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.