is a consumption tax that is levied on all products and services provided in or imported into Nigeria. Individuals, businesses, and government entities are all required to pay VAT at the current rate of 7.5%.

Customs duty: In Nigeria, customs charges are only levied on imports. Rates vary by item, often ranging from 5% to 35%, and are calculated using the current Harmonised Commodity and Coding System (HS code).

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