CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Regardless of the nation or region, the provision of social goods and services for its residents is
the primary priority of any responsible government. The governments bear equal responsibility
for maintaining law and order within their nations and defending their territorial integrity against
external threats. A significant sum of money is needed to fulfil these social obligations. This
money can be obtained from tax revenue or non-tax revenue. Non-tax revenue sources include
dividends from state-owned companies, income from the central bank, fines and fees, asset sales,
and capital receipts in the form of debts and loans from overseas financial institutions. One of the
primary revenue streams for the Nigerian government is taxes.

Taxation is one of the earliest methods of financing government expenses. It is also one of the
tools for increasing public sector performance potential and public debt repayment. Any country
that wants to become self-sufficient and meet its objectives for economic regulation must
prioritize taxes.

The government uses taxes as a tool to try and achieve some of its economic goals. Citizens'
consumption patterns can be influenced or directed by taxes. It can be applied to promote or
inhibit investment in particular economic sectors. Through this, the quantity of detrimental,
antisocial, but lawful economic activity can be greatly decreased by the government.
Additionally, it can be utilized to safeguard regional and small companies and reposition them to
more effectively compete with their larger, international rivals.

Most significantly, taxes constitute a significant portion of government revenue. The government
uses tax income to carry out its traditional duties, which include maintaining law and order,
building good roads, protecting the nation from outside threats, and controlling trade and
business to maintain social and economic stability. The infrastructure and social services that are
provided can significantly lower a business's overall operating costs. In order to ensure economic
growth and development in the nation, firms might expand their operations rather than aiming to
supply these services and infrastructures for themselves.

In Nigeria, taxes are set by law. It follows that a relevant laws (Act, By-law, decree, etc.) had to
have been put into law before such a tax could be implemented. The administrative body is
established and its tax jurisdiction is specified by the tax law. Tax rules impose tax on certain
income, profit, gain, and transaction value of taxable persons at a predetermined rate. These rules
are periodically changed to reflect changing social and economic conditions, the intricacy of
financial transactions, and welfare requirements. Nigeria's tax system is designed to fit the
Federal, State, and Local Government systems of governance. Under Nigeria's decentralized tax
system, the administration of taxes within each level of government is the responsibility of that
level alone.
 However, a lot of individuals and business entities still do not understand why they should pay
accurate taxes or pay taxes at all, even in the face of several harsh penalties and fines found in
the tax laws. For this reason, they attempt to escape paying taxes in certain situations and to
avoid paying taxes altogether in others (Bukar, 2004; Omoigui, 2004).

The top priority of every government both in rich and developing countries is to accomplish its
macroeconomic objectives such as full employment, price stability, economic development and
external balance.These objectives are not automatically realized, they must be guided by
policies. Economic policy goals are reflected in the policy guidelines (Olawunmi & Ayinla
2007). The government uses fiscal policy as one of its regulatory tools to accomplish its goals of
promoting economic growth. Keynesian economics gave rise to fiscal policy, which provides a
guaranteed way to stabilize the economy. Achieving economic stability and efficiency is the aim
of contemporary fiscal policy. Every aspect of economic life in the Nigerian economy is
regulated by the government. The government uses taxation as its main tool or instrument to
affect private economic activity. All of the changes in the economy brought about by the
implementation of a tax system are included in the effect of taxes. One could argue that
particular patterns of production, consumption, investment, employment, and other related
factors would not be achieved in a market economy in the absence of taxes. These patterns are
altered by taxes, whether in a positive or negative way. These changes are collectively referred to
as the taxation effect. As a result of the significant growth of government behavior in a country's
development process, fiscal policy deals with resource allocation and is concerned with issues
related to employment, prices, income distribution, economic growth, and social welfare.
Numerous tools have been developed by fiscal policy to address various aspects of the public
sector's economy. Any country's macroeconomic goal, developed or developing, is still to
increase its economy. The ability of an economy to generate products and services increases over
time, and this is known as economic growth. In a broader sense, economic growth entails
improving people's standards of life and decreasing income distribution inequality (Jhingan,
2003). The relationship between government expenditure and economic expansion has
persistently sparked a discourse among academics. Increases in government-funded
socioeconomic and physical infrastructure, according to some academics, promote economic
expansion. Government spending on health and education, for instance, increases labor
productivity and boosts the growth of the nation's output. In the same way, investing in
infrastructure—such as power, communications, and roads—lowers production costs, boosts
private sector investment, and boosts business profitability, all of which promote economic
growth. According to certain academics who share this opinion, increasing government spending
has a favorable impact on economic growth. Fundamentally, the goal of fiscal policy is to
promote social and economic advancement by maintaining a balance between borrowing,
spending, and taxing.

1.2 STATEMENT OF THE PROBLEM

Taxes are a significant source of funding for the government, and when properly managed, these
funds serve as the foundation for our economic growth, because of this, the government places a
high premium on the administration and collection of taxes. A tax is a compulsory financial
charge or other kind of levy that the government imposes on a taxpayer (an individual or another
legal entity) in order to make money.
There is controversy among intellectuals over the relationship between tax income and economic
growth in Nigeria. In the case of Nigeria, for instance, Ariyo (1997) found in his study on the
productivity of the tax system that it was productive prior to the oil boom, or before the 1970s,
and Eguaghide (2007) found that tax revenue did not play a significant role in stimulating
economic activity and growth in Nigeria during the 1970s and beyond. Oil has become a
significant source of tax revenue for the Nigerian government. Other taxes, such as company and
personal income taxes, are meant to help the government address the country's economic issues
and increase spending on social infrastructure projects that are anticipated to benefit the
populace. Adereti (2011).

This has not been the case in Nigeria, though, since the physical condition of the country appears
to be falling behind in terms of social amenities, capital development, economic growth, and
progress, despite the tax revenue and expenditures claimed year after year by the government.
This is demonstrated by a number of factors, including poor roads, a lack of portable drinking
water, inadequate access to basic healthcare, and a lack of energy. According to Ogundele
(2008), there was a noticeable increase in carelessness in handling non-oil revenue streams such
as value-added tax, capital gain tax, company income tax, personal income tax, and excise and
customs duties after the oil boom.

The main goal of this study project is to investigate Nigeria's unresolved issues related to
taxation specifically value added tax and petroleum profits tax and how these issues affect the
country's economic growth and progress. With the help of this study, Nigeria's tax
administration deficiencies as regards value added tax and petroleum profits tax will hopefully
be resolved, as it has prevented the nation from experiencing significant economic growth.

1.3. OBJECTIVE OF THE STUDY

The general objective of the study "Tax as a Stimulus of Growth in Nigeria" is to examine the
relationship between taxation and economic growth in Nigeria and how taxes affect economic
growth in Nigeria. The specific objective of this study is ;

1. To examine the impact of value added tax on the economic growth in Nigeria.

2. To examine the impact of petroleum profits tax on economic growth in Nigeria.

1.4. RESEARCH QUESTIONS

To achieve the objectives, this study attempts to provide answers to the following questions;

1. What is the effect of Value Added Tax on the economic growth in Nigeria?

2. What is the effect of Petroleum Profits Tax on the economic growth in Nigeria?
1.5. RESEARCH HYPOTHESES

H0 : There's no significant relationship between value added tax and Total (Federal
1

Government) Revenue

H0 : There's no significant relationship between Value Added Tax and Total (Federal
2

Government) Expenditure

H0 : There's no significant relationship between Value Added Tax and Gross Domestic
3

Product

H0: There's no significant relationship between Petroleum Profits Tax and Gross Domestic

Product

1.6 SIGNIFICANCE OF THE STUDY

Tax authority: Tax authority is a government agency or department responsible for

administering and enforcing tax laws and regulations. This study can offer the tax authority
useful data and direction for creating efficient tax laws, improving revenue collection,
encouraging compliance, offering understanding of how tax laws affect investment choices, and
advancing economic growth.

Tax payers: Tax payers are individuals or entities who are required by the law to pay taxes to
the government. This study explains to taxpayers how taxes can promote development and
economic prosperity. It helps them assess the fairness and equity of the tax system, including
whether the tax burden is distributed proportionately or not, and, it helps them make well-
informed decisions regarding their savings, investments, and consumption patterns.

Government: The government is responsible for establishing a fair and efficient tax system,
collecting revenue, and using it to provide public goods and services while promoting economic
growth and social welfare. This study offers government insightful information on how taxes
affect public finances, generate income, foster economic growth, and shape fiscal policy.

General public: This study is important to the public because it sheds light on how taxes support
economic growth and development. These insights can then be used by government officials and
policymakers to create tax policies that are more effective in fostering economic growth and
development, which can result in more job opportunities, higher living standards, and an overall
better quality of life for citizens.

1.7. SCOPE OF THE STUDY

The scope of this study is aimed at examining the relationship between taxes and economic
growth, as well as the ways in which taxes drive economic development in Nigeria. The
trajectory of Value Added Tax and Petroleum Profit Tax is analyzed for the duration to ascertain
how they relate to the expansion and development of the Nigerian economy, which is measured
as GDP (gross domestic product). Data collected at the Federal Inland Revenue Service (FIRS)
will serve as the basis for the emphasis. It will describe the legislative process for tax laws as
well as the Nigerian tax system's hierarchical structure. It will look into the ways in which the
value added tax system's structure can affect GDP per capita by looking at its many parts. This
study will equally identify the various authorities responsible for tax administration in Nigeria. It
will examine the different types of tax and the bodies that administers them. This research work
also seeks to examine the problems associated with taxation in Nigeria, the reasons for non-
compliance by taxpayers and how to ensure effective tax compliance among tax payers. It will
identify tax policies to be adopted in order to ensure growth in the economy and tax policy
changes that would most likely increase growth in the Nigerian economy.

1.8. OPERATIONAL DEFINITION OF TERMS

Taxation: This is the process by which the government and its agencies levy fees on the incomes
of people and organizations in order to raise money for public uses.

Economic Growth: This is defined as the rise in the value of output, or goods and services,
expressed in terms of GDP (gross domestic product).

Tax Authorities: They are the organizations responsible for overseeing the administration and
application of tax laws and regulations in connection with particular jurisdictions.

Value Added Tax: This is described as a type of indirect tax levied on the consumption of goods
and services purchased by individuals and organizations.

Petroleum Profits Tax: This is the type of tax that is imposed on organizations engaged in
upstream petroleum operations.

Personal Income Tax: This is a kind of tax imposed on the earnings of individual citizens,
independent contractors, civil servants and others.

Custom and Excise Duty: This is a kind of tax imposed on goods that are imported and
exported in and out of the country.

Gross Domestic Product (GDP): This is the total monetary or market value of all finished
products and services produced inside a country's borders over a specific period of time.
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Ayeni Olasubomi Adefolake and Cordelia Onyinyechi Omodero(2022). Tax revenue and
Economic growth in Nigeria Cogent Business and Management, 9:1, 2115282
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Gareth D. Myles. Fiscal Studies(2000) Vol.21, no.1, pp.141-168. Tax and Economic Growth.

Nigeria Tax System: Structure and administration pml.com.ng/nigerian-tax-system-and-

administration/

Key Issues and challenges of the Nigerian Taxation System pml.com.ng/taxation-system/

Chidiebere Chibuike. Jan 22, 2023. Unveiling the problem and prospects of Income tax
administration Https://en.wikipedia.org/wiki/economic.development

Mark Horton, Asmaa el-Ganairy(2024) Fiscal Policy: Taking and Giving away. Finance and
development Magazine. Https://www.imf.org/en/publications/fandd/issues/series/back-to-
basics/fiscal-policy

Adam Hayes(2023) Michael J Boyle, Amanda Jackson. All about fiscal policy: what it is, why it
matters and examples. https://www.investopedia.com/terms/f/fiscalpolicy.asp

Abubakar Biliksu Aliyu, A.A. Mustapha(2020) Impact of Tax Revenue on Economic Growth in
Nigeria. Bullion Vol.44 No. 4 Article 5

Professor Ogbonna Gabriel Nkwazema, Amah Cletus O.(PHD) (2021). Taxation and Economic
Growth in Nigeria.
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1. CONCEPTUAL REVIEW

2.1.1. CONCEPT OF TAX AND TAX ADMINISTRATION IN NIGERIA

Governments use the taxation process to impose obligatory payments on individuals or entities.
Though for different reasons, taxes are imposed in almost every nation on the planet. Taxes are
primarily used to generate money for public spending. For goods and services that are
occasionally provided, taxes are mandatory payments to the government that are not refundable.
Generally, the government receives payment from both private firms and consumers (Agunbiade
& Idebi, 2020). In modern economies, taxes are the government's main source of revenue. Taxes
are levied freely and are unrequited, which means that they are typically not paid in return for the
sale of public property, the issuing of public debt, or any particular good or service, in contrast to
other forms of income.
Although the exact benefits that any one taxpayer may have received have no bearing on their
tax responsibilities, taxes are normally collected for the benefit of taxpayers. Taxation and tax
management are fundamental elements of every endeavor to establish a nation. This is
particularly true for developing or transitional countries such as Nigeria, where taxes set the
stage for states to accomplish their goals, act as the main forum for state-society relations, and
influence the balance between redistribution and accumulation that gives states their unique
social character. Stated differently, taxes generate capability, legitimacy, and consent. Nigeria
was colonized by the British, just like some other African countries, and gained independence on
October 1, 1960, thanks to an act of the British Parliament. It became a republic within the
commonwealth in 1963.
However, the personal income tax Ordinance was introduced in the northern part of Nigeria in
1904, which preceded the unification of the country by the colonial rulers. This marked the
beginning of Nigeria's tax system. Later, under the Native Revenue Ordinance, it was applied to
the western and eastern regions in 1917 and 1928, respectively. It was later integrated with
several amendments made in the 1930s and put into Direct Tax revenue Ordinance No. 4 of
1940. Following that, several governments have continued to improve Nigeria's tax system.
The Nigerian tax system has undergone several reforms with the goal of enhancing tax
administration and collection while minimizing enforcement expenses. However, due to the
system's insufficient provisions, which promote widespread tax evasion and avoidance, taxpayer
non-voluntary compliance continues. The pervasive practice of tax avoidance and evasion has
seriously impeded the growth of the economy. In order to solve problems with tax
administration, the Nigerian government carried out a number of substantial tax reforms. One
such reform was the development of the Taxpayer's Identification Number (TIN), which became
effective in February 2008. Different tax types are imposed by different nations, and each tax's
contribution to GDP differs. A wide variety of countries impose taxes on individuals in several
ways: income taxes are paid when an individual earns money; consumption taxes are paid when
they spend money; property taxes are paid when an individual owns a home or land; and estate
taxes are occasionally paid when an individual dies. The federal, state, and local governments in
the US are in charge of collecting taxes. All industrialized countries rely heavily on personal
income taxes and corporate income taxes as part of their revenue systems. The money collected
from personal income taxes serves as the US government's main funding source. In 2006, it
accounted for more than half of all federal revenue. Nzotta (2006). The appropriate criteria to be
applied while developing and evaluating the tax system are referred to as the principles of tax
revenue.
These recommendations are essentially a practical implementation of various welfare
economists' theories. To achieve the greater objectives of social justice, a country's tax system
should be based on sound principles. Jhingan (2004), Bhartia (2009), and Osiegbu (2010) have
outlined the following principles of tax revenue: equity, clarity, simplicity, economy,
productivity, adaptation, and diversity. The convenience idea of tax revenue states that the
schedule and procedure must be convenient for the taxpayer. This concept of tax revenue serves
as justification for the Pay As You Earn (PAYE) method of tax payable system of tax collecting.
As per the "certainty principle of taxation," clear, concise, and specific tax regulations are what
taxpayers should be able to grasp. All taxes should be reasonable for the government to impose
and for the taxpayer to pay, in accordance with the economy principle (Appah, 2004; Jhingan,
2004; Bhartia, 2009). According to the equality principle of taxation, there should be no bias or
exceptions and all individuals and objects should pay the same amount in taxes. The productivity
principle states that a tax is productive if it yields a sizable amount of revenue that the
government can utilize. This serves as the primary rationale behind the continued
implementation of tax reforms by governments worldwide.
2.1.2. THE NIGERIAN TAX STRUCTURE AND SYSTEM

Tax revenue existed even before Nigeria amalgamated as a governmental entity in 1914. The
management of these taxes was successful because the people in the northern part of Nigeria
were used to paying taxes in one way or another before direct taxes were formally established.
How efficiently the administrative organization functioned under the emirate system was the
main component. After the north and south united in 1914, direct tax revenue was introduced
into the western regions in 1916 and the eastern provinces around 1927. British laws and
regulations served as the model for the enabling legislation and rules. According to Adiegbe
(2011), taxes are a legal system that has been authorized by a government body to be in charge
of, control, administer, and create policies, laws, and regulations for the tax system in order to
guarantee that all necessary taxes are collected and sent to the right authorities.
Policy management is therefore one of the most important markers of an effective tax system.
The two primary legal entities in charge of enforcing Nigeria's company income tax, petroleum
profit tax, personal income tax, value added tax, withholding tax, education tax, and custom
excise duty are the Joint Tax Board (JTB) and the Federal Inland Revenue Service (FIRS). The
Joint Tax Board was established in 1961 with the intention of offering direction, coordinating
various tax revenue streams, and encouraging uniformity in the application of the Personal
Income Tax Act of 1993 and in the tax incidence on persons throughout Nigeria. The CITA
(2004) further stated that the establishment of FIRS was done with the intention of carrying out
the following duties and powers assigned to it by any federal government enactment regarding
the aforementioned taxes: advising the federal government on requests for double tax revenue
arrangements; encouraging uniformity in the application of the Personal Income Tax Act of 1993
and the incidence of tax on individuals; advising the federal government on requests for capital
allowances rates and other tax revenue matters; and imposing its decisions on any state within
the federation regarding procedural matters and the interpretation of the PITA 1993 in order to
adhere to such mutually agreed-upon interpretation. Upon its founding, the Federal Board of
Inland Revenue was tasked with overseeing the administration of the Company Income Tax Act
(1890). The FBIR's operational branch is the Federal Inland Revenue Service (FIRS), which was
established in 1993. FIRS governs the assessment, collection, accounting, and administration of
income taxes. Between 1904 and the present, the Nigerian tax system has undergone substantial
modification. The outcomes of the country's numerous reforms are as follows: The Nigerian
Inland Revenue was given autonomy in 1945; the Raisman Fiscal Commission was founded in
1957; the Inland Revenue Board was established in 1958; income tax was first enforced in
Nigeria between 1904 and 1926; the Federal Inland Revenue Service was established in 1991–
1992; the Petroleum Profit Tax Ordinance No. 15 of 1959 was enacted; the Income Tax
Management Act of 1961 was passed; the Lagos State Inland Revenue Department was
established; the Companies Income Tax Act (CITA) 1979 was passed; and the Federal Board of
Inland Revenue was established under CITA 1979. Ogbonna (2008). Ola (2006) contends that
because taxes are unfair, Nigeria's tax system does not adhere to acceptable norms. Many of the
alleged tax payers are uncomfortable disclosing their taxable income because they are unaware
of the regulations controlling their tax payments, the range of deductible expenses, and their
allowance. The present standard of tax convenience in Nigeria is the ability of a taxpayer to visit
the tax office, declare the amount he is prepared to pay, be suitably evaluated, make the payment,
and obtain a tax clearance certificate. Ola, back in 2006. The aforementioned suggests that these
have led to inefficiencies in the administration. Both the literacy rate and the popular culture
surrounding record keeping are poor. There aren't enough tax officials to cover the field. The
bulk of the authorities are dishonest, have poor salaries, limited training, and inadequate tools.
According to Ogbonna (2011), one of the primary problems with tax administration is that it
downplays the importance of citizen-government discussion and communication when it comes
to matters of concern pertaining to tax revenue. In contrast to the United States, the United
Kingdom, and Canada, where all taxpayers or organizations have access to an integrated
computer system that enables effective tax collection at the source, Nigerian tax administration is
very different. The Nigerian Federal Inland Revenue Service (FIRS) is primarily in charge of
implementing this.

2.1.3. FEDERAL GOVERNMENT COLLECTIBLE TAXES IN NIGERIA

Raising the income levels of the less fortunate segments of society requires investing a
substantial amount in sectors like health, education, and other industries that have the potential to
generate jobs. The government will be able to implement all of these programs if it can raise the
required money, the majority of which come from taxes. According to Olawunmi and Ayinla
(2007), policy advice embodies the objective of economic policy. The two main instruments of
fiscal policy are revenue from taxes and governmental spending. In light of this, the following
section addresses several government-imposed taxes and their mechanisms:

PETROLEUM PROFITS TAX

Businesses involved in upstream petroleum operations are subject to a tax known as the
Petroleum Profits Tax (PPT). The tax is governed by the Petroleum Profits Tax Act, Cap P13
LFN 2004 (as amended). According to Buba (2007), the Petroleum Profits Tax Act of 1990
requires all companies engaged in the extraction and transportation of petroleum to pay taxes in
Nigeria. Adigbe (2011) states that the profits from the sale of oil and related materials that the
company uses in its own refineries, as well as any additional revenue from petroleum-related
operations, are included in the taxable income of petroleum firms. Adereti (2011) states that a
petroleum company's taxable income is subject to an 85% tax after five years of operation,
however this amount is waived to 65.75 percent. A 50% tax rate will also apply to oil companies
that operate under production sharing agreements. For the same revenue, businesses entitled to
PPT are not subject to CIT. Consequently, the foreign trade sector became the primary source of
income in the 1960s. In the early 1970s, direct taxes took the role of indirect taxes due to the
start of the oil boom and certain structural changes in the revenue profile. Until 1973, an increase
in import taxes was proportionate to the decrease in non-oil tax revenue brought about by the
neglect of conventional (agricultural) sources. Furthermore, the manufacturing sector's enhanced
performance in the 1970s led to a significant increase in excise tax collection, as noted by Buba
(2007). This popular perception has remained true to this day because of the oil sector's
dominant role as a substantial source of government funding.

COMPANIES INCOME TAX

With the exception of companies engaged in petroleum exploration, the Companies Income Tax
Act, 1990 is the current enabling legislation that governs the taxation of profits produced by
Nigerian firms. Every year that a company's profits are assessed, this tax is owed at a rate of 30%
Adereti, (2011). Ola (2006) claims that the way income tax is administered by Nigerian
businesses is not up to par. Due to a lack of oversight, people who fall under the category of
independent contractors and unquoted private firms escape paying taxes. Festus and Samuel
(2007) conducted research on the Nigerian economy and corporation income tax. They
concluded that although corporation income tax is one of Nigeria's main sources of income, the
system's low oversight has made taxpayer noncompliance with tax rules and regulations deeply
embedded. A general tax reform is necessary to address the Nigerian corporate income tax
system.

VALUE ADDED TAX (VAT)

VAT is a tax that is levied when goods and services are consumed. It is paid on all goods
manufactured, assembled, or imported into Nigeria as well as on all services rendered by
inhabitants of Nigeria, excluding those that are legally exempt, such as healthcare services,
community banks, baby products, and raw food items. Value-added taxation, or VAT, is a
consumption tax that is widely used worldwide. It is difficult to evade and is relatively easy to
administer (FIRS, 1993). The Value Added Tax Act, 2004 (as amended) regulates the collection
of taxes due on vatable products and services. Adereti (2011). This tax was supposed to replace
the previous sales tax. It is a consumption tax that is paid for by the final consumer and is levied
throughout the whole consumption chain. After registering with the Federal Board of Inland
Revenue, a taxable person is required to charge and collect VAT at a flat rate of 7.5% of all
invoiced quantities of taxable goods and services. Whether or not they are a resident of Nigeria,
anybody who sells products or renders services in Nigeria under the provisions of the VAT Act
(as amended) is required to register for VAT within six months of opening for business.
Registration is maintained by the Federal Board of Inland Revenue (FBIR).

PERSONAL INCOME TAX

When a person is subject to Pay As You Earn (PAYE) taxation, their income determines the
amount of tax owed. Since the tax is deducted by the appropriate authorities from civil officials'
paychecks, it is easily collected, unlike the commercial sector where tax payers must file returns,
a procedure that is seldom completed Abu (2012). The Nigerian government has reportedly
enacted a number of tax reforms to raise tax collection over time, according to academic
publications. Nonetheless, prior statistical data has shown that income taxes' share of the
government's overall revenue has remained low and is even decreasing. However, personal
income tax remains the most problematic, ineffective, disappointing, and unpleasant tax in
Nigeria among all other taxes. PAYE taxpayers are required to pay the Federal Inland Service as
well as the state Board of Internal Revenue, depending on the industry in which they are
employed. The tax is governed by the Personal Income Tax Act of 2004.

CUSTOM AND EXCISE DUTIES

The most traditional source of current tax revenue in Nigeria is customs taxes. First established
in 1860, import duties, sometimes referred to as taxes on imports into Nigeria, are computed as a
percentage of the imports' value or as a fixed amount based on quantity. Buba (2007). One of the
primary sources of revenue for the federal government is customs duty, which is paid by
importers of specific commodities. Adegbie (2011) looked at the impact of customs and excise
taxes on the growth and development of the Nigerian economy. The study concludes that excise
and customs taxes have a major effect on Nigeria's economic expansion. This suggests that
Nigeria should develop this source of income. Additionally, the study shows that financial
malpractices and fraud negatively impact the contribution of customs and excise to Nigeria's
economic development. A significant amount of Nigeria's non-oil revenue comes from customs
and excise taxes. They have contributed significantly to the nation's development over time and
have been an essential source of income for the nation both before and after its oil riches were
found. He continued by saying that the Nigeria Custom Service is responsible for collecting all
tariffs, fees, excise taxes, and other levies imposed by the Federal Government on imports,
exports, and statutory rates.
2.1.4. ROLE OF TAX REVENUE IN ECONOMIC GROWTH

Other macroeconomic factors are significantly impacted by a country's tax system. Specifically,
for both mature and emerging nations, there is a relationship between the tax structure and the
rate of economic growth and development. In fact, it has been argued that there is a strong
correlation between the goals of tax policy and the level of economic development of a country.
According to Olopade & Olopade (2010), growth necessitates an increase in economic activity.
The expansion of a country's potential GDP or production is known as economic growth. The
government must spend more money because investments in infrastructure, health care,
education, roads, power, and water supplies are essentials that can propel the economy from the
practitioner stage to the take-off stage.

Human societies always strive to accomplish these goals, and human society growth is a one-
sided process. Growing as measured by the GNP or rising per capita income were formerly
referred to as "development." But development and growth are not the same thing. Perhaps it's
growth and social justice together. If an economy grows over time without altering its social and
economic structure, it is believed to be less likely to be seen as progressing. Development is
commonly understood to refer to modifications that lead to development or improvement. Taxes
are primarily used to manage the economy, redistribute income, and raise funds to pay for
government spending. For economic growth of a country, tax can be used as an important tool in
the following manner:

Optimum allocation of available resources: The primary source of funding for the government is
taxes. Tax imposition results in the transfer of resources from the taxed to the nontaxed sectors.
The funds are dispersed among the country's manufacturing sectors with the aim of augmenting
the overall economy. Tax revenue can be used to fund development projects in the country's less
developed areas, which tend to attract less investment from regular investors.

Reduction of income and wealth disparities: The government can encourage residents to save
and invest in profitable businesses by implementing an efficient tax structure that reduces
income and wealth disparities.

Acceleration of Economic Growth and Price Stability: Tax policy can be used to treat two
significant economic conditions: inflation and depression. Taxes are intended to increase
aggregate demand during a slump by decreasing savings and increasing spending, and vice versa.
As a result, tax regulations can be used to boost the rewards associated with investing and
saving. Stable growth in less developed countries is contingent upon the preservation of price
stability.

Control mechanism: Tax laws are also employed as a control mechanism to prevent inflation,
limit the use of alcoholic beverages and luxury items, and shield the underprivileged local
businesses from unfair competition. The sole practical tool for reducing private consumption and
transferring resources to the state is tax revenue. In this way, the economy can guarantee long-
term growth.
Promotion of local industries: If taxes are managed well, local businesses always have a strong
incentive to succeed in a nation. The imposition of taxes and customs tariffs may shield domestic
industries from fierce competition from those of wealthy nations.

2.2 THEORITICAL REVIEW

Socio political theory: This theory of tax revenue holds that social and political objectives

should be the primary drivers of taxation. The argument holds that taxes need to be designed to

help society as a whole rather than to benefit particular groups of people (Chigbu et al., 2012).

Adolph Wagner promoted the use of taxes to bridge the income gap and a contemporary welfare

approach to tax policy. Wagner thought that each economic problem needed to be examined in

light of its social and political context in order to come up with a workable solution. He

disapproved of the individualistic approach to problem-solving (Etim et al., 2021).

Benefit received theory: The basic assumption of this theory is the fact that there is

fundamentally an exchange connection between taxpayers and the government. Members of

society receive some goods and services from the government, and in exchange for the benefits

they receive, they bear a portion of the costs. Issues like fair wealth distribution and income

inequality have no place in this arrangement. Rather, the basis for allocating the tax obligation in

a particular way is the benefits obtained. This hypothesis ignores the notion that tax policy could

promote economic growth or stability in the nation.

Faculty theory: The theory holds that taxes should be determined by an individual's financial

situation. Individuals should pay taxes commensurate with their income. This idea holds that

people who earn more money are required to pay more in taxes than people who earn less

money. The rationale behind this notion is that individuals with higher incomes can afford to pay

more taxes. A person must pay taxes just because they can, according to Bhartia (2009), and

their ability to pay will determine how much of the total tax burden they bear.
Expediency theory: The theory states that all tax measures must pass the practicality test. When

choosing a tax plan, it must be the only consideration made by the authorities. It is necessary to

ignore the economic and social objectives of the state as well as the outcomes of a tax system.

Bhartia (2008). Practicality is a crucial element of any tax policy. It makes no sense to impose a

tax that cannot be collected. Nevertheless, each feasible tax and practicability rate must be

considered in light of their potential consequences on the state of the economy.

Therefore, the expediency theory is the primary focus of this study, allowing us to evaluate how

closely the Nigerian tax system adheres to the scenario in which there is a relationship between

economic activity and tax liability. Given a determined profile of economic development, such

characterisation, if applicable, will improve precise tax revenue projection and targeting of

certain tax revenue sources. Among other things, it will help with the estimation of a sustainable

revenue profile, which will enable efficient control of a nation's fiscal policy. This is so because

the expediency hypothesis emphasizes how taxes are collected in order to accomplish economic

goals, which promote a society's overall growth and development. The socio-political, benefit

and faculty theory are relevant but they lay more emphasis on political, relationship and ability

to pay objectives.

2.3 EMPIRICAL REVIEW

Previous research has looked closely at the concepts of tax and tax income in a variety of

contexts, involving tax experts, academics, governments, and international organizations. But for

the sake of this study, tax can be roughly described as a levy that is required of both individuals

and corporate organizations in compliance with the tax laws; tax income is the outcome of

applying the tax laws in a way that furthers the objectives of the government. As a result, tax

income is a major source of finance for all governments, and having cash on hand is necessary to
keep a state in operation. These studies' findings suggest a link between taxes and economic

expansion and development.

Onyeoma, Enabulu, and Oligbi (2021) studied taxation as a tool for economic progress, using

Nigerian instances utilizing annual data from 1986 to 2019, the study examined taxation as a tool

for economic growth in Nigeria and produced compelling policy recommendations utilizing the

Group Unit Root Test, ARDL Bounds Testing, and Co-integrating Long Run Testing. In this

study, the value-added tax (VAT), businesses' income tax (CIT), petroleum profit tax (PPT),

customs and exercise duty (CED), and value-added tax (VAT) were the independent variables,

while the GDP was the dependent variable. VAT seemed to have detrimental effects on GDP,

although PPT, CED, and CIT appear to have positive effects. In addition, it was imperative to

develop suitable policies and initiatives with the objective of augmenting the efficacy and

efficiency of tax administration in Nigeria. Economic growth was to be positively impacted by

this.

Yaro & Mahmood (2021) researched on Impact of taxation on economic growth and

development in Nigeria: a review. Examining the connection between taxation and economic

growth in Nigeria was the aim of this study. Determining how taxes were collected by the tax

authorities and how they were utilized to support the economy was the primary goal of the study.

The data analysis was presented tabularly using simple parentage and narration responses. It was

made up of statistical computations on unprocessed data that were done to answer research

questions. The outcome showed that competent administration enhanced the Federal Inland

Revenue Service's (FIRS) revenue years. This suggested that Nigeria's economic growth and the

non-oil income profit tax were positively correlated.

Adeusi et al. (2020) investigated the impact of non-oil revenue in the economic growth of

Nigeria where value-added tax, personal income tax, corporation income tax, and custom and

excise charges were the non-oil revenue sources for the years 1994 to 2018, according to

information obtained from the National Bureau of Statistics and the Federal Inland Revenue

Service. For the examination of the data, ordinary least square regression techniques was

applied. According to the study, company income tax and personal income tax have a

considerable negative influence on economic growth, whereas value added tax and customs and

excise taxes have a more pronounced beneficial impact.

Asaolu et al. (2018) investigated the relationship between tax revenue and economic growth in

Nigeria from the year 1994 till 2015, an auto-regressive distributed lag (ARDL) regression as

well as a descriptive and historical research methodology were used in the study. The study

found a negative and substantial relationship with economic growth, an insignificant association

with economic growth, and a significant relationship between CED and VAT and economic

growth.

Udofot and Etim (2017) from 1980 to 2015 looked into the relationship between SMEs’ tax

revenue and economic growth in Nigeria. The Federal Inland Revenue Service (FIRS) annual

reports and several statistics reports from the Central Bank of Nigeria (CBN) provided the

study's data. Analysis of correlation and regression were performed on the gathered data. The

results showed a good and strong relationship between the factors, and they recommended

reworking the entire tax administration structure in order to raise more money.

Akeem and Adejare (2015) conducted research on the impact of petroleum profit tax (PPT) on

economic growth in Nigeria. Examining the effect of Nigeria's petroleum profit tax on economic

growth was the study's main goal. The Central Bank of Nigeria (CBN) provided secondary
sources of the data that were used. were employed to evaluate the data in order to look at how

Nigeria's economic growth is affected by the petroleum profit tax. The study's conclusions

demonstrated that the petroleum profit tax significantly increases GDP over time, both in the

short and long terms.

SUMMARY OF EMPIRICAL REVIEW

Author Year Title Objective Methodology Findings

Onyeoma, 2021 Taxation as a To reveal the Group Unit Root PPT, CED, and CIT
Enabulu & tool for relationship Test, ARDL appear to have
Oligbi economic between tax Bounds testing beneficial effects on
growth and economic and co- GDP, however, VAT
growth integrating long appears to have
run testing negative
consequences

Yaro & 2021 Impact of The purpose is Simple The Federal Inland
Mahmood
taxation on to figure out parentage and Revenue Service's

economic how the tax narration (FIRS) revenue

growth and authority response years are improved

development collects taxes by competent

in Nigeria: a and how management.

review they're used to

help the

economy

Adeusi et 2020 The impact of To find out Ordinary Least Value Added Tax
al how non- oil
non-oil revenue Square and Custom and
affects our
revenue in the economy Regression Excise duties have
 economic Techniques more significant

growth of positive impact on

Nigeria economic growth

while Company

Income Tax and

Personal Income Tax

have a negative but

significant effect on

economic growth

Asaolu et 2018 The To see how a descriptive and There's a significant

al tax affects relationship between
relationship economic historical CED and VAT with
growth economic growth, a
between tax research design negative and
significant
revenue and and an Auto relationship with
economic growth
economic Regressive and an insignificant
relationship with
growth in Distributed Lag economic growth.

Nigeria (ARDL)

Regression

Udofot & 2017 The To examines Regression and the variables are
Etim the impact of
relationship SME’s tax correlation positively and
revenue on
between economic analyses strongly related, and
growth
SMEs’ tax they suggest

revenue and redesigning the

 economic entire tax

growth in administration

Nigeria. system to increase

revenues collection.

Akeem & 2015 The impact of To examine To examine the Petroleum profit tax
Adejare
petroleum the impact of impact of has positive

profit tax petroleum petroleum profit significant impact on

(PPT) on profit tax on tax on economic GDP both in the

economic economic growth in short run and in the

growth in growth in Nigeria long run

Nigeria. Nigeria respectively.

2.4. SUMMARY OF LITERATURE

The research conducted into the subject of "Tax as a stimulus for growth in Nigeria" provides
results that are compatible with those of other empirical investigations. The impact of tax income
on economic development and growth is examined in these studies. This study confirms earlier
research's results that tax money contributes to the expansion and development of the Nigerian
economy. It is believed that the company income tax, customs and excise taxes, and petroleum
profit tax will increase the GDP of the nation. In developing countries, redistributing money may
not be best achieved by direct taxation, which imposes taxes on the earnings and profits of
individuals and businesses; instead, the structure of the tax system may need to be adjusted to
suit local needs. Tariffs and other domestic product and service levies have accelerated GDP
growth in both wealthy and developing countries. However, in developing nations, taxes have a
negative relationship with economic expansion. Furthermore, income tax has little effect in
developing countries but a negative and significant correlation with GDP in industrialized
countries.

RESEARCH GAPS

Numerous studies on the relationship between tax revenue and economic growth have been
conducted, as shown by the embedded empirical review of this literature review. Research in this
area of interest has been done in a number of different countries. Nonetheless, it appears that
little research has been done on how changes in the VAT rate can affect economic development
and income. The majority of the research on this topic ends between 2017 and 2018, and the
most recent data is not included. Furthermore, there are contradictory findings regarding the
relationship between tax revenue and economic growth.

References

Udofot, P. O., & Etim, E. O. (2017). The effect of tax revenue components from SME’s and
economic growth of Nigeria

Adereti, S., Sanni, M., & Adesina, J. (2011). Value added tax and economic growth of Nigeria.
European Journal of Humanities and Social Science, 456-471.
Adeusi, A. S., Uniamikogbo, E., Erah, O. D., & Aggreh, M. (2020). Non-oil revenue and
economic growth in Nigeria. Research Journal of Finance and Accounting, 11(8), 95–106.
https://doi.org/10.7176/RJFA/11-8-10

Asaolu, T. O., Olabisi, J., Akinbode, S. O., & Alebiosu, O. N. (2018). Tax revenue and economic
growth in Nigeria. Scholedge International Journal of Management & Development, 5 7 , 72–85.
https://doi.org/10.19085/journal.sijmd050701

Ibrahim Kabiru Yaro, Mahmood Omeiza Adeiza (2021). Impact of taxation on Economic
Growth and Development in Nigeria; a review. OSR Journal of Humanities And Social Science
(IOSR-JHSS)Volume 26, Issue 6, Series 1 (June. 2021) 41-45www.iosrjournals.org

Onyeoma, S., Enabulu, G. O., & Oligbi, B. O. (2021). Taxation as a Tool for Economic Growth:
Evidence from Nigeria. Igbinedion University Journal of Economics and Development Studies
(IUJEDS), 72-90.

Yaro, I. K., & Adeiza, M. O. (2021). Impact of Taxation on Economic Growth and Development
in Nigeria: A Review. IOSR Journal of Humanities and Social Science, 26(6), 41-45

Value Added Tax (VAT) FAQ https://www.firs.gov.ng/value-added-tax-vat-faq/

Petroleum profits tax (PPT) https://www.firs.gov.ng/petroleum-profits-tax-ppt/

Theresa Ekpe Oto, Solomon Ways (2024). Value Added Tax and Economic Growth in Nigeria
(2003-2022). FUDMA Journal of Accounting and Finance Research, vol. 2, Issue 1, ISSN: 2992-
4693

Modesta Amaka Egiyi (2022). Taxation as a Significant Tool for Economic Development.
International Journal of Economic and Public Policy, 6(1), 12-22

Innocent Ikechukwu Okpe, Anastasia Nwakaego Duru and Ezeoma Stella (2017). Effect of Tax
Revenue on Economic Growth in Nigeria. IDOSR Journal of Arts & Management 2(3): 85-103,
2017.

Dr. Awa Felix N., Ineanu Rita Ijeoma (2020). Impact of Tax Revenue on Economic
Development in Nigeria (1997-2018). European Journal of Accounting & Finance Research
vol.8, no.7, pp. 18-32, July 2020.

CHAPTER THREE

METHODOLOGY

3.1. RESEARCH DESIGN

The framework of research methodologies and techniques selected by a researcher to carry out a
study is known as research design. The design enables researchers to focus on the most effective
research techniques for the topic at hand and organize their investigations for success. The
relationship between PPT, VAT, and economic growth in Nigeria was investigated using both
descriptive and ordinary least square regression as methods of quantitative research, which
makes use of secondary data analysis.

3.2 Population of the Study

The population of this study comprises of all Petroleum Profits Tax, Value Added Tax, Total
Tax Revenue, Total (Federal Government) Expenditure and Gross Domestic Product figures for
five (5) years (2018 to 2022) which was gotten from National Bureau of Statistics, CBN
Statistical Bulletin, Federal Inland Revenue Service..

3.3. Sample and Sampling Techniques

The sample is the specific group of individuals that you will collect data from to draw conclusion
concerning a particular topic. The study used the population as sample for the study.

3.4 Method of Data Collection

This study is based on the use of secondary source of data

Secondary Data: The data for this study was obtained from the Federal Inland Revenue Service
(FIRS) publications, statistical bulletins/annual reports and accounts of the Central Bank of
Nigeria (CBN) and previous works of scholars.

3.5 Research Instrument

A research instrument is a device that you can use to gather, quantify, and examine information
about your areas of interest. Tests, questionnaires, interviews, and checklists are examples of
research instruments.The researcher often chooses the research instrument, which is linked to the
study design. Information for this study came from secondary sources. The National Bureau of
Statistics, the Federal Inland Revenue Service, and the Central Bank of Nigeria (CBN) Statistical
Bulletin were the secondary sources used to compile data for the study's 2018–2022 period.

3.6 Validity and Reliability of Research Instrument

Validity and reliability are two principles that are utilized to assess the quality of research,
according to Middleton (2023). They show the accuracy with which a procedure, test, or method
measures something. Measurement of consistency is known as reliability, while measurement of
accuracy is known as validity. By utilizing data from reliable government agencies in charge of
financial reporting, the study sought to guarantee the validity of the research tool. This study
attempts to minimize biases and errors related to data collecting by depending on trustworthy
sources.
3.7. Method of Data Analysis

The analysis of the data was done with Microsoft Excel. The study's findings were obtained by
applying the ordinary least squares (OLS) method of linear regression. A popular method for
calculating the coefficients of linear regression equations that depict the connection between one
or more independent quantitative variables and a dependent variable is the Ordinary Least
Squares regression (OLS) (simple or multiple linear regression). The minimum squares error is
represented by least squares (SSE). Alternatives to OLS include maximum likelihood and the
Generalized Method of Moments Estimator. By providing the best fit, OLS was utilized to
reduce errors between the regression line's points and the actual observed points. The validity
test was carried out to check the robustness of the regression results obtained in the study.
At a basic level, the relationship between a continuous response variable (Y) and a continuous

explanatory variable (X) may be represented using a line of best-fit, where Y is predicted, at least

to some extent, by X. If the relationship is linear, it may be represented mathematically as a

straight line equation;

Where;

Y = the dependent variable;

= the constant;

= the coefficient of the independent or explanatory variable

= the independent or explanatory variable

Coefficient of Determination, R²

The degree to which data points conform to a statistical model—sometimes just a line or curve—

is indicated by the coefficient of determination (R²). It is employed in relation to statistical

models whose primary goals are hypothesis testing or future outcome prediction. It shows how

well the model represents observed results. A high R² indicates the significance of X1 and X2 in

Y value determination (Egbulonu, 2007).

R² expresses the percentage or amount of Y's total variation that the regression model explains.

This quantity is non-negativity, and its range of values is 0 to 1 (0≤ R2 ≥ 1). A perfect match is

indicated by an R² of 1 (one), meaning that Yi = Yi for each i, where R² it shows no relationship

between regressed and regressor.

Descriptive Statistics

Test of Central Tendency: In this test, the mean and median are taken into account. The mean

represents average variables, whilst the media represents the midpoint, or middle observations. A

measure of central tendency, in general, indicates the distribution's aggregative tendencies, or

how closely the data are related.

Test of Spread and Variation: The standard deviation, or average square root of the difference

from the mean, is taken into consideration here. We are examining the deviation from the mean

under spread and variance. In this instance, a mean that is less than the standard deviation

indicates that the mean is not an accurate depiction of the distribution.