Impact of Taxation on Manufacturing Sector Output in Nigeria

Abstract

This study explores the impact of taxation on manufacturing sector output in Nigeria from 1994 to 2023, using the Autoregressive Distributed Lag (ARDL) bounds testing approach to uncover both short-run and long-run dynamics. Drawing on secondary data from the Central Bank of Nigeria, National Bureau of Statistics, and the Federal Inland Revenue Service, the analysis focuses on direct and indirect impact of taxation on manufacturing sector output using four key tax types: Petroleum Profit Tax (PPT), Company Income Tax (CIT), Value Added Tax (VAT), and Personal Income Tax (PIT). Anchored in the Laffer curve theorem which suggests a non-linear relationship between tax rates and economic performance, the study examines whether Nigeria’s tax policies have supported or hindered manufacturing sector’s growth. The findings reveal that PPT significantly boosts manufacturing output in both the short and long run, highlighting the developmental value of resource-based revenues. CIT shows a positive influence in the short run but turns negative and statistically insignificant in the long run, suggesting that prolonged high corporate taxes may discourage industrial growth. VAT and PIT, although showing some long-run influence, were not statistically significant. Based on these insights, the study recommends a rebalancing of tax policy especially optimizing petroleum profit tax utilization, reform corporate tax structure to reduce burdens, reassess the design and administration of value added tax and balancing personal income tax rates to safeguard demand and productivity. By blending empirical evidence with theoretical insight, this research adds to the fiscal policy discourse in developing economies and offers a valuable framework for rethinking Nigeria’s tax strategy in support of sustainable industrial development.