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AN EVALUATION OF THE EFFECT OF INDIRECT TAXATION ON
CONSUMPTION IN NIGERIA
AN EVALUATION OF THE EFFECT OF INDIRECT TAXATION ON
CONSUMPTION IN NIGERIA
CHAPTER 1: INTRODUCTION
1.1 Background of the
Study
The mono-product status of the Nigerian economy has received
series of criticisms in recent times. According to Okonjo-Iweala (2012),
without the diversification of Nigerian revenue from oil, the economy will soon
collapse. Recently, Nigeria’s dependence on crude export for revenue based on
the projected price and assumed production is 80%. However, oil revenue has
accounted for over 76% of government revenue. (Ebosele & Adekoya, 2012).
The implication of this overly dependence on oil revenue is the boom-and burst
nature of the economy (Akpokodge, 2000).
Against the backdrop of the need to diversify the economy of
Nigeria, taxation has come extremely handy. Taxation is made up of two broad
components and several subcomponents and basically we have indirect and direct
taxation. For purposes of this study, emphasis is on indirect tax considering
its effect consumption in Nigeria.
However, an indirect tax (such as sales tax, per unit tax,
value added tax (VAT), or goods and services tax (GST)) is a tax collected by
an intermediary (such as a retail store) from the person who bears the ultimate
economic burden of the tax (such as the consumer), this is the major reason why
it has great influence on consumption. The intermediary later files a tax
return and forwards the tax proceeds to government with the return. In this
sense, the term indirect tax is contrasted with a direct tax, which is
collected directly by government from the persons (legal or natural) on whom it
is imposed (Wikipedia, 2015).
An indirect tax may increase the price of a good to raise the
price of the products for the consumers. Examples would be fuel, liquor, and cigarette
taxes. An excise duty on motor cars is paid in the first instance by the
manufacturer of the cars; ultimately, the manufacturer transfers the burden of
this duty to the buyer of the car in the form of a higher price (Lim, 2008).
Thus, an indirect tax is one that can be shifted or passed on. This is a
function of the relative elasticity of the supply and demand of the goods or
services being taxed. Under this definition, even income taxes may be indirect.
Indirect taxation is policy commonly used to generate tax
revenue. Indirect tax is so called as it is paid indirectly by the final
consumer of goods and services while paying for purchase of goods or for
enjoying services. It is broadly based since it is applied to everyone in the
society whether rich or poor. Since the cost of the tax does not vary according
to income, indirect taxation is a proportional tax. However, indirect taxation
can be viewed as having the effect of a regressive tax as it imposes a greater
burden (relative to resources) on the poor than on the rich. The taxpayer who
pays the tax does not bear the burden of tax; the burden is shifted to the
ultimate consumers. Therefore, indirect tax have effect on consumption and the
standard of living of the general public.
1.2 Statement of the
Problem
Evidence so far supports the view that indirect tax is
already a significant source of revenue in Nigeria. For instance, revenue from
indirect tax 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 organized private sector have been voicing
their reservations in the sense that indirect tax is taking a toll on the
prices of their products thereby affecting consumption in Nigeria. From an
economic point of view, one expects the price of goods subject to indirect tax
to rise, however, beyond this expected rise, businesses are taking advantage of
the existence of indirect tax 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 Mclure (1989) to state that policy makers
should be concerned about the macroeconomic impact of indirect tax, especially
on prices, output, income and consumption, before considering its adoption.
However, the researcher is evaluating the effects of indirect taxation on
consumption in Nigeria
1.3
Purpose/objectives of the Study
The following are the objectives of this study:
1. To evaluate the
effects of indirect taxation on consumption in Nigeria.
2. To identify various
forms of indirect taxation imposed in Nigeria and their respective effects.
3. To determine other
factors that affect prices of goods and consumption in Nigeria.
1.4 Research
Questions
1. What are the
effects of indirect taxation on consumption in Nigeria?
2. What are the
various forms of indirect taxation imposed in Nigeria and their respective
effects?
3. What are the other
factors that affect prices of goods and consumption in Nigeria?
1.5 Research
Hypothesis
HO: There is no significant relationship between indirect
taxation and consumption in Nigeria
HA: There is significant relationship between indirect
taxation and consumption in Nigeria
1.6 Significance of
the Study
The following are the significance of this study:
1. The results of this
study will provide a basis for minimizing the adverse effects of indirect
taxation by the Federal government of Nigeria, while consolidating its benefits
because this study will assess the macroeconomic impact of indirect taxation on
general price levels and consumption in Nigeria.
2. This research will
also serve as a resource base to other scholars and researchers interested in
carrying out further research in this field subsequently, if applied will go to
an extent to provide new explanation to the topic.
1.7 Scope of the
Study
This study on the evaluation of the effect of indirect
taxation on consumption in Nigeria will cover all types of indirect taxation on
prices of goods and services, consumption and standard of living in Nigeria
1.8 Limitation of the
study
1. Financial
constraint- Insufficient fund tends to impede the efficiency of the researcher
in sourcing for the relevant materials, literature or information and in the
process of data collection (internet, questionnaire and interview).
2. Time
constraint- The researcher will simultaneously engage in this study with other
academic work. This consequently will cut down on the time devoted for the
research work.
1.9 Definition of
Terms
Taxation: A means by which governments finance their
expenditure by imposing charges on citizens and corporate entities. Governments
use taxation to encourage or discourage certain economic decisions.
Consumption: the using up of a resource.
Revenue: income, especially when of a company or organization
and of a substantial nature.
Inflation: Inflation is the rate at which the general level
of prices for goods and services is rising and, consequently, the purchasing
power of currency is falling.
REFERENCES
Akpokodge, G .(2000). The effects of export earnings
fluctuation on capital formation in Nigeria; AERC Research paper, African
Economic Research Consortium, Nairobi, Kenya.
Ebosele, M and Adekoya, F (2012). Worries over great reliance
on oil, neglect of real sector. The Guardian 29 (12,303), 2.
Okonjo-Iweala, N. (2012). Diversification of Nigeria economy.
Sunday Punch, 18, (19), 685:57.
Mclure, Charles E., Jr. (1989) 'Income distribution and tax
incidence under VAT' in Gillis, Makolm, Carl S. Shoup and G. P. Sicat (eds)
Value and Taxation in Developing Countries. Washington D.C.: The World Bank.
Ajakaiye, Dele Olu (1999) 'Macroeconomic Effects of VAT in
Nigeria: a Computable General Equilibrium Analysis', African Economic Research
Consortium Papers, n. 92.
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