Reinvestigating the Impact of Taxation on Manufacturing Output in Nigeria.

Abstract

Despite being a key determinant in the promotion of industrialisation, job creation and economic diversification, the manufacturing sector has failed to live up to expectations due to its poor performance. This study, however, re-investigated the impact of Company Income Tax and Value Added Tax on manufacturing output in Nigeria, controlling for inflation, using annual time-series data spanning 1986–2023. The study employed the Autoregressive Distributed Lag (ARDL) modelling approach because the variables exhibited a mixed order of integration, as confirmed by the Augmented Dickey–Fuller unit root test. The ARDL bounds test established the existence of a long-run equilibrium relationship among the variables, while the error correction model captured the short-run dynamics. The empirical findings indicate that Company Income Tax (CIT) exerts a positive and statistically significant long-run impact on manufacturing output (β = 0.5555, p < 0.01), suggesting that corporate tax revenue can
promote manufacturing output when efficiently utilised for productive public investment. In contrast, Value Added Tax (VAT) has a negative and statistically significant long-run impact (β = -0.3221, p < 0.01), implying that persistent increases in Value Added Tax raise production costs and reduce manufacturing competitiveness. Inflation exhibits a negative but statistically insignificant long-run impact (β = -0.4172, p = 0.1396). Based on the findings, this study recommended strengthening fiscal accountability to ensure that Company Income Tax revenue is efficiently invested in productive infrastructure, restructuring the Value Added Tax system
to reduce its burden on manufacturers through targeted tax exemptions, improving tax administration to lower compliance costs, and maintaining macroeconomic stability to foster a more conducive environment for sustainable manufacturing growth.