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.

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