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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 thatabout 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 CEDindividually 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


Content                                                                                                                                   Page

Title Page                                                                                                                                i

Certification                                                                                                                            ii

Dedication                                                                                                                              iii

Acknowledgements                                                                                                                iv

Abstract                                                                                                                                  v

Table of Contents                                                                                                                   vi

List of Tables                                                                                                                          xi

List of Figures                                                                                                                         xiii


  • Background to the Study 1
  • Statement of the Problem 6
  • Objective of the Study                                     9
  • Research Questions                                     10
  • Hypotheses                                     10

1.5.1 Rationale for Hypotheses                                                                                              10

  • Significance of the Study                                     12
  • Scopeof the Study                                                                                     13

Content                                                                                                                                   Page

  • Operationalization of Variables                                     13

1.10 OperationalDefinition ofTerms                                                                                       15


  • Conceptual Review                                     17

2.1.1 Historical Background of Taxation in Nigeria                                                               17

2.1.2 Taxation                                                                                                             19

2.1.3 Nigerian Tax System                                                                                                      21 Tax Authorities                                                                                             23 Federal Inland Revenue Service Board (FIRSB)                                              23

2.1.4Nigeria National Tax Policy                                                                                            24

2.1.5Revenue Generation of Nigerian Government                                                               25

2.1.6Reasons for Insufficiencies of Tax Revenue                                                                  26

2.1.7Problems of Tax Administration in Nigeria                                                                    27

2.1.8Problems of Tax Collection in Nigeria                                                                            28

2.1.9The Role of Taxation on Economic and Social Development Sustainability                 30

2.1.10 Tax reforms in Nigeria                                                                                     30

2.1.11. Economic growth                                                                                                        31

2.2 Theoretical Review                                                                                                           32

2.2.1 Deterrence Theory                                                                                                         32

Content                                                                                                                                   Page

2.2.2 Behavioural Economics                                                                                                 33

2.2.3Risk Management Theory                                                                                               33

2.2.4Other Theories of Taxation                                                                                             34 Benefit Received Theory                                                                                            34 Cost of Service Theory                                                                                               35 Responsive Regulation Theory                                                                                   35

2.2.5    Theoretical Framework                                                                                               37

2.3 Empirical Review                                                                                                              37

2.3.1 Tax Reforms and Economic Growth in Nigeria                                                            37

2.3.2Tax Revenue and Economic Growth in Nigeria                                                 43 Company Income Tax and Customs and Excise Duties and Economic Growth       43 Petroleum Profit Tax and Economic Growth in Nigeria                                           44 VAT and Economic Development                                                                            46 Customs and Excise Duties and Economic Development                                          47

2.4Gaps in Literature                                                                                                              52


3.1Research Design                                                                                                                54

3.2Population                                                                                                                          54

3.3 Sample size and sampling Technique                                                                                54

Content                                                                                                                                   Page

3.4Sources of Data                                                                                                                 55

3.4.1 Validity of the Research Instrument                                                                             55

3.5Model specification                                                                                                           56

3.6. Method of Data Analysis                                                                                                58

3.7Model Estimation and Evaluation Technique                                                                    58

3.8Apriori Expectation                                                                                                           59

3.9Ethical Considerations                                                                                                       59



4.1Descriptive Analysis                                                                                                          60

4.2Empirical Analysis                                                                                                 63

4.2.1. Correlation Analysis                                                                                                     63

4.2.2. Regression Analysis                                                                                                      64 Test of Hypothesis One (H01)                                                                                    64 Test of Hypothesis Two (H02)                                                                                    66 Test of Hypothesis Three (H03)                                                                                   67 Test of Hypothesis Four (H04)                                                                                    69

4.2.3 The Main Model                                                                                                70 Diagnostic Test                                                                                                           70

Content                                                                                                                                   Page Regression Result                                                                                                       72 Post Estimation Test                                                                                                   75

4.3 Discussion of Findings                                                                                                     76



5.1Summary                                                                                                                            83

5.1.1. Summary of Findings                                                                                                   84

5.1.2Implications of Findings                                                                                     86

5.2Conclusion                                                                                                             89

5.3Recommendations                                                                                                             89

5.4Contribution to Knowledge                                                                                               90

5.5Limitation of the Study                                                                                                     91

5.6Suggestion for Further Studies                                                                                          91

References                                                                                                                              92

Appendix I: Results                                                                                                                100

Appendix II: Data Used                                                                                                         107





Table                                                                                                                                       Page

2.3.1 Summary of Empirical Review                                                                                      48

4.1.1 Descriptive analysis of the raw data of variables in Naira (₦’Million)                         61

4.1.2 Contribution of Tax Revenue to GDP                                                                           61

4.1.3 Descriptive analysis of the Natural Logarithm of the variables under study                61 Pearson’s Correlation Result                                                                                       63 Regression estimate                                                                                                    64 Regression Estimate                                                                                                    66 Regression Estimate                                                                                                    67 Regression Estimate                                                                                                    69 Unit Root Test Results                                                                                              71 Summary of Unit Root Test Results                                                                         71 Bounds Co-integration Tests Result                                                                         72 Auto Regressive Distributed Lag (ARDL) Model                                                   73 Long Run Estimation                                                                                                74 Post Estimation Tests Result                                                                                      75





Figure                                                                                                                                      Page

2.1 Compliance Model                                                                                                            36

2.2Conceptual Model                                                                                                             53




















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 in developing countries. They further said that it is difficult to create an efficient tax administration without a well-educated and well-trained staff. Where money is lacking to pay good wages to tax officials and to computerize the operation (or even to provide efficient telephone and mail services), and where taxpayers have limited ability to keep accounts, inefficiencies will definitely thrive. As a result, governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems. So tax administrations must be strengthened to accompany the needed policy changes.

Aderibigbe and Zachariah (2014) are of the opinion that tax system is an opportunity for the government to collect additional revenue needed in discharging economic development and creating a conducive business environment for its citizens, they also opined that tax is a major source of government revenue all over the world. The structure of Nigerian tax administration is in relation with the system of government in operation. These include the three tier system comprising of the local government, state government and federal government structures. Each of these tiers of government is constitutionally saddled with administration of specific taxes, while the joint tax board oversees the whole system and resolve disputes as noted by Akintoye and Dada (2013). The Board of Inland Revenue administers the federally collected taxes through the Federal Inland Revenue Service (FIRS), while the board of state internal revenue service administers the taxes collectible by the state government and the revenue committee administers taxes and levies collectible by the Local governments (James and Moses, 2012).

The history of Nigerian tax administration can be traced to the British model tax administration since 1960 and has been in operation until 1990 when the self-assessment scheme came into play which seems similar to the American model of tax administration system (Enahoro and Olabisi, 2012). They further commented that countries have encountered problems on assessing how efficient tax administration is, against the quantum of tax revenue collected. In other words, the process of tax collection is of great importance to developing nations especially in an economy like Nigeria where great reliance is place on one source of revenue. Some of the challenges of Nigerian tax administration as highlighted by McPherson (2004)  are; paucity of tax statistics, unethical practices (corruption), non-prioritization of tax efforts, poor administrative processes, multiplicity of taxes, economic structural problems which hinders effective implementation of taxes and the challenge of underground economy.

A good tax administrative system should have efficiency and effectiveness as its watch word. According to Kiabel and Nwoka (2009), the administration of tax is the responsibility of various tax authorities as established by relevant tax laws. However in Nigeria, the inefficiencies of tax administration as highlighted above have led to various tax issues. Abiola and Asiweh (2012) observed that those working in the informal sector of Nigerian economy do not see the need to pay tax whereas they dominate the economy leading to tax evasion and tax avoidance. From the above purview, this study sets out to critically examine the impact of tax administration and revenue on the economic development of Nigeria.

The whole essence of tax administration is to generate sufficient revenue to advance the welfare of the people of a nation with focus on promoting economic growth and development of a country through the provision of basic amenities for improved public services via efficient administrative system, and structures. Tax revenue plays a crucial role in promoting economic activity growth and development. Through tax revenue, government ensures that resources are channeled towards important projects in the society, while giving succor to the weak. The role of tax revenue in promoting economic activity and growth may not be felt if poorly administered. For business to thrive and compete globally, infrastructural amenities such as power, roads, telecommunication, water and quality health facilities are essential, as this will reduce the overhead cost of business owners and give room for expansion thereby creating wealth for the prosperity of all citizenries. The provision of these amenities is the primary duty of government and requires huge capital outlay. Efficient tax administration will enhance the total revenue available to the government to carry out its role. This calls for a need for proper examination of the relationship between revenue generated from taxes and the economy, to enable proper policy formulation and strategy towards its efficiency.

According to Olashore (1999), the Nigerian economy has remained in a deep slumber with macroeconomic indicators reflecting an economy in dire need of rejuvenation, revival and indeed radical reform. Oni (1998), is also of the opinion that there is the need for tax administration to be refurbished and refunds of taxes as well as duty drawbacks administration are inefficient.

1.2    Statement of the Problem

The revenue accruing to the federal Government of Nigeria from taxation over the years has remained grossly insufficient to meet the expanding social and public spending required in fostering economic growth and development in the country. In the opinion of Ayua (1996), the tax system is grossly inefficient as it is characterized by tax evasion, avoidance and record falsifications which have led to consistent low tax revenue inflow. Gross inefficiency and leakages have hampered the amount of revenue realized from tax sources over the years which has been affecting the economy negatively.

The inability of the Federal Inland Revenue Service Board to ensure total compliance to tax rules by companies and bring all operational companies into the tax net has significantly limited the contribution of tax revenue to economic growth. According to James and Moses (2012), the prevalence of tax evasion in the Nigeria tax system, has curtailed the amount of revenue collected from tax income, this in no doubt has effect on the government expenditure and inflation in the economy. Moreover, the revenue generation capacity of the nation’s present tax administrative system is hampered by challenges such as paucity of data, inefficient monitoring and enforcement system, and corrupt practices, as noted by, (Leyira, Chukwuma, and Asian 2012). All these have impeded the economic growth of Nigeria; which has resulted to her current state of economic recession with the resultant effect of companies closing down, hence, reducing the tax revenue of the Government.

In most countries, tax system is seen as an embodiment of contention and controversy whether in its policy formulation, legislation or administration as observed by (Bariyama & Gladson 2009). For example Nigeria government is contemplating to raise Value Added Tax rate, while the organised private sector is resisting that attempt and would rather have government bring more companies and individuals into the tax net as noted by (Alli, 2009). According to Enahoro and Olabisi (2012) there is a huge scale of corrupt practices prevalent in Nigeria tax administrative system, this tells to a reasonable extent that the economy is at a disadvantage position. Ahmad (2005) pointed out that the objectives of tax system are multi-dimensional in nature, which includes revenue generation, resources allocation, a fiscal tool for stimulating economic growth and development and Social functions, like redressing the rural-urban population drift, and making everybody to be responsible. Taxes, and tax systems, are fundamental components of any attempt to build any nations economic growth, and this is particularly the case in developing or transitional nations like Nigeria. However, given the ever increasing social and infrastructural expenditure needs of government, greater tax revenue will be needed to execute or sustain the required level of spending that can trigger economic growth.  These shortcomings may be more evident where government’s financing relies heavily on more “distortionary” taxes (e.g. direct taxes) and where public expenditure focuses on “unproductive” activities. Ayua (1996) pointed out that the major problem lies in the procedures, machinery and approaches adopted in collection, assessment and compliance practices of tax, however, this study seeks to ascertain the effect of poor tax administration system and assess its impact on economic growth of Nigeria.


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