Value added tax and household consumption in Sub-Saharan Africa: Evidence from Nigeria and South Africa

Abstract

This study focuses on Nigeria and South Africa and examines how value added tax (VAT) affects household consumption   in sub-Saharan Africa.  We use time series data from 1994 to 2021 as well as panel Autoregressive Distribution Lag (ARDL) regression through pooled mean group estimation. The findings show that in the long -run and with a 0.05 degree of materiality, VAT has a significant positive influence on household consumption and the exchange rate significantly depletes household consumption. In the short term, at 10% importance, VAT has a significant impact on household spending. According to the Error Correction Model (ECM), there will be a short-run return to equilibrium of 93.7%. According to the country specific results for Nigeria, VAT at 10% has a significant positive impact on CPI but at lag 3, CPI has a significant negative reaction to VAT and the Exchange rate (EXG). EXG has a significant positive influence on CPI at lags 1 and 2. For South Africa, CPI affects itself positively and significantly at lags 1 and 2 but VAT appears to be harmfully unimportant whereas EXG affects CPI positively and significantly at lags 1 and 3 but becomes minor at lag 2. The study concludes that VAT implications are detrimental to households in the short run despite having a positive impact in the long term. As a result, the study recommends adequate public awareness prior to VAT implementations as well as zero VAT for basic household goods and services in African regions that have yet to implement such policies.