Abstract
The study investigates how government can implement an increase in the rate of value-added tax (VAT) to ensure that the final rate of 15% is achieved in a way that satisfies the public (households and business community) and also ensures maximum revenue generation for the government. The nation’s VAT rate is presently at 5%. A recursive dynamic CGE model is used to address the study’s objective, and the model is solved and simulated for 10 years. It is found that the best policy option is to increase the rate by 2.5% yearly for the next 4 years. The option delivers the best outcomes for real GDP (and its growth), investment, intermediate imports, government expenditure and household consumption when compared to alternative options that require 5% increase (implemented in the first and fourth years) and 10% increment (implemented in the first year). Government revenue (divided into VAT, tax and total revenue) registers the highest percentage changes under 2.5% VAT policy in the medium term (6–10 years).
Highlights
Value-added tax (VAT) was introduced into the Nigerian federal tax system in 1994, and it has been making a substantial contribution to non-oil federally collected revenue since
The percentage change in VAT revenue in the first 5 years is highest under the 10% VAT policy (196.63%) compared to what obtains under the 2.5% (139.64%) and the 5% (136.34%) VAT policy options
In the second 5-year period, it is the 2.5% VAT policy that delivers the highest percentage change in VAT revenue compared to the percentage changes under the 5% (199.65%) and the 10% (201.41%) VAT policy options
Summary
Value-added tax (VAT) was introduced into the Nigerian federal tax system in 1994, and it has been making a substantial contribution to non-oil federally collected revenue since . Another case for considering 2.5% is the empirical finding in Aminu (2007), which relates to the macroeconomic implications of implementing such a policy option, and there is a need to explore further its macroeconomic, sectoral and welfare implications in a longer period context.18 Both the 5% and 10% increments in VAT rate had been proposed before now by the government without any study conducted to shed light on their implications for the economy, firms and households
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