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The year 1926 was a year of depression-slack in overall economic activities in Britain which led to decline of the total earnings of the economies, shortage of fund in the private sector and reduction in income per capita in Britain.

It was at this juncture that the economic world formulated various fiscal policies. The main and prime objective of these policies was to revive, rehabilitate and mobilize enough capital to provide for economic and social expenses and to raise the crunched standard of living of citizens. It was this period that the term, Fiscal Policy called TAXATION came into existence. 

The direct taxation in its reformed pattern was introduced in Nigeria in 1904 by Lord Lugard, the then British High commissioner for Northern Nigeria with the issue of the land revenue proclamation for Northern Nigeria. In other words, income tax was introduced into Nigeria in 1904 and that was when community tax became very operative in Northern Nigeria. 

It is important to realize that the present tax laws in Nigeria were developed or formulated from the Raisman’s commission of enquiry of 1957. Before now, there were the income tax ordinances for colonies and which was rather common in all the colonies and the provisions were similar. Raisman’s recommendation was the basis for providing in section 70; subsection 1 of the Nigerian constitution Order in council of 1960 which conferred an exclusive power on parliament to make for Nigeria or any part thereof with respect to personal income tax.

In exercise of these powers, the Federal Government enacted the Income Tax management Act, 1961 (ITMA) on April 1. But before ITMA, Lagos territory was being administered as a region and the personal income tax (Lagos) Act, 1961 was enacted for it separately. But when ITMA ’61 came into operation, all the other regional laws on taxation were amended to bring them into conformity with federal law.

As previously mentioned, the earliest trace of any form of direct taxation in

Nigeria according to Ezejelue (1981:33) even before the British administration “was in Northern Nigeria” it was relatively easy to introduce the reformed system in the North because the tax-paying tradition had already been established there. Unlike the South, the North had a form of organized central administration under the Emirs. The spirit of Mohammedanism which made it possible for people to contribute towards charity, afforded a religious foundation for direct taxation in the North.

This tradition of direct taxation found expression in a number levies and forms of taxes existing in the North long before 1914.

These included in Zakat, Kurdin Kassa, Shukka Shukka, Jangeli and Kharat which according to Mrs. Iheduru were grain tax, agricultural tax, plantation tax, livestock, and community tax respectively.

According to Okigbo (1955:80) they were so varied, perplexing and complex that in the 1880’s the problem as seen by the Royal Niger Company (RNC) was not how to introduce new tax forms but how to simplify the existing forms. 

All this time, southern Nigeria was separately administered until 1914 when North and South were amalgamated. It was not easy to impose direct taxation on the south. They resisted it until after some experiments, the native Revenue Ordinance of 1917 was grudgingly accepted in the western providences of the South in 1918.

Discussions were held in 1924 and 1925 to find ways and means of modifying the ordinances I its application in the Igbo taste. Since there were no traditional natural rulers like in the North and some areas in the West that could be used in revenue matters. Suspicions and oppositions wee evoked over the issue of nominating warrant chiefs by the government.

In Aba, Calabar, and Owerri, there was riot that were in attempt to resist taxation. Particularly in Aba in the then Eastern Region the women’s riot was of such a dimension that a probe was instituted to look into the causes, though government finally succeeded in extending the Native Revenue Ordinances in amended form to Eastern providences in 1928.

Taxation is divided into two (2) viz:

i.             Direct taxation and ii.             Indirect taxation

i. Direct taxation

This is based on the ascertainment of income and assessment of income either on individual, a group of individuals, corporate bodies and institutions. This is a tax paid to the state for the maintenance of government as well as its services and not just for a specific service rendered to the payers.

Again the direct taxation is further divided into two viz:

1.     Personal income tax and

2.     Companies income tax 

The personal income tax is assessed and collected by the state from those individuals resident in the state. While the companies income tax is charged on corporate bodies and it is the responsibility of Federal Board of Inland Revenue (FBIR). ii. Indirect tax can come in the following types:



Sales or Purchases now replaced by Value Added Tax (VAT). 

Buying and selling

Entertainment tax


Excise Duty


Airport tax


With the clear understanding of what taxation is all about, we can now go ahead to mention the tax incentives enjoyed by companies and individuals whose profit or income is accruing in, derived from, brought into or received in Nigeria.

The incentives are:

•         Personal Allowance

•         Investment Allowance

•         Capital Allowance

•         Loss Relief

•         Roll over Relief

•         Pioneer Relief

•         Exploration Incentives.

Tax incentives policy is guide by the following legislation enacted in Nigeria:

 Industrial Development Income tax relief Act 1971.

 Income Tax Management Act 1961 as amended.

 Capital gains Tax Act 1979.

 Companies Income Tax 1979 as amended  Capital Transfer Act 1979.

 Petroleum Profit Tax Act 1959 as amended.

It is pertinent to point out that individuals, corporate bodies engage in tax evasions and tax avoidance. This is an attempt to pay less or avoid tax completely.

Ezejelue  (1981:19) asserted that in view of the compulsory nature of, and strong aversion to tax payment, efforts must be constantly made to make any tax system as attractive and as convenient as possible.




NIGERIA” clearly attempts to determine the level or extent the tax incentives (as a fiscal policy measure) will be used to re-direct the investment pattern of individual and corporate bodies and how this has contributed to growth and industrial development of Small and Medium Scale Organisations.

According to Crowningshield and Gorman (1982:72) “taxes being cash disbursement are capable of playing an important role in investment decision by influencing the quantum and the timing of cash flow”.

In view of this, presence of tax incentives is assumed to be a motivator, expense relieving-syndrome and also a kind of encouragement to the investors, and corporate bodies, to boost their investment scope.

So the problem for this research work is to ascertain if the available tax incentives in Nigeria, particularly as regards to small and medium scale have achieved its objectives.


Investment is a function of savings that is:

I= f (S? G, etc)


                 I    =   Investment

                 S   =   Savings  

                   G   = Government expenditure

William (1990:15) affirmed that taxes have drastic reduction effect on profit, wealth, disposal income, capital budgeting, in fact, the over ally investment decision. So the exemption leads to rise in the investment level and stimulates capital formation.

Therefore, the objectives of the study are as follows:

-  To ascertain if the available tax incentives given to industries enhances and motivate their investment.

-  To ascertain the relationship that exist between tax incentives and investment. - To evaluate the impact of the tax incentives with the quality of products produced by industries.

-  To determine how these incentives schemes motivate companies to establish industries which will create employment opportunities.

-  To show how these incentives schemes are helping the existing industries and companies in expanding their areas of operations.

-  To ascertain the adequacy of the available incentives to industrial growth.

-  To offer some solutions to any problem discovered in the above objectives.   


1.            What are the effects of tax incentives in the productive assets, investment patterns and capital formation of small and medium scale industries?

2.            What are the impacts of tax incentives on the employment and investment levels of small scale industries?


To be able to examine adequately the effects of tax incentives in growth and development of small and medium scale industries with three selected firms in the state, the researcher has formulated the following hypothesis and is given in their null form in accordance with university directives:


Tax incentives given to small scale industries have negative influence on the investment patterns and capital formations of small and medium scale industries.


Tax incentives available to small scale industries are not enough to motivate and stimulate the industries to invest or expand their existing investment and employment level.


The Nigerian tax regulations are too wide and vary according to the analyst area of interest. No study of this nature can afford to test all the tax laws. For this reason, only Company Income Tax Act (CITA) 1979 as amended will be analyzed.

However, mention will be made of other tax laws where necessary. Also, since the field of investment and development is too vast. This study will focus on growth and development of small and medium scale manufacturing industries in Nigeria.


Tax incentive scheme is a strong fiscal measure as well as industrial and       economic policy for which there exist so many competing alternatives.

On this note, the completion of this research work shall prove useful to the following:

a.     Government

b.     Business organizations

c.      Academics

d.     Researcher.

a.     Government: This research work will help government to know the impact of incentives grant to individuals and corporate bodies. That is, since tax incentives constitute an opportunity cost, the research work will help the government to know the best alternative and its corresponding benefits.

b.    Business Organizations: This work will help these organizations or investors to know the available incentives thus encourage them in their investment pattern.

c.      Academics: This study will help academics in understanding the effects of tax incentives and the effectiveness of its administration . It will also go a long way to serving as a basis for further research.

d.    Researcher: This is a course requirement, a study in partial fulfillment for the award of Master’s Business Administration (MBA) in Accountancy.


Sidney (1991:12) in his study observed that people tend to be unnecessarily fast, tricky and at times crafty when it comes to the area of paying tax. Taxation is a sensitive issue; it is not easy to get some vital information. Most industries are tax averters. Some pay tax but they do not reveal accurate profit; some do not reveal/present their actual profit in their annual financial statement. So their responses to questions are biased.  

The core of all the limitations is:

Difficulty in getting at the companies audited financial statements.

1.9  Definition of Terms:

You either get what you want or your money back. T&C Apply

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