Relationship between VAT and GDP in the Nigerian Economy

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Journal of Management and Corporate Governance © 2010 Cenresin Publications

Volume 2, December 2010


Denis Basila
Department of Accounting Adamawa State University, Mubi, Nigeria

ABSTRACT This study is an empirical investigation into the relationship between Value Added Tax (VAT) and Gross Domestic Product (GDP) in Nigeria. This research is significant for planning and policy formulation as regards revenue generation. A data based on VAT revenue figure and GDP figure from 1994 to 2008 obtained from Central Bank of Nigeria’s statistical bulletin, 2008 was collected and used. GDP and VAT figures for the period of study are tested for correlation. The test revealed a strong Pearson’s Product Moment Correlation (PPMC) at about 96 per cent strength. Further, a test of significance confirmed that VAT revenue is significantly different at 99 percent confidence level in relation to GDP. This implies that VAT is not effective as revenue earner, in the sense that significant parts of GDP which represent aggregate national income as well as aggregate national expenditure are not collected as tax. Therefore, the recommendation by this study includes maintenance of the status quo as it could suggest support to the economy and convenience principles of taxation. Key words: Investigating, VAT, GDP, Nigeria. INTRODUCTION It is important to look into how Value Added Tax (VAT) generates revenue for the Nigerian economy fifteen years after introduction (1994 - 2008) as Nigerian state is in dare need of revenue base diversification. Keen and Lockwood (2006) confirmed that VAT is a money machine, particularly in OECD member nations on which the study was based. Money machine suggests that VAT effectively generates revenue. Relationships that were considered in the study referred to included VAT and GDP, so also was Lin (2004), on evaluating the VAT in china suggested a relationship between VAT and GDP exists. Economic expert (Fitch, 2010) recently made an opinion on the state of Nigerian economy regarding sovereign credit rating of country that suggests a downgrade of the state of the economy from stable to negative one. To meet the persistent short fall in federation account, the report said, government has turned to the international market for borrowing. More than five billion US dollars of foreign debt were taken in the year 2010, doubling the current debt level; this, as reported, is apart from a US$500 million international bond that is to be launched before the end of the year 2010. Atojoko (2010) confirmed that, within 18 months, the country’s debt portfolio has risen from US$18.45 billion at the beginning of 2009 to US$29.6 billion by June 2010; this is not a healthy economic situation. Further, the report confirms that all levels of government have turned to the borrowing business, which makes it relevant for the study as the scheme is designed for the benefit of the states and local governments. Bearing in mind that Nigeria has not been so long released from Paris Club debts (in 2005), returning to borrowing, by any tier of the government should be with a causion. 65

Investigating the Relationship beyween VAT and GDP in Nigerian Economy

Denis Basila

The Central Bank of Nigeria (2008) states that Nigeria’s Gross Domestic Product (GDP) by expenditure is based on expenditure at purchase price including free on board values of exports of goods and services less the free on board value of import of goods and services. According to Anyanwuocha (2004), GDP refers to the total value of all goods and services produced in a country within a period of one year, by all the residents of the country irrespective of their nationality. Jhingan (2003) opines that GDP is the total measure of the flow of goods and services at a market value resulting from current production in a course of a year by all residents of a...
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