CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Value Added Tax (VAT) has become a major source of revenue in many developing countries like Nigeria. In sub Sahana Africa for example, VAT has been introduced in Benin Republic, Cote d‟Ivore, Guinea, Kenya, Madagascar, Mauritius, Niger Republic, Senegal, Togo. Evidence suggests that in these countries VAT has become an important contribution to total government tax revenue; (Ajakaiye 2000) the value Added Tax decree was established in 1993 and was imposed on 1994. Value Added Tax (VAT) in an ideal form of taxation in Nigeria tax system and has significantly contributed to resources mobilization as well as capital formation to the economy. It has positive and significant impact on revenue mobilization in Nigeria; it also has positive relationship with consumption.
VAT is a consumption tax that is relatively easy to administer and difficult to evade and it has been embraced by many countries worldwide (Federal Inland Revenue Service 1993). Evidence so far supports the view that VAT revenue is already a significant source of revenue in Nigeria. For example, actual VAT revenue from 1994 was N8.189 billion which is 36.590 higher than the projected N6 billion for the year. Similarly, actual VAT revenue for 1995 was N21 billion compared with the projected N12 billion. In terms of contribution to total federally collected revenue, VAT accounted for about 4.06% in 1994 and 5.93% in 1995. As much as N404.5 billion was collected on VAT (5.1%) of total revenue in 2008.
VAT revenue is generated for distribution to the state and local government in Nigeria. Unlike the oil revenue whose market government has no control over. This helps to reduce over dependence on oil revenue, this assures a sustainable economic growth and development. While the performance of VAT as a source of revenue in Nigeria is encouraging, it means difficult to find attempts to systematically assess the impact on VAT on the economy.
Recent research work on the impact of taxation on the Nigeria economy impact up all the various taxes together without isolating VAT. How and in what direction VAT has be affecting the Nigeria economy? And the relationship of VAT on economic growth? Findings answers to these and other similar questions is the main trust of this paper.