Certification                                                                                                                iii

Dedication                                                                                                                  i

Acknowledgement                                                                                                      v

Abstract                                                                                                                      ix


1.1 Background of the Study                                                                          1

1.2 Statement of the Problem                                                                          7

1.3 Objectives of the Study                                                                            9

1.4 Research Questions                                                                                              10

1.5 Research Hypothesis                                                                                            10

1.6 Significance of the Study                                                                         11

1.7 Scope and Limitations of Study                                                               11

1.8 Definition of Terms                                                                                               12

References                                                                                                                  13



2.1 Conceptual framework                                                                             14

2.2 A Review of the Taxation System in Nigeria Historical Review             17

2.3 Theoretical literature                                                                                             26

2.4 Economic growth                                                                                     34

2.5 Empirical literature                                                                                               35

References                                                                                                                  45


3.0 Introduction                                                                                                          48

3.1 Sources of data for the study                                                                    48

3.2 Data analysis method and instrument                                                       48

3.3 Model specification                                                                                              49

3.4 Method of estimation                                                                                            50

References                                                                                                                  51



4.1 Presentation of results                                                                               52

4.2 Analysis of result                                                                                      53

4.3 Test of statistical significance                                                                   57

4.4 Discussion of findings                                                                              60




5.1 Summary of findings                                                                                            62

5.2 Conclusion                                                                                                            65

5.3 Recommendations                                                                                    66

References                                                                                                                  69

Appendix I                  Regression result

Appendix II                 Regression data



1.1 Background to the Study

Governments all over the world demand or impose one type of tax or the other.  The main purpose of imposing any type of tax has been for the government concerned to use the proceeds of the taxation to run the government and to provide some essential services.  It is being noted that the aims and objectives of taxation differ from one country to the other.

A Tax is a fee charged or levied by a government on a product, income, or activity. If it is levied directly on personal or corporate income, it is called a direct tax. If it is levied on the price of a good or service, then it is called an indirect tax. The main reason for taxation is to finance government expenditure and to redistribute wealth which translates to financing development of the country (Ola, 2001, Jhingan, 2004, Musgrave and Musgrave, 2004, Bhartia, 2009). Whether the taxes collected are enough to finance the development of the country will depend on the needs of the country and, countries can seek alternative sources of revenue to finance sustainable development (Unegbu and Irefin, 2011). Tax revenue is the receipt from tax structures.

Revenues accruing to an economy, such as Nigeria, can be divided into two main categories, which are; Oil Revenue (includes revenue from royalties, Petroleum Profit Tax (PPT), gas tax) and Non-Oil revenue (includes trade, loans, direct and indirect taxes paid by other sectors of the economy, Aids, agriculture etc). The importance of taxation in promoting economic growth and development as well as the survival of many nations cannot be overemphasized. Through it, government ensures that resources are channelled towards important projects in the society.

According to Emmanuel (2010), many developed and developing economies around the world had experimented and proven that no nation can truly develop without developing its tax system. Consequently, many countries have embarked on tax reforms and restructuring with a view to developing a tax system that maximizes government revenue without creating disincentiveness for investment.

According to Kiabel and Nwokah (2009), within the last decade, the issue of domestic resource mobilization has attracted considerable attention in many developing countries due to unabating debt difficulties coupled with domestic and external financial imbalances. It is not surprising that many developing nations have been forced to adopt stabilization and adjustment policies which demand better and more efficient methods of mobilizing domestic financial resources with a view to achieving financial stability and promoting economic growth. A critical challenge of tax administration in the 21st century is how to advance the frontiers of professionalism, accountability and awareness of the general public on the imperatives and benefits of taxation in our personal and business lives which include: promoting economic activity; facilitating savings and investment; and generating strategic competitive advantage (Kiabel and Nwokah, 2009). If tax administration does not for any reason meet the above challenges, then there is a desperate need for reform.

The importance of taxation in the activities of any government cannot be overemphasized. The world over, taxes is one major source of government revenue, however, not every national government have been able to effectively exploit this great opportunity of revenue generation. This can be attributed to a number reasons including the system of taxation; tax legislation; tax administration and policy issues; over reliance on other sources of revenue (such as foreign aid and grants); corrupt practices in the system – especially as it relates to the system of tax collection and behaviour of citizens towards tax payment; and ease of tax payment.

However, an essential common feature of tax has been the dynamic nature in every system to reflect the economic and policy needs of that nation. Another common feature of tax is that it has always been a compulsory levy.

For government to achieve her laudable objectives, it has been successively trying all techniques in the pass which include grouping and segregating tax and those who pay it and even varying methods and time of payment.  It has been the view that the sole objectives of these grouping, segregation and variations have been the same to enable government generate enough revenue without really inconveniencing the tax payers. It is this idea of trying to collect tax efficiently on the part of government and pay tax conveniently on the part of the tax payer and together with the fact that the existing monetary policy in Nigeria is not generating the much needed revenue to meet up with government expenditures and the need to review the entire Nigerian Tax System which is the major non-oil source of revenue that has promoted the introduction of Value Added Tax (VAT) in Nigeria.

The effect of corporate taxes on any economy vis-à-vis investment and entrepreneurship is one of the central questions in both public finance and development. This effect matters not only for the evaluation and design of tax policy, but also for thinking about economic growth (see Barro 1991, DeLong and Summers 1991, and Baumol, Litan, and Schramm 2007).

Company income tax (CIT) was introduced in 1961. The original law (Company Income Tax) has been amended many times and is currently codified as the Company Income Tax Act 1990 (CITA). The Federal Board of Inland Revenue, whose operational arm is the Federal Inland Revenue Services (FIRS), is empowered to administer the tax. CITA policy regimes can be divided into two phases, namely, pre-1992 and post-1992. The CIT policies in the pre-1992 era were narrowly based and characterized with increasing tax rates and overburdening of the taxpayers, which induced negative effects on savings and investment. Since 1992, however, measures have been taken to address these structural problems. For instance, excess profit tax was eliminated in 1991, and the capital transfer tax scrapped in 1996. Tax rates on company profits, payable on trade profits and investment income, fell from 45 per cent during 1970 to 1986 (when SAP was introduced) to 40 per cent between 1987 and 1991, further to 35 per cent for the period 1992-95 and to 30 per cent from 1996 to date. There is, however, a 20 per cent tax concession for certain companies: i.e., those engaged in agricultural production or mining of solid minerals with a maximum turnover of N 0.5 million and those in manufacturing or the export promotion sector with a turnover not exceeding N 1 million.6 The rates on capita allowances have been reduced continually to reflect the economic reality of the country.

The idea of introducing VAT in Nigeria came from the Report of the study group set up by the Federal Government in 1991 to review the entire tax system.  VAT was proposed and a committee was set up to carry out feasibility studies on the implementation.  In January 1993, government agreed to introduce VAT by the middle of the year.  It was later shifted to 1st September 93 by which time the relevant legislation would have been made and proper groundwork done.  VAT is a replacement of the existing sales tax, which has been in operation under Federal Government Legislated Decree N0. 7 of 1986 but is operated on the basis of residence. Since VAT is based on the general consumption behaviour of the people, the expected high yield from it will boost the formers of the state government with minimum resistance from the payers of the tax.

VAT by its nature is a consumption tax that has been embraced by many countries worldwide.  Because it is a consumption tax, it is relatively easy to administer and difficult to evade.

The yield from VAT is a fairly accurate measurement of the growth of an economy since purchasing power (which determines yield) increases with economic growth.  Vat is a self-assessment tax that is paid when returns are being rendered.  In built in the new tax is the refund or credit mechanism which eliminates the cascading effect that is a feature of the retail sales tax.  The input-output mechanism in VAT also makes it self-policing because of the need to obtain receipts at each stage of the transaction.

1.2 Statement of the Problem

In Nigeria the contribution of tax revenue has not been encouraging, thus

expectations of government are being cut short. Corruption, evasion, avoidance and tax haven indicators are strongly associated with low revenue (Attila, Chambas, and Combes, 2008) and indeed, corruption functions like a tax itself. According to Adegbie and Fakile, 2011), the more citizens lack knowledge or education about taxation in the country, the greater the desire and the opportunities for tax evasion, avoidance and non-compliance with relevant tax laws. In this respect, the country will be more adversely affected because of absence of tax conscience on the part of individuals and the companies and the failure of tax administration to recognize the importance of communication and dialogue between the government and the citizens in matters relating to taxation.

In the face of resource deficiency in financing long term development, Nigeria has heavily resorted to foreign capital, such loans and aid as the primary means to achieve rapid economic growth. Thereby accumulate huge external debt in relation to gross domestic product and serious debt servicing problems in terms of foreign exchange flow and, as such majority of the populace live in abject poverty. Government has expressed concern over these and has vowed to expand the tax revenue in order to meeting its mandate. Kiabel and Nwokah (2009) argue that the increasing cost of running government coupled with the dwindling revenue has left all tiers of government in Nigeria with formulating strategies to improve the revenue base. Also, Ndekwu (1991) noted that, more than ever before, there is now a great demand for the optimization of revenue from various tax sources in Nigeria.

Nigerian tax system is concentrated on petroleum and trade taxes while direct and broad-based indirect taxes like the value-added (VAT) are neglected. This is a structural problem for the country’s tax system. Although direct taxes and VAT have the potential for expansion, their impact is limited because of the dominance of the informal sector in the country.

1.3 Objectives of the Study                                          

The main objective of the study is to analyze the relative importance of corporate tax and value added tax (VAT) and their effects on Nigerian economic growth.

The specific objectives are as follows:                                                     

  1. To assess the relative importance of corporate tax in the Nigerian economy.
  2. To assess the relative importance of value added tax (VAT) in the Nigerian economy.
  3. To determine the effect of corporate tax on Nigerian economic growth.
  4. To determine the effect of value added tax (VAT) on Nigerian economic growth.

1.4 Research Questions

In the light of the objectives of the study stated above, the researcher raised the following questions, which the study seeks to answer:

  1. Has corporate tax any relative importance in the Nigerian economy?
  2. Has value added (VAT) tax any relative importance in the Nigerian economy?
  3. What is the effect of corporate tax on Nigerian economic growth?
  4. What is the effect of value added tax (VAT) on Nigerian economic growth?

1.5 Research hypotheses

The research work is guided by the following hypotheses:

H01: There is no significant effect of corporate tax on Nigerian economic growth.

H02: There is no significant effect of value added tax (VAT) on Nigerian economic growth.

1.6 Significance of the Study

The general relevance of the study lies in its attempt towards the understanding of the relative importance of corporate and value added tax (VAT) and their effects on Nigerian economic growth and so is particularly relevant in the followings areas:

  • The findings of the study will enable us understand the relative importance of corporate tax and VAT in the Nigerian economy.
  • Again, the findings of the study will enable us ascertain the effects of corporate tax and VAT on Nigerian economic growth.
  • The findings of the study will also help us to assess the effectiveness of the Nigerian tax administration system.
  • Finally, the findings of the study will add to existing literature on the subject of corporate tax, value added tax and Nigerian economic growth.

1.7 Scope and Limitation of the Study

The study is empirical in nature and covers the relative importance of corporate tax and value added tax (VAT) and their effects on Nigerian economic growth. The study covers a period of thirteen years (2000-2012). The study is however limited to corporate tax, value added tax, Nigerian economic growth, the data used and the findings of the study.

1.8 Definition of Terms

Economic growth: This measured in terms of gross domestic product (GDP) and refers to the money value of the goods and services produced in an economy within a year.

Corporate tax: This is the tax levied on the income of companies after the deduction of operating costs, interest, capital allowances and tax relief.

Tax: This is compulsory levies on private individuals and organizations made by government to raise revenue to finance expenditure on public goods and services, and to control the volume of private expenditure in the economy.

Tax administration: This is the process of implementing tax policies and collection of revenue from tax in a country.

Tax yield: This refers to the revenue collected by government from taxation.

VAT: Value added tax. Conceptually this is a tax based on the value added in a country.

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