THE EFFECT OF VALUE ADDED TAX ON PRICE STABILITY IN NIGERIAN ECONOMY”
1.1 BACKGROUND TO THE STUDY
The desire of every patriotic citizen of Nigeria is to have a sound and buoyant economy. One way of demonstrating such a desire is through the prompt payment of taxes to the government. One of the means by which government increases its internally generated revenue is Value Added Tax (VAT). This is a tax on the supply of goods and services which is eventually borne by the final consumer, but collected at each stage of the production and distribution chain. VAT as a concept was first introduced by France In 1954, and has over time been embraced by well over 70 countries. It has in recent time become a major source of revenue in many developing countries,including the sub-Saharan African countries. Shalizi and Squire (1989) found that VAT accounted for about 30 percent of total tax revenue in Ivory Coast, Kenya and Senegal in 1982. Bogetic and Hasan (1993) found that Indonesia introduced VAT in 1983, and by 1988, the ratio of VAT revenue to GDP had risen to 4.5 percent.Evidence so far supports the view that VAT is already a significant source of revenue in Nigeria. For instance, VAT revenue in the year of its inception (1994)was N8.194 billion, which was 36.5 percent greater than the projected N6 billion for that year (Ajakaiye, 1999). However, the members of the organised private sector have been voicing their reservations in the sense that VAT is taking a toll on the prices of their products. From an economic point of view, one expects the price of goods subject to VAT to rise, however, beyond this expected rise, businesses are taking advantage of the existence of VAT to increase prices of goods and services arbitrarily. According to Aruwa (2008), the resulting price increase has led to higher inflation. This may have prompted McClure (1989) to state that policy makers should be concerned about the macroeconomic impact of VAT, especially on prices,output, income and consumption, before considering its adoption.