Impact of Taxation on Business Profitability in Nigeria

Abstract

Taxation is universally recognized as a fundamental fiscal instrument for revenue generation and wealth redistribution. However, its implications for profitability remain debatable, particularly in developing economies such as Nigeria where businesses face operational challenges. This study investigates the relationship between tax obligations and profitability of Nigerian firms using a mixed-methods approach. Quantitatively, it employs panel regression analysis on a dataset of 50 listed firms covering 2013 to 2023 to assess how direct and indirect taxes (Corporate Income Tax and VAT) impact profitability proxies (Return on Assets and Net Profit Margin). Qualitatively, semi-structured interviews with tax and finance managers provide insights into strategic responses to tax burdens and operational challenges. Results reveal a significant negative relationship between tax burdens and profitability, as both data sources highlight that high taxes limit reinvestment and growth opportunities. The study concludes that while taxation is critical to government revenue, excessive tax rates may harm business sustainability. Policy recommendations therefore emphasize tax reforms that balance fiscal needs with private sector growth. This study empirically investigates the relationship between tax obligations and the profitability of Nigerian firms across diverse sectors between 2013 and 2023. Using a balanced panel dataset of 50 firms listed on the Nigerian Stock Exchange (NSE), the study applies robust econometric techniques, including descriptive statistics, correlation analysis, and fixed-effects panel regression models. The research focuses on both direct taxes (Corporate Income Tax) and indirect taxes (Value Added Tax), examining their separate and combined effects on key profitability proxies such as Return on Assets (ROA) and Net Profit Margin (NPM). The results reveal a statistically significant negative relationship between tax burdens and firm profitability. Specifically, higher effective tax rates and VAT payments are found to exert downward pressure on firms’ profit margins and overall returns on assets. These findings support the hypothesis that excessive taxation can dampen business performance, particularly in environments characterized by limited fiscal incentives and high cost of doing business. The implications of these findings are profound, suggesting the need for policymakers to balance revenue generation objectives with tax policies that foster private sector competitiveness and economic resilience. In conclusion, this study contributes to the growing body of knowledge on taxation and corporate performance in emerging markets, providing empirical evidence from Nigeria and offering policy recommendations aimed at achieving a more efficient and growth-friendly tax regime.