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© 2020 by the authors; licensee Eastern Centre of Science and Education, USA 

 

Asian Business Research Journal 
Vol. 5,  7-12, 2020 
ISSN : 2576-6759 
DOI: 10.20448/journal.518.2020.5.7.12 
© 2020 by the authors; licensee Eastern Centre of Science and Education, USA 

 
 

 

 
Indirect Tax and Employment Generation in Nigeria 

 
George-Anokwuru Chidinma Chioma. B.1 
Olisa Felix Ubaka2 

Obayori, Joseph Bidemi3    
  

( Corresponding Author) 
 
 
 

 

1Department of Economics, Faculty of Social Sciences, University of Port Harcourt, Nigeria. 

 
2School of Graduate Studies University of Port Harcourt, Nigeria. 

 
3Department of Economics, Faculty of Social Sciences, Nnamdi Azikiwe University, Awka, Nigeria. 

 
 

Abstract 
This paper empirically investigated indirect tax and employment generation in Nigeria from 1999 
– 2019. The specific intentions of the study were to; examine the correlation between value added 
tax and employment generation in Nigeria and determine the impact of custom and excise duties 
on employment generation in Nigeria. Secondary data on employment rate, custom and excise 
duties as well as value added tax were collected from Central Bank of Nigeria statistical bulletin 
and the method of Dynamic Ordinary Least Square regression analysis was applied. Given the 
empirical results, the paper concluded that indirect tax measures by value added tax (VAT) has a 
direct link with employment rate. Also, custom and excise duties have a significant impact on 
employment generation in Nigeria. Based on the empirical findings, the study recommended 
amongst others that government should put in place adequate fiscal measure to ensure that 
revenue generated from indirect taxes is effectively utilize to develop and grow the economy 
through employment generation. 

 
Keywords: Benefit theory, Custom duty, Employment, Generation, Indirect tax, DOLS, VAT. 

JEL Classification: E24:62. 

 
1. Introduction 

One of the basic targets of fiscal policy is to increase the rate of employment vis-à-vis the utilization of either 
the direct or indirect tax revenue. Meanwhile, the most and efficient of these two types of tax revenue is the 
indirect tax; this is because the tax payers find it very difficult to evade most forms of indirect tax such as value 
added tax (Obayori & Omekwe, 2019). Thus, the difficulties in its evasion bring about increase in the revenue base 
of government and in the long run it will results to creation of employment for the citizenry. By means of 
definition, an indirect tax is a type of tax in which the payers, (the final consumers) bears the final burden. Also, it 
is a type of tax collected by an intermediate from the individual who bears the eventual economic liability of the tax 
and the intermediate later files a tax return and forwards the tax proceeds to government. Thus, an indirect tax 
may be used to raise the price of products for consumers. At such, an indirect tax is a regressive tax since both high 
and the low income earners pay the same tax amount for consumption of certain quantity of specified commodities. 
Examples of such tax include; sales tax, value added tax (VAT), custom and excise duties; import and export duties. 
On the other hand, Obayori and Robinson (2019) defined employment as a state in which individuals who are eager 
to work at a predominant wage rate by law are adequately engaged. In other words, employment is created when 
openings for work could be given by the legislature through government fund in the arrangement of social and 
financial framework in the economy Maeba (2019).  

Meanwhile, before the 1970s, indirect tax revenue from non-oil sector was the principal source of financing 
government budget in Nigeria. By then graduate and youth unemployment was not a serious macroeconomic 
problem as it is today. But as government shift attention to direct tax revenue from the oil sector since the 1970s 
till date, employment generation has been the bane of Nigeria government. This is because, people have the 
mentality that crude oil is the free gift of nature and it will never go in extinction. This belief may be what 
warranted lack of prudence use of the revenue from the oil sector to counteract macroeconomic problem such as 
unemployment and stunted growth. For instance, the oil sector which accounted for over 90 per cent of export 
earnings and more than 80 per cent of government revenue since 1970s still maintain the same trend till date. But 
it is alarming that employment generation does not correspond with the increase in the direct tax revenue from the 
oil sector as youth unemployment has risen to about 60% today (Obayori & Robinson, 2019). 

Given the volatility in the crude oil price at the international market, constantly relying on revenue from it to 
promote fiscal sustainability and growth will be detrimental to the developmental process of the Nigerian economy. 
Hence the need to have a mix of revenue sources to boost the nation’s revenue base through efficient management 
of suitable fiscal policies (Jones & Ekwueme, 2016). Similarly, since direct tax revenue from petroleum products is 
not healthy for sustainable economic growth as a result of fluctuation in the crude oil prices in the international 

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market, hence the need for a paradigm shift to tax revenue and particularly to indirect tax such as value added tax 
and customs and excise duties, which are easier to collect and less prone to evasion. The revenue collected from 
these sources will help the government achieve full employment in the short run and economic development in the 
long run through judicious use of the tax revenues (Nmesirionye, Jones, & Onuche, 2019). Given this assumption, 
Nigeria government uses various indirect taxes revenue such as the ones from value added, custom and excise 
duties amongst others to counteract the problem of chronic unemployment rate that has risen from less than 9% in 
the 1970s to about 25% in 2018 (National Bureau of Statistics (NBS), 2019). 
Given the background above, the paper empirically examined the impact of indirect tax on employment generation 
in Nigeria by answering the following questions; what is t h e relationship between VAT and employment 
generation? How has excise and custom duties impacted on increase in employment in Nigeria? Thus, the 
objectives of the study were to; examine the relationship between value added tax and employment generation in 
Nigeria and determine the impact of custom and excise duties on employment generation in Nigeria since the 
return to full democracy in 1999. Moreover, this paper is one of the very few studies that examined indirect tax and 
employment generation. This is because; most of the existing studies examined the effect of tax on economic 
growth over different data periods. Since it was realized that there is hardly any work on the effect of indirect tax 
on employment generation in Nigeria; this study filled this research gap.  

 

2.  Review of Related Literature 
2.1. Theoretical Review: Benefit Theory of Tax  

According to the renowned economists; Knut and Lindahl (1967) taxes should be paid for consumed public 
commodities by individuals based on benefits received. In other words, tax is directly proportional to state derived 
activities (Bhartia, 2009). This simply connote that the more profits an individual enjoys from government 
activities, the more such individual should pay to the government. A true picture of this theory is the taxes 
collected in every local authorities, such as market place, bus stop amongst others, which in the long run will be 
used to develop various social services which results to social benefit to the citizenry. Thus, the public service 
enjoys is a function of tax revenue derived from the benefit people enjoy. 

The theory has been subjected to various criticisms on the ground that; (i) Benefit is absolutely an abstract 
issue and there is no logical method to gauge the extent of advantage and its money value. (ii) If benefits 
accumulated to an individual are the premise of tax collection, the poor must pay higher on the grounds that in a 
welfare economy, the poor get a larger number of advantages than the rich. This is plainly out of line and as such 
an inadmissible suggestion (iii) The equitable distribution of wealth, the main objective of most of the modern 
governments will be defeated if this principle is followed. 
 

2.2. Empirical Review and Justification of the Study 
Empirical works of scholars who examined the nexuses between various indirect taxes and economic 

performance such as economic growth and employment/unemployment were identified. Such scholarship include; 
Nmesirionye et al. (2019) who looked at indirect taxes and the performance of the Nigerian economy as of 1994 to 
2017 with the use of Ordinary Least Square. The findings revealed that VAT has direct impact on GDP of Nigeria 
while custom and excise duties has significant positive impact on GDP in Nigeria. Also, Obayori and Omekwe 
(2019) used ARDL model to examine indirect tax and economic growth in Nigeria. They concluded that VAT as an 
indirect tax system in Nigeria has direct influence on economic growth in Nigeria since its inception in 1994. 
Inimino, Otubu, and Akpan (2018) used ECM to examine VAT as a form of indirect tax and economic growth in 
Nigeria from 1994 to 2015. They established that VAT, exchange rate and interest rate all impacted on economic 
growth in Nigeria. But private domestic investment does not impact on economic growth. Akhor and Ekundayo 
(2016) used ECM to consider indirect tax revenue and Nigeria GDP for the period 1993-2013. They averred that 
VAT had a direct impact on GDP while excise duty had an inverse impact on GDP. Okunbor and Izedonmi (2014) 
used linear regression to examine the contribution of VAT to the development of the Nigerian economy from 1994 
to 2010. The result of their findings revealed that VAT revenue and total revenue accounted for almost 92% 
deviations in GDP in Nigeria. Ihendinihu, Jones, and Ibanichuka (2014) investigated the long-run equilibrium 
nexus between tax revenue and economic growth in Nigeria from 1986 to 2012 with the use of ARDL technique 
and found that VAT has no statistical significant impact on economic growth in Nigeria. Johnson (2013) examined 
the impact of tax policy on inflation and unemployment in Nigeria from 1970 to 2008. The OLS estimations 
showed that taxes have a negative effect on both inflation and unemployment rates but with insignificant 
coefficient. Ilaboya and Mgbame (2012) investigated indirect tax-economic growth dynamics from 1980-2011 with 
the use of error correction mechanism. They found an indirect and insignificant connection between indirect tax 
and economic growth in Nigeria. 

Meanwhile, existing empirical studies revealed that several research explorations have examined the effects of 
indirect tax on economic growth and other macroeconomic variables over different data periods. Also, the empirical 
review exposed that most of the studies of particular interest applied different estimation techniques in their 
analysis, such as Ordinary Least Squares, cointegration and error correction technique and ARDL. But these 
empirical studies reached different conclusions about the influence of indirect tax on economic fundamentals, which 
cannot be generalised for policy decisions. But from the scholarship, it was realized that hardly is there any work 
on the effect of indirect tax on employment generation in Nigeria; this study filled this research gap. This was done 
by using the technique of dynamic ordinary least square (DOLS) to examine indirect tax and employment 
generation in Nigeria. It also, extends the period of study to 2019 in order to capture realities of recent policy 
actions on employment creation in Nigeria.   
 

3. Methodology 
The data ranges from the period of 1999 to 2019. This data was mainly sourced from the publications of the 

Central Bank of Nigeria (CBN) statistical bulletin volume 30, 2019.This study adopted the econometrics method of 
dynamic ordinary least square (DOLS) to explore the impact of the explanatory variables (value added tax and 



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custom/excise duties) on the dependent variable (employment rate). The essence of using the DOLS proposed by 
Stock and Watson (1993) is because it has the ability to eliminate endogeneity problem and it is robust to 
autocorrelation problem. Meanwhile, preliminary test via descriptive statistics was carried out to ascertain the 
characteristic nature of the time series under consideration. Also, stationarity test via ADF unit root test was 
carried out to establish stability of the time series. Also, co-integration test proposed by Johansen (1998) was 
conducted to ascertain the long-run equilibrium relationship among the variables 
 

3.1. Model Specification 
The empirical model for the study was cast in line with the model proposed by Nmesirionye et al. (2019) who 

used OLS to examine indirect taxes and performance of the Nigerian economy from 1994 to 2017.  Their OLS 
model was in the form of GDP = f(VAT, ECD)       (1). Where GDP is economic performance, VAT is value added 
tax and ECD is excise duties. But the current model replaced GDP with employment generation (EPG) in the 
model. It also extend the time frame to 2019. Thus, DOLS model specified in log-linear econometric form is stated 
thus; 

EPG =  λ0 +  λ1LnVATt + λ2LnCUDt + ∑  

𝑛

𝑖=1

∆λ1𝐿𝑛𝑉𝐴𝑇𝑡 − 1 + ∑  

𝑛

𝑖=1

∆λ2LnCUDt + µt (2) 

Where; EPG is Employment Rate (proxy for employment generation), VAT is Value Added Tax, CUD is Custom 

and Excise Duties, µ is Error Term, λ1 and λ2 are Slope Parameters, λ0 is Intercept Parameter and ∑ is summation. 

 

3.2. Description of the Variables  
Employment Generation: This is an economic situation in which people who are ready to work are 

productively employed to increase the production output of the economy. Employment generation was calculated 
as a percentage inverse rate of unemployment. The ideology was based on the formula proposed by Swane and 
Vistrand (2006). 

Value Added Tax:  This is a consumable levy imposed on goods whenever value is added at each stage of the 
supply chain. It is imputable on the supply of payable goods and services except otherwise specified. VAT can 
either be input VAT or output VAT. Therefore, it is anticipated that revenue from VAT will have a positive 
correlation with employment rate.  

Custom and Exercise Duties: These are charges placed on goods imported to the country. This is anticipated 
that tax revenue from custom and exercise duties have a positive link with employment generation. 
 

4. Results and Discussion    
4.1. Descriptive Statistic Result 

This section analyses the descriptive statistic in order to ascertain the nature and characteristic of the variable 
under study. 

 
Table-1. Descriptive statistic result. 

Measurement EPG VAT CUD 

Mean 8.634762 410851.8 295553.3 

Median 8.700000 468400.0 297500.0 

Std. Dev. 1.576866 276697.7 129852.0 

Skewness 0.471666 -0.169604 -0.472708 

Kurtosis 2.024800 1.259734 2.166395 

Jarque-Bera 1.610780 2.750639 1.390120 

Probability 0.446914 0.252759 0.499044 

Observations 21 21 21 

 
The descriptive statistics reported in Table 1 indicated that employment rate (EPG) has an approximate 

average of 8.6percent with the corresponding standard deviation of 1.6percent. Similarly, Value added tax (VAT), 
has an approximate average of N410852billion with the corresponding standard deviation of N276698billion. 
Custom and excise duties (CUD), has an approximate average of N295553billion with the corresponding standard 
deviation of N129852billion. Thus, it can be infer from the analysis that the standard deviation of all the variables 
were not higher than respective averages. Therefore, they converged around their respective mean. Meanwhile, the 
skewness test showed a mixture of both negative and positive slopes. This negate the principle of consistency of 
result. Also, the probability of Jarque-Bera statistics showed that the null hypotheses of the variables were 
accepted. Thus, the variables were normally distributed.  
 

4.2. Unit Root Test 
The unit root test via Augmented Dickey Fuller (ADF) test was used to investigate the order of integration of 

the variables.  
 

Table-2. Unit root test at level and first difference. 

Variables ADF Test 
Statistic @ 

Level 

ADF Test 
Critical Value 
@ 5% (level) 

Order of 
Integration 

ADF Test 
Statistic @ 1st 

Difference 

ADF Test 
Critical Value 

@ 5% (1st Diff.) 

Order of 
Integration 

EPG 0.6698 -3.0403 Not Stationary -8.8897 -3.0403 1(1) 
VAT 0.9940 -3.0206 Not Stationary -5.7670 -3.0299 I(1) 
CUD -1.4077 -3.0206 Not Stationary -6.4119 -3.0299 I(I) 

 



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The unit root test of stationarity for the series via the ADF test shown on Table 2 disclosed that all the 
variables were not stationary at level, since their ADF test statistic values were far less than their critical values at 
5%.  In view of this, the variables were differenced once and they became stationary at first difference prior to 
further estimations to avoid spurious regressions results when these variables were used in model estimations.  
 

4.3. Johansen Test for Co-Integration 
This part analyzed and discussed the co-integration result in order to validate economic assumption of long 

run association amongst variables. 
 

Table-3. Johansen test for co-integration. 

Eigen value K=1, r=2 Trace Statistics 5% critical value Prob. ** Hypothesis of CE(s) 

0.864005 56.71227 29.79707 0.0000 None * 

0.607829 18.80465 15.49471 0.0153 At most 1* 
0.052246 1.019546 3.841466 0.3126 At most 2 

Eigen value K=1, r=2 Max-Eigen Statistic 5% critical value Prob. ** Hypothesis of CE(s) 

0.864005 37.90762 21.13162 0.0001 None* 

0.607829 17.78510 14.26460 0.0133 At most 1* 
0.052246 1.019546 3.841466 0.3126 At most 2 

Note: r=number of co-integrating vectors and k = number of lags in model. * rejection of the H0 . 
 

The results of the Johansen test of co-integration via both the Trace and Max-Eigen statistics, showed the 
existence of two co-integrating equations in the model at 5% level. Thus, the null hypothesis (H0) of no co-
integration among the variables was rejected. Based on this result, the paper concludes that there is a long run 
equilibrium relationship amongst the variables in the model.  
 

4.4. Discussion of Dynamic Ordinary Least Square Multiple Regression Result 
This section analyzed and discuss the regression result in line with the objectives of the study in order to 

validate economic assumptions.  
 

Table-4. Dynamic ordinary least square regression result for the model. 

 Dependent Variable: Employment Rate (EPG) 

Variables Coefficients S-Error t-statistics Probability 

C 81.18568 19.02463 4.267398 0.0021 
Ln(VAT) 1.482344 1.084835 1.366423 0.2050 
Ln(CUD) -7.244370 2.558989 -2.830951 0.0107 

Adjusted R2 0.8905 f-statistics 31.23672  
Durbin Watson 1.6887 Prob(F-stat) (0.0001)  

 
The results of the estimated model as presented in Table 4 showed that the adjusted R-squared is 0.8905. 

Thus, the variation in employment rate (EPG) brought about VAT and custom and excise duties are 89%. This 
shows that the model is a good fit. The Durbin Watson (DW) which measures the level of serial autocorrelation in 
an estimated model which was obtained via correlogram-Q-statistics test is 1.6887. This value is very close to the 
DW bench mark of 2.0. Thus, it was infer that the model is free from problem of serial autocorrelation. Given the 
occurrence of no serial correlation, the estimated model is valid for policy making. In like manner, the f-statistics 
which measures the overall significant of the explanatory variables in the model showed that the two explanatory 
variables are significant in explaining employment generation in Nigeria. This is because, the probability of f-
statistic of 0.0001 < p-value of 0.05. 

Meanwhile, the results in Table 4 showed that, the value of Value Added Tax revenue (VAT) has a positive 
relationship but insignificant impact on employment rate  (EPG). Thus, a percentage increase in VAT will 
causes an increase in employment by 1.48%. The result conforms to the finding of Obayori and Omekwe (2019) as 
well as Onwuchekwa and Aruwa (2014) who examined the link between value added tax as a form of indirect tax 
and economic growth, and discovered that value added tax (VAT) has a direct relationship with economic growth in 
Nigeria. On the contrary, the value of custom and excise duties (CUD) has a negative relationship with 
employment rate but impacted significantly on employment rate. Thus, a percentage increase in custom and 
excise duties will decrease employment generation by 7.24%. The finding supports the empirical work of Charles 
(2012) when he averred that the output growth is negatively influenced by indirect tax rate such as custom and 
excise duties. But negates the empirical finding of Obayori and Omekwe (2019). 
 

4.5. Post Estimation Test 
From the results of post estimation tests as depicted by both the normality and Wald tests. The estimated 

model is reliable for policy formulation. 
 



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0

1

2

3

4

5

6

7

-1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00

Series: Residuals

Sample 2001 2018

Observations 18

Mean      -8.37e-15

Median   0.041789

Maximum  0.756250

Minimum -0.842237

Std. Dev.   0.356017

Skewness  -0.203826

Kurtosis   3.562123

Jarque-Bera  0.361622

Probability  0.834593

 
Figure-1. Normality test. 

 

The normality test as presented in Figure 1, showed that the error terms are normally distributed. This is 
because the probability values of the Jerque-Bera statistic (J-B stat) of 0.8345 is greater than 0.05 critical value. 
Thus, it was concluded that the sample data are normally distributed. The result meets the statistical criteria and 
authenticates the reliability of the estimated model for policy making. 

The Wald test help to measure the significant of the explanatory variables in explaining the dependent variable 
in an estimated model. This was done by comparing the probability of f-statistic and P-value at 5%. Thus, if the 
probability of f-statistic is less that P-value at 5%, we conclude that the explanatory variables are significant in 
explaining the dependent variable.  
 

Table-5. Wald test. 

Wald Test: 

Equation: Untitled  

Test Statistic Value Df Probability 

F-statistic 31.23672 (2, 9) 0.0001 

Chi-square 62.47344 2 0.0000 

Normalized Restriction (= 0) Value Std. Err. 
C(1) 1.482344 1.084835 

C(2) -7.244370 2.558989 

 
The estimated result in Table 5 showed that the f-statistics value of 31.2367 has the corresponding probability 

value of 0.0001 which is far less than 0.05 p-value at 5%. Thus, it was concluded that the two explanatory variables 
(VAT and CUD) are significant in explaining employment generation in Nigeria during the studied period. 
 

5. Conclusion 
This paper empirically investigated indirect tax and employment generation in Nigeria from 1999 – 2019. This 

was done against the background that since the return to full democracy in 1999, direct tax from 
petroleum products have not generated enough employment to propel the Nigerian economy to the desired level of 
growth and development due to the volatility of crude oil prices in the international market and mismanagement of 
the said revenue. Thus, a study of indirect tax was aim at increasing the revenue base of government and 
makes funds available for developmental purposes through increase in employment level and improved human 
development index. Based on the empirical results, it was concluded that indirect taxes measures by value added 
tax (VAT) as well as custom and excise duties has direct correlation and significant impact with employment 
generation and hence economic development in Nigeria. Following the empirical findings,  t h e  s t u d y  
recommends that government should put in place adequate f i s c a l  measure to ensure that revenue generated 
from indirect taxes is effectively utilized to develop and grow the economy through employment generation. Also, 
given the indirect link between custom and excise duties with employment rate, it was recommended that all 
identified administrative loopholes should be plugged and well managed for custom and excise tax revenue to 
have direct relationship with employment rate in Nigeria.  
 

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Citation | George-Anokwuru Chidinma Chioma .B.; Olisa Felix 
Ubaka; Obayori, Joseph Bidemi (2020). Indirect Tax and 
Employment Generation in Nigeria. Asian Business Research 
Journal, 5: 7-12. 
History:  
Received: 19 May 2020 
Revised: 22 June 2020 
Accepted: 24 July 2020 
Published: 10 August 2020 
Licensed: This work is licensed under a Creative Commons 

Attribution 3.0 License  
Publisher:  Eastern Centre of Science and Education 
 

Acknowledgement: All authors contributed equally to the conception and 
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Funding: This study received no specific financial support.    
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