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1.1Background of the study

The Value Added Tax (VAT) has been widely recognized as a significant source of revenue for governments worldwide. According to Ebrill et al. (2001), VAT has been adopted by over 160 countries since its inception in France in the 1950s. The authors further argue that VAT has become a preferred form of taxation due to its efficiency and revenue-generating potential.

In a study by Bird and Gendron (2007), they found that VAT contributes to a significant portion of tax revenue in many countries. They noted that the effectiveness of VAT as a revenue source is largely dependent on its design and implementation.  Adebisi and Gbegi (2013) conducted a study in Nigeria and found that VAT has significantly contributed to the country’s total revenue since its introduction in 1994. However, they also noted that there are challenges in its administration, such as tax evasion and avoidance, which can limit its potential as a revenue source.

On the other hand, Keen and Lockwood (2010) argue that while VAT is an effective source of revenue, it can also be regressive, impacting lower-income individuals more than those with higher incomes. They suggest that governments should consider this when implementing and adjusting VAT rates.

Taxation is the central part of modern economic development. Their importance is not only due to the fact that it is by far the most important of all incomes, but also to the severity of the problems caused by the current high tax burden (Greene, 2011). The main objective of taxation is to generate revenue. In a welfare , a large amount of tax is required to meet its obligations. According to Musgrave (2008), taxation is used as a means to achieve certain social goals, ie as a means of redistributing wealth and reducing inequalities. Taxation in a modern government is therefore not only necessary to generate the revenues needed to cope with the ever-increasing expenditure on administration and social services, but also to reduce income and wealth disparities. Taxation is also needed to withdraw money that would otherwise go into consumption and increase inflation.

In most countries around the world, the goal is to achieve rapid overall development through optimal tax collection and a broader income base. In order to achieve this goal, many countries of the world, especially developing countries, have selectively introduced new forms of taxation to boost their income opportunities in order to improve socio-economic conditions. their citizens and a rapid economic development. Countries (Iorun, 2012). One of these forms of taxation is value added tax (VAT), this impressive VAT performance in almost every country in which it was introduced. According to Ajakaiye (2000), he clearly influenced the decision to introduce VAT in Nigeria on 1 September 1993, although the actual transaction did not begin until 1 January 1994. VAT is a relatively simple excise tax to manage and difficult to avoid. adopted by many countries of the world (FIRS circular, 1999). To date, the evidence supports the view that VAT revenue is already a significant source of revenue in Nigeria and that VAT revenue is a fairly accurate measure of economic growth. A purchase that increases performance with the economy.

VAT is charged on the consumption of goods and services. This includes goods and services imported into the country. It is calculated throughout Nigeria at a fixed rate of five (5%). The 5% Exit Tax is calculated for all goods and services offered by a registered person and the tax burden is compensated by the end user (Ajakaiye, 2000). The broadening of the VAT base is leading to a sharp increase in federal revenue, indicating that the consumption patterns of the majority of Nigerians are increasing. The increase in consumption habits creates a market and has a positive effect on the economic activities of the country (Unegbu and Irefin, 2011). The study will examine the impact of VAT on Nigeria’s tax system.

1.2 Statement of the Problem

The Value Added Tax (VAT) is a significant source of revenue for many countries worldwide. However, its effectiveness and efficiency as a revenue source have been a subject of debate among economists and policymakers (Ebrill, Keen, Bodin, & Summers, 2001). The problem lies in the assessment of VAT’s contribution to the overall revenue of a country, its impact on the economy, and the challenges associated with its implementation and collection.

One of the main issues is the complexity of VAT administration. It requires a robust and efficient system to ensure accurate collection and prevent tax evasion (Bird & Gendron, 2007). In many developing countries, the lack of such systems has led to significant revenue losses. This raises the question of whether the VAT system is the most effective way to generate revenue in these contexts.

Another problem is the regressive nature of VAT. It is often argued that VAT disproportionately affects lower-income individuals as they spend a higher proportion of their income on consumption (Auerbach & Slemrod, 1997). This raises concerns about the equity and fairness of VAT as a source of revenue.

Furthermore, the influence of VAT on tax evasion and avoidance is another area of concern. Some studies suggest that the introduction of VAT can lead to an increase in these activities due to its complexity and the opportunities it provides for fraudulent practices (Slemrod & Yitzhaki, 2002).


The impact of VAT on businesses, particularly small and medium-sized enterprises (SMEs), is also a significant issue. SMEs often bear a disproportionate burden of VAT compliance costs, which can hinder their growth and competitiveness (Onji, 2009).

Nigeria intends to increase the percentage of value added tax on goods and services due to its importance for income, economic growth and development by turning away from direct taxation a consumption based indirect taxation system in line with best practices worldwide, to achieve a stable flow of oil revenues and reduce corporate and income taxes. However, citizens have different ideas (including: too much burden on the end user, inflation and higher prices for fuel pumps). This view of the majority of Nigerian citizens made research on the impact of VAT on the Nigerian tax system relevant. It is therefore necessary to understand, on the basis of empirical facts, the impact of VAT on the Nigerian tax system.

1.3 Purpose of the study

The main objective of this study is to ascertain whether Assessment of Value Added Tax (VAT) as a source of Revenue. Specific objectives include:

  • To ascertain the influence of Value Added Tax on tax collection.
  • To ascertain the influence of Value Added Tax on tax evasion.
  • To ascertain the influence of Value Added Tax on tax avoidance.

1.4.  Research Questions

The research questions are buttressed below:

  • How does Value Added Tax influence tax collection?
  • What is the impact of Value Added Tax on tax evasion?
  • In what ways does Value Added Tax affect tax avoidance?

1.5. Study hypothesis

The study hypothesis is:

Ho1. Government tax collection of Nigeria is not significantly influenced by Value Added Tax.

Ho2. Government tax evasion of Nigeria is not significantly influenced by Value Added Tax.

Ho3. Government tax avoidance of Nigeria is not significantly influenced by Value Added Tax.

1.6.  Significance of the study

This study will be of great importance to the government by highlighting the effect of VAT on the tax system of nigeria. This study will also help in shaping and providing a better understanding to citizenries on how VAT is charged and its contribution to the economy. More so, it will help other researchers to carry out further research on this subject area.


1.7.  Scope and Limitations of the Study

The scope of this study is to examine the impact of value added tax on Tax system of Nigeria using of revenue mobilization and fiscal allocation commission Abuja as case study. Limitation faced by the research was limited time and financial constraint

1.8.  Definition of Basic terminologies

Concepts of Value added Tax

value added tax as an indirect form of taxation based on the general consumption behavior of the people. It is a tax on spending expected to be borne by the final consumer of goods and services. It covers manufactured goods, imports as well as professional and banking services.

The consumption Value Added Tax

Under the consumption VAT, capital purchases are treated the same way as input. It has some advantages, one of which is that it is easier to compute, as the firm does not have to separate expenditure on other items of purchases in determining the VAT base. The main disadvantage of this type of VAT is that it creates refined problems where very heavy and expensive machinery are involved.

The income Value Added Tax

With this type of VAT, the tax paid on purchases of capital inputs is amortized (that is credited against the firm’s VAT liability) over the expected lives of such capital inputs.


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