The Impact of Value Added Tax on Economic Growth in Nigeria: Evidence from Vector Error Correction Model (VECM) 1994-2025

Abstract

The study examines the impact of Value Added Tax (VAT) on Economic Growth in Nigeria from 1994-2025. The study adopted a VECM approach using annual time series data sourced from CBN Statistical Bulletin and FIRS. Variables include Real GDP, Real VAT Revenue, Real Household Consumption Expenditure, Inflation, Interest rate, Government Consumption, Investment and Population. The ADF test revealed that all variables are I(1). Johansen cointegration test confirmed long-run relationship. The VECM result shows that VAT has a negative and significant impact on economic growth both in the short and long-run. Specifically, a 1% increase in VAT reduces real GDP by 0.312% in the long-run and 0.089% in the short-run. Household consumption expenditure also has positive and significant impact on economic growth. A 1% increase in household consumption expenditure increases real GDP by 0.821% in the long-run and 0.380% in the short-run. Granger causality test revealed unidirectional causality from VAT to GDP. The study concludes that while VAT is an important revenue source, high VAT burden crowds out productive expenditure and retard growth. The study recommends that government should widen the VAT base instead of increasing rate, and ensure that VAT proceeds are channeled to productive infrastructure.