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The aim of this study was to examine the impact of tax revenue collected by federal government on the economic growth of Nigeria, while looking at the specific objectives which include: assess the impact of companies’ income tax on economic growth of Nigeria; ascertain the influence of Petroleum Profit Tax on economic growth of Nigeria; examine the impact of custom and excise duties on economic growth of Nigeria and determine the impact of VAT on the economic growth of Nigeria.

Ex -post facto and survey research designs was adopted in the work to investigate reasons for consistent low tax contributions to GDP in Nigeria over a period of 35 years. Secondary data were obtained from FIRS and Bureau of Statistics for the purpose of this research. Method of analysis include ordinary Least square regression model was estimated to examine the individual effects of tax revenue proxies of Value Added Tax (VAT), Petroleum Profit Tax (PPT), Customs and Excise Duties (CED), and Companies of Income tax (CIT) on Gross Domestic Product (GDP), Auto-regressive distributed lag (ARDL) model was adopted to determine the combined effect of tax revenue proxies on GDP of Nigeria.

The study revealed that the GDP is strongly impacted upon by VAT, PPT, CED, and CIT. In summary, the simple regression analysis shows that about 75% variations in GDP can be attributed to changes in PPT; also, Value Added Tax (VAT) was discovered to be responsible for about 95% changes in GDP. The average contribution of tax revenue to GDP for the thirty five year period was computed at mere 7.8%, which is still far below the acceptable global average of 20%.  Although the simple regression showed that CIT and CED individually has positive effect on GDP, the multiple regression analysis through long run estimation indicated that in the long run, CIT and CED have negative effects on GDP and PPT and VAT have positive effects on GDP.

The study concluded that tax revenue combined have significant effect on the economic growth of Nigeria, although Companies Income Tax (CIT) and Custom Excise Duties (CED) have not contributed positively to economic growth of this nation over the period of study, hence government need to reposition the tax administrative system and sufficiently equip them to deal with complexities of technological advancement in global commerce, enforce compliance and track all taxable persons in order to generate sufficient revenue needed to foster economic growth in Nigeria.

Keywords: Tax Revenue, Value Added Tax, Custom and Excise Duties, Company Income Tax, Gross Domestic Product

Word Count: 403



1.1       Background to the Study

Effective tax administration is an issue as old as taxation itself.  The balancing act between maximizing tax revenues and minimizing the impact on the populace in which the state must engage was evident as early as 2350 BC. The responsibility shouldered by the government of any nation, particularly the developing nations, is enormous. The need to fulfil these responsibilities largely depends on the amount of revenue generated by the government through various means.

Taxation is one of the oldest means by which the cost of providing essential services for the generality of persons living in a given geographical area is funded. Globally, governments are saddled with the responsibility of providing some basic infrastructures for their citizens. Functions or obligations the government may owe her citizens include but are not restricted to: stabilization of the economy, redistribution of income and provision of services in the form of public goods (Abiola & Asiweh, 2012).  Taxation is a major source of government revenue all over the world and governments use tax proceeds to render their traditional functions, such as: the provision of roads, maintenance of law and order, defence against external aggression, regulation of trade and business to ensure social and economic maintenance (Appah & Eze, 2013). The primary function of a tax system is to raise enough revenue to finance essential expenditures on the goods and services provided by government; and tax remains one of the best instruments to boost the potential for public sector performance and repayment of public debt as enunciated by (Okoye & Raymond, 2014).

According to Azubike (2009), a system of tax avails itself as a veritable tool that mobilizes a nation’s internal resources and it lends itself to creating an environment that is conducive for the promotion of economic growth. Therefore, taxation plays a major role in assisting a country to meet its needs and promote self-reliance. In Nigeria, tax revenue has accounted for a small proportion of total government revenue over the years compared with the bulk of revenue needed for development purposes that is derived from oil (Uremadu & Ndulue 2011). The serious decline in the prices of oil in recent times has led to a decrease in the funds available for distribution to the federal, state and local governments as noted by (Nzotta, 2007). Consequently, dependence on oil as a particular or main source of revenue in Nigeria has become risky and not beneficial for sustainable economic growth. It is worse for Nigeria where there are fluctuations in prices in the oil market; thereby creating concerns amongst Nigerians and indeed the Nigerian government on the need to diversify the economy. 

Naturally, and globally, there is a paradigm shift to taxation revenue as an alternative source of revenue. Nigeria is not an exception. The machinery and procedures for implementing a good tax system in Nigeria are inadequate; hence tax evasion and avoidance of the self-employed individuals and organizations whose data base is not captured in the relevant tax authority’s data system poses a great challenge and impediment to national economic growth as submitted by (Angahar & Alfred, 2012). In the findings of (Edemode 2009), the need for the government to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. The desire of any government to maximize revenue from taxes collected from tax payers cannot be over- emphasized. This is because, as it well-known, the importance of tax lies in its ability to generate revenue for the government, influence the consumption trends and grow and regulate economy through its influence on vital aggregate economic variables (Leyira, Chukwuma & Asian 2012).

According to Ariwodola (2001), tax is a compulsory levy imposed by the government authority through its agents on its subjects or his property to achieve some goals. Tax is the transfer of resources from the private sector to the public sector. Okezie (2012) noted that tax is the price everyone must pay for an egalitarian society. The tax administration in any country does not only encompass the procedures of imposing these compulsory levies but also the establishment of tax laws and ensuring its compliance. Despite the millennia that have passed and the quantum of academic research work, Chandler (2013) opined that today's policymakers are still grappling with the questions of effective tax administration leading to adequate tax revenue.

Empirical studies have shown that the quantum of revenue available to any government needed to meet the social and capital expenditure in a country depends on its ability to harness funds from internal and external sources and channel it towards national development and economic prosperity. Appah (2010), in his findings, stated that revenue from taxation forms the bedrock of the revenue base of most governments all over the world. The extent to which a government can provide social, economic and infrastructural development is a function of the amount of funds at its disposal.

It has been observed that in Nigeria, the quantum of income generated from non-oil tax over the years by the federal government is grossly insufficient in relation to the ever increasing social, political and infrastructural developmental needs of the country. As noted by Odusola (2006), Nigeria economy has thrived largely on oil revenue in the past three decades. In essence, Nigeria runs a monolithic economy which is subject to international oil price mechanism far beyond the control of the government, thereby exposing the economy to global market fluctuations, distorting budgetary projections, and renders meaningful developments improbable. The current budget of borrowing in Nigeria is a fall out of the dwindling oil revenue that has sank into abysmal low prices in the international market and has thrown the Nigeria budget for 2016 into serious crisis.

Appah (2010) further stated that the economic growth and development of any nation depends on the amount of revenue generated by the government for the provision of infrastructural facilities. The highway of economic growth of most developed nations of the world is paved with revenues derived from efficient taxation system as implied by Enahoro and Olabisi, (2012). The provision of public services such as power, roads, efficient transportation system, healthcare facilities, schools, security of lives and properties and defence against internal and external aggression, are the exclusive responsibility of governments all over the world.  According to Worlu and Emeka (2012), to meet these responsibilities, governments need to harness all sources of revenue available to it nationally and internationally. Reliance on external sources of revenue for developmental purposes has proved unproductive for many countries over the years, and those countries which experienced rapid social and infrastructural development around the world were found to have leveraged on revenue from efficient tax system.

The International Monetary Fund (2012), observed that the developing countries must be able to raise the revenues required to finance the services demanded by their citizens and the infrastructure (physical and social) that will enable them to move out of poverty (economic growth). Tax Justice Network (2012), Stated that taxation is expected to play an important role in this revenue mobilization. The structure of tax must be strengthened rather than tax administration and geared towards generating more revenue from existing tax sources by being more efficient and effective according by Oloidi and Oluwalana (2014), who describe efficiency as the ability to utilise available resources for optimal results while effectiveness is the ability to be able to functionally produce expected results.

From above, it can be deduced that efficient taxation system capable of generating greater amount of the revenue needed for social and infrastructural development purpose is of primary importance in Nigeria. According to McPherson (2004), efficiency and effectiveness is the benchmark for designing a good tax administrative system. In the opinion of Tanzi and Zee (2000) efficient tax administration plays vital role to revenue collection of any country. In the acclaimed study, they posited that the formation of tax policy capable of raising sufficient revenue to meet the social an infrastructural development of the citizen in equitable and minimum tax disincentives on the polity is of great essence. Four critical areas which are inimical to the formation of a national tax policy such as economic structure  that makes the imposition and collection of certain taxes impossible; limited capacity of tax administrators; paucity or poor  quality of data and the political set up

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