Effects Of Tax Incentives In The Development Of Manufacturing Industries In Nigeria

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Effects Of Tax Incentives In The Development Of Manufacturing Industries In Nigeria


After the economic depression of the 1930’s the concept of economy. Many nations began to implement policy measures aimed at both raising revenue for the government and encouraging investment via investment tax credit. In Nigeria, the concept of taxation, especially as it relates to tax incentive had been an important topic for discussion both in the government circle and in the private sector. A review of the annual budgets of the federal Government reveal that the government usually gives tax concessions and incentives to firms/ corporations in the following lines of business: manufacturing, agriculture and the mining sector. Over the years, successive administrations in the country had continued to reduce rate of effective taxes. In 1996 for instance, the highest rate of income tax was further reduced to 25% from 30% because increasing revenue from consumption taxation would compensate the military regime them felt that the loss in revenue as a result of the income tax cut. Would be compensated by increasing revenue from consumption taxation.

Chapter One


1.1 Background of the Study

The concept of taxation sharp momentum after the great would of economic depression of 1930’s. After the depression aimed at raising enough capital to provide for social overhead expenses and at the same time embarking on several ways to lift the standard of living of their citizens. In Nigeria, there are many forms of taxations in practice dating back to the days of our great grandfathers that is before the coming of our colonial masters, whereby communities tax themselves through labor to execute community projects or to help the community suppress external attack or aggression. Therefore, taxation can be referred to as machinery by which communities or groups are made to contribute part of their incomes in some agreed amount and method for the purpose of administering the society. This accounts for the reasons why taxation is often referred as civic responsibility. The mode by which economic and industries can be effectively and efficiently developed have a problem. As a result, government charges less tax in order to encourage investments and activities in those areas which helps to improve the production capabilities, active economic growth as well as allocation of resources in social desirable manner. The administration and payment of tax by taxable adults in Nigeria dates back to pre-colonial era. Both the administration and collection of taxes were carried out by the Emirs, Chiefs, and their appointed agents. The system as it was though functional for that time was extremely croaked and arbitrary. It is important to note that tax collection developed from the Northern states of the country and gradually percolated to the Southern states. On the advent of the British in about 1900, the administration of tax effected through several ordinances (now acts and decrees), which principally entrusted the responsibility of collection of taxes on local authorities. In 1940, the direct taxation ordinances were introduced to Nigeria through the administration and collection of taxes was still shared between the British administration and the local authorities. When Nigeria became a federation in 1952, the regional governments (Northern, Western, and Eastern regions and the Federal Territory of Lagos) took full responsibility for assessment and collection of taxes in their regions. Thus each of the regions including the federal territory of Lagos made their respective personal income law. However, income tax Management Act 1961 failed to unify the rates of taxes, relief and allowance through the country. The defects of ITMA 1961 were rectified by(income tax management Uniform Taxation Provision Act,1957).Subsequent amendment took place before the enactment of personal income Tax Decree No.104 of 1993, which was later amended. Ezejelue and Ihendinihu (2006) defined taxation as the demand made by the government of a country for a compulsory payment of money by the citizens of the country with the objectives of raising revenue to finance government expenditures, satisfy collective wants of the people and regulate economic and social policies.

Basically, tax incentives are designed to encourage investment in certain preferred sectors of the economy and sometimes they are geared towards attracting in-flow of foreign exchange to compliment domestic suppliers for rapid economic development. Generally, these incentives are in the areas of manufacturing, export, agriculture and solid mineral, VAT, individuals and other areas. These incentives include: Personal allowance, Capital allowance, Investment allowance, Loss relief, Roll over relief, Annual allowance, Pioneer relief, Tax free dividend, Export Processing Zones Relief, Research and development and Tax free holiday. It is good to note that the incentives are to ease off the burden of tax on tax payers. The present tax laws in Nigeria was borne out of the Raisman’s fiscal commission of inquiry of 1957. Before them, we only had what was called the income tax colonies with similar providing section 70, subsection 1 of the Nigeria constitution, order in council of 1960 which conferred an exchange power upon parliament to make laws for the whole Nigeria or any part of the country with respect to personal income tax. In the exercise of these powers the federal government enacted the income tax management act of 1961 (ITMA) and because Lagos territory was being administrated as a region it enacted the personal income tax (Logos). Act 1961.On April 1961, the income tax management act came into operation and all the existing laws at the regional level had to be amended to bring them into conformity with what the Raisman fiscal commission recommend in 1958, the introduction of uniform basic principle of taxing income of persons other than limited liability companies throughout the country. Oliver Wendell Homlmes, United States Supreme Court judge said, “Taxes are the price we pay for a civilized society”.Nigeria and been an encouragement by the government to attract individuals and corporate bodies to invest in the country. The idea of the research was to assess how the incentives had helped industries grow and how companies had availed themselves of these opportunities

1.2 Statement of Problems

The study entitled effects of tax incentive in the development of manufacturing industries attempt to determine the way by which some organization or firm especially Emenite Ltd. Emene has utilized huge amounts of money. Nigerian government sacrifice every year by way of tax incentive towards the development of manufacturing industries.

Some of the problems, which they encounter, are as follows.

  1. Liability of the tax incentives scheme to redirect the investment patterns of individuals and corporate bodies towards the development of manufacturing industries.
  2. The level in efficiency in administering tax incentives scheme has made it impossible using it to attract foreign investors to the manufacturing industries.
  3. Liability to use tax incentives in generating employment in manufacturing industries.
  4. Most manufacturing industries are unable to apply tax incentives in a flexible manner.

1.3 Purpose / Objective of the Study

The purpose this study is as follows:

  1. To ascertain the extent tax incentives have redirect investment of individuals and corporate bodies towards the development of manufacturing industries.
  2. To establish how inefficiency in administering tax incentive scheme has made it impossible using it to attract foreign investors to manufacturing industries.
  3. To ascertain the extent by which most manufacturing industries are unable to apply tax incentive in a flexible manner.

1.4 Research Questions

The research questions of this study are as follows:

  1. To what extent does tax incentives redirects the investment pattern of individuals and corporate bodies towards the development of manufacturing industries?
  2. To what extent does inefficiency in administering tax incentive scheme distorts foreign investors to manufacturing industries?
  3. To what extents does tax incentive help in employment generation?
  4. To what extent does most manufacturing industries were unable apply the tax incentives in a flexible manner.

1.4 Research Hypotheses

  1. H0: tax incentives do not redirects the investment pattern of individuals and corporate bodies towards the development of manufacturing industries.
    H1: tax incentives do redirects the investment pattern of individuals and corporate bodies towards the development of manufacturing industries.
  2. H02: manufacturing industries are not able to apply the tax incentives in a flexible manner
    H2: manufacturing industries are able to apply the tax incentives in a flexible manner

1.5 Significance of the Study

This work will be very useful to the government. It will enable the government to know the extent manufacturing industries have been responding to the available tax incentives.Government, through this research could evaluate the profitability of the tax incentives that is whether the revenue in other words, it will enable government to know whether tax investment patterns of individuals and corporate bodies towards the development of manufacturing industries.

This study will also enable government to compare the identify those that are profitable to the Nigerian economy at large.This study will go a long way to sensitize companies and individuals on the existing tax incentives available to the manufacturing industry and their companies to make qualitative investment and tax decision modeled to elevate the organization’s growth patterns.

1.6 Scope / Delimitation of the Study

For the scope if this study, the researcher will restrict himself to the corporation tax incentive available to the manufacturing company in Nigeria. With particular reference to Emenite (NIG) Ltd.As a case study.

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study.

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Finance:

The finance available for the research work does not allow for wider coverage as resources are very limited as the researcher has other academic bills to cover.

1.7 Definition of Terms


According to advanced learner’s Dictionary, the word incentive is “that which incites or rouses a person action”
Therefore, tax incentive, encompasses all the measures adopted by the government to motivate tax payer or manufacturing companies to respond to their tax obligations. This may includes adjustments to tax policy aimed at lessening the effects on an industry.

The taxation of consumption rather than income may, for instance be considered as an incentive by people who believe that tax payers find it more difficult to bear their income tax burden or direct taxes exert a harsher incidence on the tax base. An incentive is created when the government deliberately manipulates the tax system to the advantage of a potential investor or corporate body by adopting favorable tax policies.


According to the award illustrated dictionary (COZA), manufacture is defined as making of articles by physical labour or machinery especially on large scale; branch of such an industry.


The same dictionary defined “industry” as a branch of trade or manufacture, especially one employing much labour and capital infect, manufacturing in general

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, research methodology, definition of terms and historical background of the study.
  • Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to investigate the effect of tax incentive in the development of manufacturing industries in Nigeria.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given.

In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of child abuse.

5.2 Summary

This study which is centred on ascertaining the effect of tax incentives on the development of manufacturing industries in Nigeria, the research questions and hypothesis played a vital role in modeling the focus of the study. With the above background, the following findings were arrived at: Tax incentives have a positive impact on the investment decision of an organization and that tax incentive coupled with political stability stimulate economic growth. That tax incentives usually lead to a reduction in government’s revenue but is compensated with economic development and successful companies. That tax incentives brings about a sustainable working capital for industries and firms. That most of the respondents proved that the incentives granted are not adequate. The incentives attract foreign investors. The incentives can stimulate individuals to incorporate their companies. That full employment could be achieved through the incentive scheme if well implemented. That with the tax incentives granted, local industries could be well equipped to compete with their foreign counterparts in technology and outputs.

5.3 Conclusion

From the results of the findings it can be concluded that Tax incentives alone do not increase GDP growth rate. It was found that there was an inverse relationship between manufacturing sector growth rate and tax incentives.

Though tax incentives may encourage investments in a country, they do not drive economic growth. GDP growth rate is affected by so many other factors as it was shown from the correlation analysis that no one particular factor significantly affects economic growth rates. Therefore, though it has benefits to the business community, it is necessary for the Government to rationalize these incentives to ensure that the country is not losing out on needed resources while at the same time not reaping any benefits for the resources given up.

5.4 Recommendation

The study makes a few policy recommendations that may be effected by the key decision makers. There is need for the government to rationalize the tax incentive schemes in the county. It is important to note that this process has now begun by the government scrapping various tax remission and exemption provisions in the VAT Act, 2013 including the TREO program and it is expected that the intended review of the Income Tax Act will also comprehensively address this issue. This will ensure that the tax incentive scheme is both efficient and beneficial to the economy.

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