Tax Structure And Economic Growth In Nigeria

Master's Thesis, 2010

90 Pages, Grade: M.Phil/PhD






List of Tables

List of Figures

1.1 Background To The Study
1.2 Statement Of The Problem
1.3 Objectives Of The Study
1.4 Justification Of The Study
1.5 Scope Of The Study
1.6 Organization Of The Study

2.1 Introduction
2.2 Overview Of The Nigeria Tax Structure
2.3 Major Federal Government Taxes
2.3.1 Company Income Tax (CIT)
2.3.2 Petroleum Profit Tax (PPT)
2.3.3 Customs and Excise Duties
2.3.4 Value-Added Tax (VAT)
2.4 Tax Structure and Revenue Profile Of Nigeria
2.5 The Relationship Between The Different Taxes And GDP in the Two Structures

3.1 Introduction
3.2 Tax Structure And Economic Growth: Theoretical Issues
3.3 Tax Structure And Economic Growth: Empirical Evidences

4.1 Introduction
4.2 Theoretical Framework
4.2.1 Technologies
4.2.2 Factor endowment
4.2.3 Preferences
4.2.4 The evolution of capital
4.2.5 The Effects Of Taxation
4.2.6 Welfare Effects
4.3 Model Specification
4.4 Methodology And Estimation Procedures
4.5 Time Series Properties Of The Variables
4.5.1 Unit Root Tests
4.5.2 Co integration Tests
4.5.3 Error Correction Term
4.6 Data Types And Sources

5.1 Introduction
5.2 Descriptive Statistics
5.3 Time Series Tests Results
5.3.1 Unit Root Results
5.3.2 Cointegration Tests Results
5.4 Model Estimation Issues And Discussion Of Result
5.5 The Granger Causality Test
5.6 Test for Structural Stability

6.1 Introduction
6.2 Summary Of Major Findings
6.3 Implications For Policy And Recommendations
6.4: Conclusion
6.5 Limitations Of The Study
6.6 Agenda For Further Research



Appendix A. Table 1: Definition Of Variables

Appendix B. Table 2: Data Used For The Regression


This study examined the relationship between tax structure and economic growth in Nigeria using annual data between 1970 to 2007. The motivation is to track the impact of the observed change in the tax structure on economic growth in order to inform policy. Two tax structures namely pre Value Added Tax (VAT) and post VAT were identified and their impacts evaluated.

The empirical analysis was anchored on the endogenous growth theoretical framework which allowed for linking tax structures to growth. Econometric models were then developed to explore the relationship between the identified tax structures and economic growth. The first model present a growth equation with average tax rate variable, while the second model is where the specific tax variables were included alongside variables in the first model. The third, fourth and fifth models were used to test the robustness of the second model. This was accomplished basically by introducing additional variables. Prior to the empirical estimations, the standard tests of unit root and co-integration analysis were conducted to ascertain the appropriate estimation procedure and technique(s) to use. The unit root test show that all the variables of the models are stationary at the first difference, while the co-integration analysis indicates that one model out of the five models had no co-integrating relationship, while the rest had co integrating relationships. On the basis of these tests results, the model for which we found no co-integrating relationship was estimated using the Vector Auto Regression (VAR) technique while the others with co-integrating relationship were estimated via the Error Correction Modeling (ECM) technique. Further to this, the Granger Causality test was also conducted to ascertain the direction of causality among the variables of the model.

The estimated results show that in the first model, average tax bears insignificant relationship with growth rate of real GDP. Likewise, following the introduction of specific tax variables in the modeling, average tax rate and other tax variables were not significant in the determination of economic growth in Nigeria. The results obtained from robustness check models indicate that the signs and significance levels of the tax variables varied with other policy variables that are applied in conjunction with the tax variables. However, customs and excise duties showed a consistent negative and insignificant relationship with annual growth rate of real GDP, while the Value Added Tax (the variable that captures the difference in the two identified tax structures) showed consistent and insignificant positive relationship with growth rate of real GDP. The Granger causality results indicate that the variables do not Granger-cause each other.

From the results, it could be inferred that the change from one tax structure to another has not made any significant difference on economic growth rate in Nigeria. However, the positive but weak relationship that the Value Added Tax (VAT) bears with economic growth is an indication that the introduction of VAT in changing the tax structure in Nigeria has potentials for positively impacting on economic growth in Nigeria. This study therefore, recommends that the implementation of the Value Added Tax be improved upon so that its potential impact on growth can be realized.

Key words: Tax Structure, Economic Growth, Co integration, Error Correction, Granger Causality.


In the period this programme has lasted, three things did happen. A major breakthrough in my family, I found my heartthrob (Echuaka, Linda Onyinyechi-my gem of inestimable value). The third and most remarkable was my younger brother’s (my major sponsor) ugly predicament abroad. But contrary to the traditional fears such news could engender in my life, God sustained and provided me the enablement to this end. It is therefore worthwhile to show my deepest and heartfelt gratitude first to Him, the Almighty God, who has been my pillar of strength, my fountain of knowledge, my sustainer, who gave me the ability and opportunity to put this work together and above all grant me the grace, guidance and protection throughout this period of study.

Like Seneca, “there is as much greatness of mind in acknowledging a good turn, as doing it”. The debt of gratitude I owe my able, dynamic and painstaking supervisor cannot be quantified. His constructive criticism from the outset has gone a long way to positively contribute immensely to the completion of this dissertation and made his, a super-vision model. Through him, it became possible to enrich the] contents of this work and substantially improve its exposition. For want of befitting words, I simply acknowledge that I owe him a great measure of gratitude.

Moreso, I will not forget my lecturers who contributed in no small measure to packaging me to a marketable entity, especially Dr. A. O. Adewuyi. Apart from being my lecturer, I see you more as my brother. Prof. A.G. Garba, thank you for teaching me two things-economics and morality. This country needs your type to move forward. Profs. E. O. Ogunkola and A. Adenikinju, Drs. F. O. Ogwumike, O. Olaniyan, O. D. Ogun, A. O. Folawewo, A. Aminu, M. A. Babatunde. I say thank you to all of you. I missed being taught by profs. T. A. Oyejide, P. A. Iwayemi and F. O. Egwaikhide. I pray to also tap from your reservoirs of knowledge in my next academic sojourn to the university of Ibadan.

In the same vein, my appreciation goes to my senior colleagues in the PhD class. They proved to me that they are really researchers. They never lacked answers to any academic problems I took to them. Above all, they never asked for a dime from me. To the leader of this group, Tosin I say thank you. I pray that God will never fail you whenever you call upon him for any help. Mr.

Samuel Orekoya, Afeez, Dr. Idowu, Okafor Harrison, Osigwe, Damilola, Ibrahim and others too numerous to mention, I thank you all.

The Bible in proverbs 27:17 says “ iron sharpens iron; so a man sharpens the countenance of his friends”. It is in view of this that I thank God for having being blessed with good friends whose companionship, ideas and love have sharpened my intellectual fecundity and spurred me up to greater heights. Mr. Magnus Lakan, my landlord. You have never seized from accommodating me and my friends free of charge whenever the situation arises. I say thank you very much. Dr. Elijah Udoh, Emeka Okeke, Chidi Nwankwo, Samson, Seun Ishola, Timi Ikidi, T. J., Niyi, Monsurah, Danjumah David, Lekan, Uche Umejiego, Ugoh Nwagbo, Obi Chuka and others. Thanks for being there for me.

Now the biggest masquerades in this celebration, my immediate family, the Nwosu’s. You are the groom of this academic bride. You are the hero in this latest race. I keep asking myself, am I the only one in the family? How do I pay back this much that has been lavished on me? I cannot wait to see you begin to reap this wonderful investment in my life. Thank you mummies and daddies, brothers and sisters in this household. To my wonderful brother and friend, Charles Nworgu and family, I say thank you.

This acknowledgement cannot be complete if I fail to appreciate my colleagues in the Association of Graduate Economics students (A.G.E.S.) ably represented by our president, Bello Kazeem. We must not allow the light of this association to go dim. To all members of this great association, I thank you for voting me in as your vice president. You have succeeded in enriching my curriculum vitae and in making me a hero.


Table 2.1: Tax Jurisdiction in Nigeria (selected taxes)

Table 2.2: Tax and Non-Tax Revenue as Percentage ofTREV, 1970-1993

Table 2.3: Tax and Non-Tax Revenue as Percentage ofTREV, 1994-2007

Table 2:4 Percentage Contribution to GDP from Direct and Indirect taxes. (1970-1993)

Table 2:5 Percentage Contribution to GDP from Direct and Indirect taxes. (1994-2007)

Table 5.1: Descriptive Statistics

Table 5.2: Correlation Matrix

Table 5.3: Augmented-Dickey Fuller (ADF) Test

Table 5.4: Phillips-Perron (PP) Test

Table 5.5: Johansen-Juselius Maximum Likelihood Co integration Test Results: Maximum Eigenvalue and Trace Tests

Table 5.6: Parsimonious Error Correction Growth Models Table 5.7: Diagnostic Tests Results Table 5.8 Granger Causality Test Result


Figure 1: Percentage Contribution Of Tax And Non Tax Revenue To Total Revenue, 1970-1993 Average

Figure2 : Percentage Contribution Of Tax And Non Tax Revenue To Total Revenue, 1994-2007 Average

Figure 3: GDP And TTR Between 1970 And 1993

Figure 4: Percentage Distribution Of The Total Tax Revenue, 1970-1993 Average Figure 5: Percentage Distribution Of The Total Direct Tax Revenue, 1970-1993 Average Figure 6: Percentage Distribution Of Total Indirect Tax Revenue, 1970-1993 Average Figure 7: GDP And TTR Between 1994-2007

Figure 8: Percentage Distribution Of The Total Tax Revenue, 1994-2007 Average Figure 9: Average Percentage Contribution To Total Direct Taxes Revenue, 1994-2007 Figure 10: Average Percentage Contribution To Total Indirect Taxes Revenue, 1994-2007 Figure 11 : Graphical Representation Of Selected Variables Figure 12: CUSUM and CUSUMSQ Tests


1.1 Background to the study:

The increasing size of government coupled with the ongoing global financial meltdown has renewed interest in the study of how the public sector can be used to provide a stimulus thereby remedying the situation and supporting the long-run growth of the Nigerian economy. The argument on how the public sector affects growth is polarized along two schools of thought. Those who believe that the public sector promote growth do so because of the provisions of public goods, the corrections of negative externalities and market failure by government etc. While those who think contrary to this, do so because they reason that taxes generate distortions in the economy and as such lead to lower growth, (Widmalm, 2001). The effect of taxation on growth depends on what is taxed, i.e. if the tax system extracts more or less resources from private agents (the tax level), or because they raise a given amount of revenue in more or less distortive ways (the tax structure), (Arnold, 2008). Taxation is thus, one of the most important variables that affect long term economic growth, but this simple truth has been neglected in the Nigerian economy because of the huge revenue generated from oil.

Tax structure refers to the mix of taxes on physical and human capital which satisfy a given government budget constraint, (Widmalm, 2001). Studies on tax structure have argued that the type of tax system adopted in every economy has implications on the economy through its effect on the supply of labour, investment in both physical and human capital and even savings, and since growth simply depends on the accumulation of capital and labour, so that any work studying tax effects on investment and labor supply do capture the relevant effects on growth. That is why the study of tax structure and economic growth is important in every economy especially an open economy like Nigeria that has to compete with other economies for investment.

According to Musgrave (1969), in the theory of tax structure, economic factors bear on the tax structure development in two ways. As the structure of the economy changes, the nature of the tax base changes as well, and with it the handles to which the revenue system may be attached. This change in either the tax base or tax handles subsequently leads to a change in the productivity of tax systems and economic growth. Some of the works done in this area include Ndekwu, 1988; Katz, 1983; Helms, 1985; Koester and Kormendi, 1989; Wang and Yip, 1992; Easterly and Rebelo, 1993; Devereux and Love, 1994; Milesi-Ferretti and Roubini, 1998; Widmalm, 2001; Bleaney et. al, 2001; Arnold, 2008; Cardia, 2003; Lee and Gordon, 2004; Anastassiou and Dritsaki, 2005; Loan, 2007; Arnold 2008; among others.

The Nigerian tax structure was initially defined to include only the direct and indirect taxes. The direct tax is made up of personal, corporate income and petroleum profit taxes. Indirect tax which was formerly made up of import, export and excise duties have undergone various reforms with the taxes under it joined together and called customs and excise duties. The tax handles under indirect taxes have increased, with the inclusion of withholding tax regime in 1978; value added tax (VAT) in 1993 and other tax systems. A study group and a working group were also inaugurated in 2002 and 2004 respectively to fashion out ways to entrench a better tax policy and improve tax administration in the country.

Available statistics shows that the link between taxation and economic growth in Nigeria since 1970 has been unstable. Between 1970 and 1990, the contribution of tax revenue to GDP was below 30 per cent, with the lowest being 9.7 per cent in 1970 and the highest of 24 per cent in 1982. While this is so, direct taxation has remained the highest contributor to this basket hovering around 28.1 per cent and 85.9 per cent within the period. Petroleum profit tax formed the bulk of this revenue from direct taxation with the highest contribution of 94.7 per cent in 1974. Udoh & Ebong (2009) highlighted the increasing importance of revenue from direct taxes relative to indirect taxes. This they adduced to the dominance of the oil sector in the economy. This sector showed a decreasing return between 1995 and 1999, thus affecting the shares of petroleum profit tax in direct tax revenue and also the total tax revenue. Beginning from 2003, the shares of direct tax revenue have been within the range of 72.0 percent and 84.7 percent. This is largely due to the high price of oil recorded in most part of the period 2003-2008. All these show that the tax system in Nigeria is still in a state of motion and will continue to be until a system that will generate the highest revenue to government without causing a distortion or deadweight loss to the economy is produced.

1.2 Statement of the problem

In other to raise revenue, most developing economies imposed taxation on their economic agents. The impact of taxation on growth was initially looked at Írom the view point of tax level (tax rate). However, with the understanding that different taxes have different effects on growth as enunciated by the endogenous growth theorists, tax policies were refocused towards diversification from direct taxation to indirect taxation in other not to discourage investments in both human and physical capital as those have been proved to be the channels through which taxation impact on growth and also strong determinants of growth. The reverse has been the case in Nigeria as the bulk of revenue comes from the non tax revenue with an average of 52 per cent contribution to total revenue within the period under review. More so, even as countries are redirecting policies away from direct taxation, that is not case with Nigeria.

The revenue profile of Nigeria in the 1970s was dominated by tax revenue. Such impressive contribution then has witnessed diminishing returns from 81.6 per cent in 1970, to 72 per cent, 53.5 per cent, 42 8 per cent and 42.3 per cent in 1980, 1990, 2000 and 2007 respectively. During this period, the contribution of tax revenue to GDP was never above 24 per cent in any year, with the lowest being 7.1 per cent in 1996 and the highest of 24 per cent in 1982. While this is so, direct taxation has remained the highest contributor to this basket hovering around 28.1 per cent and 85.9 per cent within the period. Petroleum profit tax formed the bulk of this revenue from direct taxation with the highest contribution of 94.7 per cent in 1974 because the oil sector became the mainstay of the Nigerian economy. According to Odusola (2006), oil has dominated Nigeria’s revenue structure and its share in federally collected revenue rose from 26.3 per cent in 1970 to 81.8 per cent, 72.6 per cent and 76.3 per cent in 1979, 1989 and 1999, respectively. It has accounted for over 70 per cent of the revenue profile of Nigeria in the last two decades. Instead of transforming the existing revenue base, fiscal management has merely transited from one primary product-based revenue to another with attendant reduction of the contribution of taxation to total government revenue and thus, economic growth. This neglect of other sectors has exposed the economy to the vagaries of the international oil market. The bulk of Nigeria’s economic problems emanate from this mono-economic nature.

The above scenario has caused unhealthy macroeconomic situation for Nigeria. As rightly pointed out by Udoh & Ebong (2009), the Federal government retained revenue of N747.37 billion for the first quarter of 2009 fell short of federal government expenditure of N786.37 billion for the same period. Overall deficit at the end of the first quarter of 2009 stood at N49 billion. In real terms, real GDP growth is forecast to fall from 6.4 percent in 2007 to 5.3 percent and 2.9 percent in 2008 and 2009, respectively. Inflation rose from about 10.1 percent in 2007 to 13.3 percent in April, 2009. Consequently, unemployment is on the increase as the hitherto vibrant sector (the banking sector) is laying off workers on daily basis. The vandalization of oil installations has led to the reduction in oil revenues accruing to the country and also the incessant clamour by Niger-Delta for resource control is a pointer to resort to taxation to be able to foot the bills of government especially for states where there is no oil to address these problems. The bottom line according to most studies therefore, is that tax structure has effects on economic growth.

However, the forgoing problems suggest several important conceptual and policy questions: Do tax structure matter in determining economic growth in Nigeria? What are the implications of tax structure on economic growth in Nigeria? An appropriate understanding of these questions can help policy makers in their attempts at utilizing tax structure to spur economic growth. Therefore, the main thrust of this study lies in addressing these issues and other related matters.

1.3 Objectives of the study

The broad objective of this study is to investigate how the changes in tax structure has contributed to economic growth in Nigeria. The specific objectives are;

a) to identify and characterize the different tax structures and their revenues profile and
b) to evaluate the impact of the different tax structures on economic growth.

1.4 Justification of the Study

The first justification for this study is that several studies on tax structure, both theoretical and empirical have based their researches on the effect of the overall level of taxes (average tax rate) on economic growth, for example Mahler, and Franz (1983), Koester and Kormendi (1989), Wang and Yip (1992), Engen and Skinner (1992), Anastassiou and Dritsaki (2005), Arnold (2008) among others. But according to Katz, Mahler, and Franz (1983), Wang and Yip (1992), Widmalm (2001), average tax rate say nothing about the underlying tax structure and as such yields inconclusive results. Besides, most of these works were done for developed countries (see for example; Helms, 1985; Caroli et al. 2001; Cardia et al. 2003; Poulson and Kaplan, 2008) and others, for groups of countries (for example, Widmalm 2001, Bleaney, Gemmell, 2001; Lee and Gordon, 2004; Loan, 2007; Arnold 2008, etc). This extensive literature survey shows that much has not been done in this area to cover the interactions and implications of these tax policy variables in Nigeria. Where tax issues are looked into in Nigeria, such studies focused on the issues of buoyancy and elasticity, productivity of tax system, for example Ariyo (1997). Others like Odusola (2006) worked on tax policy reforms without considering the core issues addressed in this study which will demystify the investment environment and put the economy on a higher pedestal for growth.

Secondly, as will be explored by this study, Nigeria has witnessed two different tax structures since 1970. The pre-VAT period covering the period when VAT was not introduced (1970-1993) and the post-VAT period (1994 till date), covering the period when VAT became part of the Nigerian economy tax policy, but no empirical analysis has been done to capture the effects of these tax structures on economic growth.

Furthermore, Nigeria is striving towards being among the twenty fastest growing economies in the year 2020. The effect of the global financial meltdown is still eating deep into the fabrics of the economy. Globally, businesses are closing down because of credit crunch, high tax rates and high cost of production materials, yet investment, savings, research and development are sine- qua-non in addressing the economic problems of a country. In most advanced economies, the debate and interest has been on the use of taxation to remedy the financial meltdown and bounce back their economies into reckoning. In Nigeria’s bid to borrow a leaf from these economies in other to raise revenue to further the works of government, to protect infant industries, to redistribute income etc, it is also important that the different sources of taxation drive by government do not impede growth.

There is also a belief in many quarters that taxes especially the direct taxation of personal and company income taxes are inimical to growth (Widmalm, 2001), this study is also meant to address this issue. Such findings, Ndekwu (1988) opines will help in determining appropriate modifications to the existing tax structures and rates as well as areas for improving tax administration. One of the challenges of this study is finding the right balance across the different tax structures. Since tax yield is related to tax structure, the problem of maximizing yield from Nigeria’s tax system requires the understanding of the contributions of the different tax structures in the economy with a view to designing the taxes in more or less growth-friendly ways. Knowing the impacts of different tax structures on growth and identifying the growth implications of them are useful for policy design just as its empirical contribution will show what prospects there are for Nigeria’s tax system, add to literature and also spur further research in this area. This study, while proffering solution to the problems raised above, will also add to knowledge by finding the relationship between petroleum profit tax and royalties and economic growth in the Nigerian economy. A tax variable that has not been seen in all the literatures surveyed.

1.5 Scope of the study

This study focuses on the link between tax structure and economic growth in Nigeria. This work covered the period 1970 to 2007. This period was chosen to incorporate the two periods of tax structure in Nigeria and also to accommodate data availability.

1.6 Organization of the study

This work is organized into six sections. Following this chapter one is chapter two which comprises of the overview of the Nigerian tax system. Chapter three will take care of the theoretical, empirical and the methodological literature reviews. Section four is made up of the theoretical framework, the methodology adopted, the empirical specifications of the model, estimation techniques and the sources of data. Chapter five will be the presentation of results obtained and the analysis while chapter six will be for summary of findings, recommendations, limitations of study and conclusion


2.1 Introduction

This chapter covers the overview of tax structure in Nigeria. Accordingly, the different taxes along with their contributions and implications to Nigeria’s total revenue and economic growth are explored.

2.2 Overview of the Nigeria Tax Structure

According to Udoh & Ebong (2009), Nigeria like any other developing country engages in taxation in other to generate revenue with which to finance public administration and publicly provide economic and social services. Other reasons are correction of market imperfections and incomes redistribution. The success of a country’s tax policy in providing the above depends on the efficiency of its tax system which is embedded in the tax structure in that economy. In Nigeria, the tax system dates back to 1904 when the personal income tax was introduced in northern Nigeria before the unification of the country by the colonial masters which was later implemented through the Native Revenue Ordinances to the western and eastern regions in 1917 and 1928, respectively (Odusola, 2006). It was later incorporated into direct taxation ordinance No. 4 of 1940. Subsequent governments and laws have continued to improve on Nigeria’s taxation system, for example decree no 21 of 1998 etc.

Nigeria is a federal system comprising three levels of government at the federal, state and local with different taxes operated at these levels. These taxes differ in terms of the level of government that legislates or collects and administers the tax. The major types of taxes in Nigeria are indicated in table 2.1 below.

Table 2.1: Tax Jurisdiction in Nigeria (selected taxes)

illustration not visible in this excerpt

Source: Udoh & Ebong (2009).

As the table shows, most tax legislation is done by the federal government. These taxes are generally classified into two: those relating to income and capital gains earned by corporate bodies and those on the income and capital gains accruing to individuals. The federal government makes the laws and also collects all taxes accruing from corporate bodies, such as quoted and unquoted limited liability companies. Though the federal government makes laws for personal income and capital gains taxes accruing from individuals, the actual collection is done by the government in which the tax payer lives. However, the federal government carries out exclusively the legislation, administration and collection of personal income taxes from personnel of the armed forces as well as those of external affairs and federal capital territory.

Taxes are generally grouped into two, direct and indirect taxes. Direct taxes are taxes from income and wealth rather than consumption and expenditure. Income tax is payable by both physical persons and legal entities (companies) including associations of persons, etc. The rates payable are determined for each year of assessment and are prescribed in the yearly budgets. A company, being a legal entity with management distinct and separate from individual shareholders that own it, also pays income tax called company income tax. Other direct taxes include provisions for taxation of capital gains and gifts, an annual tax on wealth and estate duties. These taxes are subject to evasion and avoidance than indirect tax. This is one of the reasons for looking for the optimal structure of taxation that will raise the highest amount of revenue without distorting the ability to pay.

Indirect taxes of the federal government include customs and excise duties, taxation of capital transactions and taxation of advertisements. Indirect taxes of states and local bodies include sales tax, certain excise duties, entertainments tax, taxation of motor vehicles, registration and stamp duties, etc., these taxes are obtained from expenditure or consumption and production- based taxes. It is very difficult to avoid and evade taxes here.

Customs and excise duties of the federal government is made up of sales tax which applies to expenditure on locally manufactured goods while customs duties apply to imported consumption goods, export duties is also levied on exporters of goods out of Nigeria. In this category also is the value Added Tax (VAT). Production-based taxes are excise duties charged on local manufactures, and landing duties imposed on imported intermediate inputs.

2.3 Major federal government taxes

The major taxes of the federal government include the corporate income tax, petroleum profit tax, customs and excise duties, value-added tax and others. We will therefore elaborate on the operations of these taxes in Nigeria.

2.3.1 Company income tax (CIT)

Company income tax (CIT) was introduced in Nigeria in 1961. This law has been amended many times and is currently called the Company Income Tax Act 1990 (CITA). The Federal Inland Revenue Services (FIRS) of the Federal Board of Inland Revenue, is empowered to administer this tax. Before 1992, CITA were characterized with increasing tax rates and overburdening of the taxpayers, and this induced negative effects on savings and investment, (Odusola, 2006). However, Since 1992, measures have been taken to address these problems. For instance, bonus shared are not to be taxable as dividends; excess profit tax was eliminated in 1991, and the capital transfer tax scrapped in 1996. Tax rates on company profits, payable on trade profits and investment income, fell from 45 per cent during 1970 to 1986 (when SAP was introduced) to 40 per cent between 1987 and 1991, further to 35 per cent for the period 1992-95 and to 30 per cent from 1996 to date. There is, however, a 20 per cent tax concession for certain companies: i.e., those engaged in agricultural production or mining of solid minerals with a maximum turnover of N0.5 million and those in manufacturing or the export promotion sector with a turnover not exceeding N1 million. The rates on capital allowances have been reduced continually to reflect the economic reality of the country, (Odusola, 2006).

2.3.2 Petroleum profit tax (PPT)

The petroleum profit tax (PPT) is levied upon upstream operations in the oil sector. It covers rents, royalties, margins and profit-sharing elements associated with oil mining, prospecting and exploration leases. It generates the highest revenue compared to other taxes in Nigeria, contributing 95 and 70 per cent of foreign exchange earnings and government revenue respectively. The PPT covers oil and gas taxation but is complemented with two different contractual relationships not formally covered by tax legislation. The first constitutes joint ventures between international oil companies and the Nigerian National Petroleum Company structured under a joint operating agreement (JOA) as set out in the memorandum of understanding (MOU). Earlier shocks led to the introduction of the MOU in 1986 to provide necessary incentive, and has been revised in 1991 and 2000. Second, it introduced measures that relates to deep offshore exploration and development under a production-sharing contract (PSC), which allows an oil company to recover its costs at a pre-established rate and to share in additional revenue according to a pre-determined formula. Taxation is 50 per cent of the cost recovery and production share revenue after deduction for costs in accordance with the PPT provisions. The Petroleum Profit Tax Act (PPTA) was amended in 1959 and it stipulates that oil producing companies must render accounts annually, while remittance of the tax is done on a monthly basis as required by the CIT Act. Over 95 per cent of Nigeria’s crude oil production is covered by the PPT/MOU system, and taxation is calculated according to two different formula. The first one is based on PPT and royalties without adjustments while the second is based on the MOU which is often referred to as the revised government tax. In order to guarantee an after-tax margin based on crude oil levels, or operating and capital expenditure, the tax payer is expected to choose the lower of the two taxes. This law has undergone further amendments in 1985 and 2005.

2.3.3 Customs and Excise Duties

Custom duties was introduced in Nigeria around I860 making it the oldest form of modern taxation in Nigeria. It was originally known as import duties, representing taxes on imports charged either as a percentage of the value of imports or as a fixed amount contingent on quantity. Import duties are the country’s highest yielding indirect or expenditure tax. Before the introduction of SAP in 1986, custom duties were as high as 300 per cent but currently range between 2-75 per cent, (odusola, 2006).

Excise duties was introduced in 1962 as an ad valorem tax on the output of manufactured goods, as enforced by the Customs and Excise Acts of 1962 and 1965 and the Customs and Excise Tariff Decree of 1995. The tax is administered by the country’s custom services. This tax is applied or reneged at will, as in 1998-2000, for instance, when it was revoked. Since 2001, duties have been abolished on most manufactured goods with the exception of products considered harmful such as bleaching creams, alcohol, spirits and tobacco in order to discourage consumption of such harmful goods. These two duties are now lumped together under the Custom and Excise Management Act of 1958 and called customs and are excise duties and administered by the Nigerian Custom Services (NCS) still.

2.3.4 Value-added tax (VAT)

VAT is a tax levied on the value added that results from each exchange. It is an indirect tax collected from someone other than the person who actually bears the cost of the tax. Valued- added tax (VAT) was introduced in Nigeria in January 1993 through the VAT Act No. 102 of 1993, but its implementation began in January 1994. , the tax was intended to be a “Super Tax” to eradicate completely many other taxes related to goods and services. VAT was then imposed on virtually all goods and services whether produced or rendered in Nigeria or not. Exemptions however, was granted in respect of medical and pharmaceutical products, basic food items, fertilizers, agricultural and veterinary medicine, books and educational items, farming and transport equipments, etc. The Value Added Tax effectively replaced the Sales Tax, which, under the constitution, was supposed to be charged by States and not the Federal Government. Since 1994 VAT has become a major source of revenue for the government. The revenue generated was to be shared 20:80 between the federal and state government: currently it is shared 15:50:35 among the federal, state and local governments. The state’s allocation was to be earmarked as 30 per cent for the state of origin, 30 per cent for consumption/destination and 40 per cent for equality of the state. The VAT Act designates the FIRS as the responsible institution for implementing VAT. In practice, the Nigerian Custom Service collects VAT on imports on behalf of FIRS.

To ensure VAT’s effectiveness, the following amendments were made to the existing tax structures. These include:

i) Reduction of the personal income tax burden through increased tax allowances and reduced tax rates;
ii) Monetization and taxation of fringe benefits;
iii) Deduction of R&D expenditure from the gross earnings of companies;
iv) Extension of tax-free status to companies in rural areas and granting of incentives based on the infrastructure available in the areas;
v) Reduction of company tax rate from 40 to 35 per cent, and subsequently to 30 per cent; and
vi) Payment of petroleum profit tax in dollars.

Although VAT is a consumption tax, a 5 per cent rate is levied on suppliers who are expected to add this amount to invoices for collection from customers, and for further remittance to the VAT authorities on a monthly basis. VAT is retained at 5 per cent regardless of the stage of production or distribution and has been increased to 10 per cent by the minister of finance in 2007.

2.4 Tax structure and Revenue Profile of Nigeria

Defined in terms of source of revenue, the tax structure of Nigeria has not changed since the 1970s. The main source of Nigeria’s revenue has remained primary commodities. Nigeria has only shifted from making higher revenue Írom agriculture prior to mid 1970s to crude oil till now. In the 1960s, the Nigerian economy was characterized by the dominance of agricultural tax, which served as a proxy for personal income tax because of the difficulty in correctly determining tax liability and accessing individual farmers, (Odusola, 2006). During this period, various marketing boards were responsible for collecting the tax (Ariyo, 1997).

However, in terms of tax handles, the Nigerian tax system has undergone some reforms. In 1993, value added tax (VAT) was introduced and its implementation took effect in earnest in 1994. However. the introduction of VAT has not made any significant difference to the tax revenue profile of the country. To understand this fact, we will divide the Nigerian tax structure into two periods. The first covers the period 1970 to 1993 when there was no VAT and the second period covers the period 1994 till date-the VAT period.

Table 2.2: Tax and Non-Tax Revenue as Percentage of TREV, 1970-1993

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Sources: Central Bank of Nigeria Statistical Bulletin, Various Years; Ndekwu (1988); Odusola (2006), Udoh & Ebong (2009); Researcher’s computation.

Notes: TREV: Total Revenue; TTREV: Total Tax Revenue; NONTREV: Non Tax Revenue.

The first structure of Nigerian taxation as indicated by table 2.2 above shows that tax revenue was the main source of government revenue. Its contribution to total revenue was never below 40.6 per cent before 1994. It generated 81.6 per cent in 1970, 72 per cent in 1980 and the highest contribution was made in 1984 with 91.5 per cent. However, tax revenue declined in the 1990s. That may have led the government to contemplate a supposed “super tax” i.e VAT in 1993 that came into full operation in 1994. The figure below shows the average contribution of tax and non tax revenue to government revenue before 1994. Tax revenue contributed in totality a total of 74.9 per cent to total revenue while non tax revenue amounted to 25.1 per cent of the entire revenue between 1970 and 1993.

Figure 1: Average Percentage contribution of Tax and Non Tax Revenue to Total Revenue, 1970-1993

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The second structure of Nigerian taxation reflects the period when VAT was introduced. The introduction of VAT, however, has not made much significant impact on the economy’s revenue profile. Instead, non tax revenue has taken over as the highest donor to the basket. While in 1997, taxation contributed 34.6 per cent, non tax revenue accounted for a total of 65.4 per cent of the total revenue. The highest contribution of tax to total revenue within this period is 53.4per cent and that was in 2007. To this end also, the dwindling contribution to total revenue by tax is noteworthy (see Figure 2 below).

Table 2.3: Tax and Non-Tax Revenue as Percentage of TREV, 1994-2007

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Sources: Central Bank of Nigeria Statistical Bulletin, Various Years; Ndekwu (1988); Odusola (2006), Udoh & Ebong (2009); Researcher’s computation.

2.5 The relationship between the different taxes and GDP in the two Structures

Taxation was originally designed to generate revenue. As a result, direct taxes from agriculture via the different marketing boards formed the major component of revenue and a determinant of GDP behaviour in the economy since the 1960s. From the 1970s, attention was diverted to oil revenue and the hitherto vibrant agricultural sector with the attendant tax revenue from it began exhibiting decreasing returns with consequential impact on economic growth. This is represented in the tables 2.4 and 2.5 capturing the two structures of Nigerian taxation.

Table 2:4 Percentage Contribution to GDP from Direct and Indirect taxes. (1970-1993).

illustration not visible in this excerpt

Sources: Central Bank of Nigeria Statistical Bulletin, Various Years: Ndekwu (1988); Odusola (2006), Udoh & Ebong (2009); Researcher’s computation.

NOTES: GDP = Gross Domestic Product; TTR = Total Tax Revenue; DTR = Direct Tax Revenue; INDTR = Indirect Tax Revenue; CED = Customs and excise Duties; VAT = Value Added Tax; PPTR = Petroleum Profit Tax and Royalties; CIT = Company Income Tax; FIR = Federal Government Independent Revenues.


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Tax Structure And Economic Growth In Nigeria
University of Ibadan
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Damian Nwosu (Author), 2010, Tax Structure And Economic Growth In Nigeria, Munich, GRIN Verlag,


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