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Effect of Value Added Tax (VAT) on Government Revenue Generation in Nigeria

Abstract

Value Added Tax (VAT) has become one of the most important sources of non-oil revenue for governments worldwide, contributing significantly to fiscal sustainability, public service delivery, and economic development. VAT is a consumption tax levied on the value added to goods and services at each stage of production and distribution, with the final burden borne by the end consumer. In Nigeria, VAT was introduced in 1994 to diversify government revenue away from excessive dependence on crude oil earnings and strengthen domestic revenue mobilization. The administration of VAT is overseen by the Federal Inland Revenue Service (FIRS), which is responsible for the assessment, collection, and remittance of VAT in accordance with the Value Added Tax Act and subsequent amendments introduced through the Finance Acts. Over the years, VAT has become a major contributor to federally collected revenue, particularly in the face of declining oil prices, exchange rate volatility, and increasing fiscal deficits. The increase in the VAT rate from 5% to 7.5% under the Finance Act 2019 further underscored the government's commitment to enhancing internally generated revenue and improving fiscal sustainability. Despite these reforms, challenges such as tax evasion, inadequate taxpayer compliance, informal sector activities, weak enforcement mechanisms, multiple taxation concerns, and administrative inefficiencies continue to affect VAT revenue performance in Nigeria. Although previous studies have examined taxation and economic growth, empirical evidence regarding the effect of Value Added Tax on government revenue generation in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of Value Added Tax on government revenue generation in Nigeria. The study is anchored on Benefit Theory of Taxation, Fiscal Exchange Theory, and Optimal Tax Theory. Benefit Theory of Taxation posits that taxpayers contribute taxes in exchange for public goods and services provided by the government, thereby supporting sustainable public finance. Fiscal Exchange Theory argues that taxpayers are more willing to comply with tax obligations when government revenue is managed transparently and translated into visible developmental projects and quality public services. Optimal Tax Theory explains that an efficient tax system should maximize government revenue while minimizing economic distortions, compliance costs, and adverse effects on business activities and consumers. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between Value Added Tax and government revenue generation in Nigeria. The study adopts an ex post facto research design utilizing secondary data obtained from the Federal Inland Revenue Service (FIRS), the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), the Federal Ministry of Finance, the Budget Office of the Federation, and other relevant government publications. A time-series research design covering a fifteen-year period will be employed to examine the relationship between Value Added Tax and government revenue generation over time. Value Added Tax will be measured using annual VAT collections, VAT growth rate, VAT-to-Gross Domestic Product (GDP) ratio, VAT compliance rate, and VAT contribution to federally collected revenue, while government revenue generation will be measured using total federally collected revenue, non-oil revenue, internally generated revenue, tax revenue growth, and revenue-to-GDP ratio. Data analysis will involve descriptive statistics to summarize the characteristics of the study variables, correlation analysis to determine the degree of association among variables, and time-series econometric techniques, including Ordinary Least Squares (OLS), Autoregressive Distributed Lag (ARDL), and Error Correction Model (ECM), depending on the time-series properties of the data. Diagnostic tests including unit root tests, cointegration tests, multicollinearity, heteroskedasticity, autocorrelation, normality, stability tests, endogeneity, and model specification tests will be conducted to ensure the validity, consistency, and robustness of the empirical findings. The study anticipates that Value Added Tax will have a significant positive effect on government revenue generation in Nigeria. Effective VAT administration is expected to increase non-oil revenue, broaden the national tax base, improve fiscal sustainability, reduce dependence on crude oil earnings, and strengthen government capacity to finance infrastructure development and essential public services. Improved VAT compliance, efficient tax administration, digital tax systems, and stronger enforcement mechanisms are also anticipated to enhance revenue collection efficiency, reduce tax evasion, and promote transparency in tax administration. Furthermore, an efficient VAT system is expected to strengthen fiscal stability, improve budget implementation, enhance public financial management, and support sustainable economic development. Conversely, weak compliance, inadequate tax administration, widespread informal economic activities, tax evasion, and inefficient enforcement mechanisms may reduce VAT collections and undermine government revenue performance. Consequently, effective VAT administration is expected to contribute significantly to improving government revenue generation, fiscal sustainability, and economic development in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on taxation, public finance, accounting, and fiscal policy by providing comprehensive evidence on the relationship between Value Added Tax and government revenue generation in Nigeria. Unlike previous studies that broadly examined taxation and economic growth, this research specifically evaluates the contribution of VAT to government revenue using a longitudinal time-series approach and multiple indicators of tax performance and revenue generation. The findings will provide valuable insights for the Federal Inland Revenue Service (FIRS), the Federal Ministry of Finance, the Nigeria Revenue Service (upon operationalization), the Budget Office of the Federation, policymakers, tax practitioners, professional accounting bodies, development partners, and academic researchers regarding the strategic importance of Value Added Tax in strengthening domestic revenue mobilization and promoting fiscal sustainability. The study will also provide evidence-based recommendations for improving VAT administration, strengthening taxpayer compliance, expanding the tax base, enhancing digital tax collection systems, reinforcing tax enforcement mechanisms, and fostering a more efficient and sustainable tax administration framework in Nigeria.

Keywords: Value Added Tax (VAT), government revenue generation, non-oil revenue, tax administration, fiscal sustainability, Federal Inland Revenue Service (FIRS), time-series analysis, tax compliance, public finance, Nigeria.