THE ROLE OF VALUE ADDED TAX (VAT) IN THE ECONOMIC DEVELOPMENT OF GHANA
Abstract:
Value Added Tax (VAT) was introduced by the Federal Government of Nigeria in 1993 to replace Sales Tax. The aim was to increase the revenue base of government and make funds available for developmental purposes that will accelerate economic growth. The paper empirically examined the contribution of VAT to the development of the Nigerian economy. Time series data on the Gross Domestic Product (GDP), VAT Revenue, Total Tax Revenue and Total (Federal Government) Revenue from 1994 to 2010 sourced from Central Bank of Nigeria (CBN) were analyzed, using both simple regression analysis and descriptive statistical method. Findings showed that VAT Revenue accounts and total revenue account for as much as 92% significant variations in GDP in Nigeria. A positive and insignificant correlation exists between VAT Revenue and GDP. Both economic variables fluctuated greatly over the period though VAT Revenue was more stable. This paper therefore recommends that all identified administrative loopholes should be plugged for VAT Revenue to continue to contribute more significantly to economic growth of the country.
INTRODUCTION
Taxation forms the most important sources of revenue to the government. Tax is a compulsory payment imposed by various tiers of government on individuals and corporate organizations.Also there is no
„quid pro quo‟ between tax payer and how the government spends the tax paid. In other word the governments need not to explain to a payer how his own particular payment will be utilized (Umeora, 2013).VAT is a consumption tax levied at each stage of the
consumption chain and borne by the final consumer of the product or service. Each person is required to charge and collect VAT at a flat rate of 5% on all invoiced amounts, on all goods and services not exempted from paying VAT, under the Value Added Tax Act 1993 as amended. Where the VAT collected on behalf of the government (output VAT) in a particular month is more than the VAT paid to other persons (input VAT) in the same month, the difference is required to be remitted to the government, on a monthly basis, by the taxable person (Oserogho & Associates, 2008). Where the reverse is the case, the taxpayer is entitled to a refund of the excess VAT paid or more practically, to receive a tax credit of the excess VAT from the government. All exports are zero rated for VAT, i.e. no VAT is payable on exports. Also, VAT is payable in the currency of the transaction under which goods or services are exchanged
(Umeora, 2013).
Value Added Tax (VAT) is one of the most popular taxes around the world. In sub-Saharan Africa for example, VAT has been introduced in Benin republic, Cote d‟ Ivoire, Guinea, Kenya, Madagascar, Mauritius, Niger republic, Senegal, Togo and Nigeria. Evidence has shown in these countries that VAT has been an important contributor to total government
revenue (Ajakaiye 2000). Shalize & Squire (1988) found that VAT accounted for about 30% of total tax revenue in Cote d‟ Ivoire, Kenya and Senegal in1982. Tait (1989) showed that VAT has
been in effect in Ecuador and Mexico since at least (1973) and by 1983 accounted for 12.35% and 19.71% of total government revenues in those countries respectively. Indonesia introduced VAT in 1983 and by 1988, the ratio of revenue GDP has raised to 4.5% (Bogetic and Hassan 1993). According to Ajakaiye
(2000), the impressive performance of VAT in virtually all countries where it has been introduced strongly influenced the
decision to introduce it in Nigeria in 1993.
The main reason for the popularity of VAT is that it provides a buoyant revenue base that usually yields significantly more revenue than other tax on consumption. It is relatively easy to administer and difficult to avoids. The yield from VAT is a fairly accurate measurement of the growth of an
economy since purchasing power increases with economic growth (Paulo 2002). 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 #8.189 billion which is 36.59% higher than the project is #6 billion for the year. Similarly actual VAT revenue for 1995 was #21
billion compared with the projected #12 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 #404.5 billion was collected on VAT (5.1%) of total revenue in 2008, VAT revenue of #1.97 trillion was paid to federation account for the first half of the year 2015 (CBN,2015).
The prevalence of high rate of unemployment, poor standard of living and the poor state of infrastructural facilities in Nigeria is alarming. The vice president of Nigeria, Yemi Osinbajo re-affirmed this on 26th June 2015 when he asserted that the poverty level in Nigeria is intolerable
(www.vanguarg.org).Research has been done to determine the effects of value Added tax on some aspects of the Nigerian economy. Ajakanye (1999) observed that VAT has become a major source of revenue in many Sub-Saharan African.
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