IMPACT OF VALUE ADDED TAX ON HOUSEHOLDS CONSUMPTION EXPENDITURE IN NIGERIA (1994 - 2016)

IMPACT OF VALUE ADDED TAX ON HOUSEHOLDS CONSUMPTION EXPENDITURE IN NIGERIA (1994 - 2016)

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ABSTRACT

The main objective for the abolition of sales tax and subsequent introduction of Value Added Tax (VAT) is that the base of sales tax is too narrow. Also, the preference for VAT to income tax is essentially because income tax reduces incentive to work and reduces consumption. An attempt by the Federal Government of Nigeria to raise VAT rate from 5% to 10% in 2012 was counteracted by widespread condemnation and protest by both the members of the public and the Nigeria Labour Congress. These actions culminated into its subsequent reversal to 5%.This study used Autoregressive Distributed Lag method to evaluate the impact of VAT on households’ consumption expenditure in Nigeria for the period 1994-2016.The long-run relationship between the variable was also investigated. The Autoregressive Distributed Lag results reveal that a 1% increase in effective VAT rate at period lagged by one, two and three significantly reduces per capital households’ consumption expenditure by 0.49%, 0.59% and 0.26% respectively in the short run. Increasing effective VAT rate with no time lag or at period lagged by one, two and three, say by 1% reduces the households’ savings-consumption ratio in the short run by 0.66%, 0.98%, 1.57% and 0.54% respectively. In the long-run the impact of effective VAT rate on household savings-consumption ratio is positive, but non significant. The study therefore concludes that VAT rate increase reduces per capita households’ final consumption expenditure in the short run, increases the composition of household consumption non significantly in the short run, and reduces the household savings-consumption ratio in the short run. The study therefore recommends that VAT rate increment should not be implemented, but rather be cut. This will exact significant positive impact on per capita household consumption and welfare, household savings-consumption ratio and capital accumulation as well as economic growth.

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

In today’s global market, all companies and individuals are required to pay taxes. The general

idea behind the imposition of taxes by government is to balance the economy in terms of the

redistribution of funds and income from the rich to the poor. There is a global shift in

paradigm, because the focal point is moving from direct to indirect taxation policy. This

action led to the implementation of Value Added Tax (VAT) in Nigeria on September 1st,

1993.The Value Added Tax (VAT) is undoubtedly the most fortuitous innovation of the last

half-century with regards to taxation policy. No other taxes, not even income tax, have made

an impact so quickly and rapidly to the extent that the Value Added Tax (VAT) now exist in

over one hundred and Forty-five (145) countries around the world including Nigeria; and in

these countries it typically accounts for one-quarter of all tax revenue (IBFD 2004). This is so

because the Value Added Tax (VAT) is not only the least distorting tax, but can also be easily

administered in most countries. Every country now makes use of the value added tax and

each year sees a new continent adopting it.

By definition, the Value Added Tax (VAT), also known as goods and services tax, is a broad-

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