10 Major Importance of Taxation in Nigerian Businesses

by Glory Ipadeola
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importance of taxation in nigeria

In recent times, Nigerians have started picking interest in the economic situation and condition of the country. The economic hardship and hikes in prices of goods and services caused by recession and inflation has affected businesses.

The government has also been revising the finance act annually. They’ve taken keen interest in utilising the relationship between tax and business and seeing that it promotes economic growth. 

Amidst the hardships, businesses still pay taxes, which has raised a question among business owners:

“Why are taxes important?”

Of course, taxes are important, but with this question, it is necessary for business owners and executives to know the importance of taxation to their businesses.

What is Taxation?

Taxation is quite different from tax. Taxation is administering and regulating tax in a particular state or country. On the other hand, tax is a compulsory levy imposed by the government on individuals and businesses.

The government does the tax, while individuals (or businesses) pay. Taxation is everything that has to do with the laws and regulations of tax, while tax is what citizens pay.

Even with an understanding of what taxation is, what tax is, and the parties involved, business owners are not satisfied. When they hear about the importance of taxation to businesses in Nigeria, they want answers to the economic hardship.

This is why they keep asking: “Why are taxes important?” “How does it affect my business?”

Why are Taxes Important?

Taxes are important because they create a safe and favourable environment for individuals and businesses. Taxes are also important because they are a key element of a country’s revenue. They are part of what makes the public revenue of the country. Without taxes, the government may not function.

This pool of funds that the government collects from its citizens and businesses is used to ensure economic growth and development (it has a lot to do with the relationship between tax and business). 

However, to achieve this goal, the business environment must be favourable. This implies that the political, economic, sociocultural, technological, ecological, and Legal environment should favour the business one way or another.

Therefore, the importance of taxation to businesses in Nigeria implies economic growth and a good business environment. When business owners and executives see this, they should realise the importance of taxation to businesses in Nigeria and take the right steps – pay taxes.

The Importance of Taxation in Nigerian Businesses

  1. Taxation helps to maintain law and order

We cannot downplay the importance of taxation in maintaining and enforcing a peaceful and safe business environment. The government uses taxes they collect from businesses to fund agencies that will assist in keeping the law of the land and maintaining order. 

The machinery put in place by the government to protect the state from any external or internal aggression needs funding. Taxes help in funding the law enforcement agencies, this gives businesses the room to operate without fear.

Nigerian businesses need protection during this present time because of the incessant kidnapping and armed robberies, taxes help to fund agencies to do their duties.

When there is a peaceful and orderly environment, businesses find it easier to operate. Businesses will not have to operate in fear of an imminent attack. Businesses that pay taxes are entitled to a peaceful environment/work conditions.

  1. Taxation makes the building of infrastructure possible

The government uses tax to construct infrastructure that will make business operations seamless. For example, when the roads leading to a particular company are bad, it discourages people from conducting business with it.

A good road network, landmarks, and other infrastructures will attract customers and do good for the business. Taxes serve as revenue for the governments to execute projects. Businesses can always express their when they don’t see results.

  1. Taxation aids the regulation of trade and business to ensure social and economic balance

We cannot underestimate the importance of taxation when talking about trade and socio-economic balance. Tax laws and regulations ensure that when businesses trade and transact, it does not harm the economy.

Besides that, it also ensures a balance between the taxes paid and the social class. This is because people pay the tax equivalent to their income, regardless of class.

  1. Taxes are used to finance investment in human capital

Business owners will be delighted to know the importance of taxation to human capital development. Taxation is used to build people. Through empowerment schemes and other skill acquisition programmes, people get better at work and are armed with the right skills. So how does it affect the business?

These beneficiaries become treasures to businesses. They get employed or build their enterprise – having been armed with the right, relevant skills make it something that the business should delight in. That is, getting people with industry-ready skills that are relevant. 

  1. Taxation helps to redistribute income in a country

Taxation is used to control the flow of money in a country. Individuals and businesses transact and exchange money. Money is passed on from place to place, and person to person, meaning money flows within a country differently. The government can use taxation to control where it goes and how it does so.

With taxation, income generated by businesses doesn’t stay in one place. Instead, the government redistributes the income to other areas of the economy to balance and ensure that poorer or less income-generating sectors have access to funding and other infrastructures.

Read Also: Understanding Business Ethics and Corporate Social Responsibility

  1. Taxes help in funding technology

The sector must have the right resources in a country where technology is on the rise and is creating our simple solution. With taxation, the government can pool funds, and the taxes that businesses pay can be used to fund technology and help alleviate the challenges that business owners may encounter.

The taxes are also used to fund research that will aid the invention of technologies that will make business operations seamless.

Business owners and executives that benefit from technology will realize the importance of taxation to their businesses.

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  1. Taxation is used to maintain a good GDP as compared to other countries

One major importance of taxation is that it helps to generate revenue for the state. Tax is a good source of revenue for the government and contributes to a country’s national income.

In addition, of course, national income makes for a good index in the international space. Hence, taxation contributes indirectly to the GDP of a country.

Moreover, when businesses pay taxes, it attracts other businesses that could ease their burdens and competition, making room for innovation.

  1. Taxation facilitates the structures to help business owners and provide business funding

Taxation is used to support business owners and businesses. When businesses have access to and support from the government, they thrive more and can solve problems better.

We can also sense the importance of taxation when it supports private and non-governmental projects aimed at putting things in place to create a more favourable business environment.

Read Also: Business Reputation Management for Nigerian Business Owners

  1. Taxation aids the funding of education in Nigeria

Education is one of the major pillars of economic growth, and a country’s education level says a lot about them. Therefore, businesses will regard the importance of taxation in preparing an environment that produces great talents. 

When businesses pay taxes, they indirectly boost the sector and contribute to the country’s political atmosphere. Taxes are collected specifically for the educational sector. Therefore, businesses should endeavour to pay them.

  1. Taxation is a tool for political stability

Taxes help with the government’s running expenditures and are also a tool for political stability. Businesses and individuals who pay taxes are used to oil the gears of governance and keep away threats to the political environment. When the affairs of a state are fairly stable, the country becomes a safe place for investors.

It will keep the business environment favourable. Business operations are threatened in a situation of political unrest and instability. To highlight the importance of taxation to businesses in Nigeria, the government has to leverage the link between tax and business.

How do Businesses Pay Taxes in Nigeria?

In Nigeria, all employed individuals and companies are mandated to pay taxes. However, businesses in Nigeria often shy away from paying taxes because they don’t know their importance. Businesses should know the types of taxes they should pay.

The Federal, state, and local governments collect different types of taxes, which are collected by the internal revenue services.

What are the types of taxes paid by Nigerian businesses?

  1. Companies Income Tax

This is an annual tax on registered businesses in Nigeria. It is usually received by the Federal Internal Revenue Service (FIRS). This tax is chargeable to all companies except petroleum companies. If your company’s profit exceeds 25 million naira, you will have to pay 30% of the gross profit.


Lagoon Constructions makes a profit of 120 million naira in 2022. Their auditors must have checked the accounts before deciding the payment. With the right calculation, they are expected to pay 36 million to the government as companies income tax (CIT). Lagoon Construction is not only paying the tax but also contributing to the country’s growth.

Companies that do not have a turnover of 25 million are exempted from this tax.

  1. Capital Gains Tax

This tax is imposed on the sale of a physical asset. 10% is paid to the government when the investor sells an asset for a higher price.

  1. Education Tax Fund

This is a chargeable tax on businesses as a contribution to the education trust fund. Companies are mandated to pay 2% of their profits to support the education sector.

  1. Value Added Tax (VAT)

This is a tax placed on goods and services. Consumers pay these taxes, they pay an added 7.5% to the goods and services. Companies don’t pay this but act as agents of the government by remitting the tax to them.

  1. Personal Income Tax

This is a tax imposed on workers. Individuals who work for the government have their taxes removed before they are paid monthly wages. Businesses must include the Pay As You Earn policy and remit the taxes to the government.


Knowing the difference between tax and taxation makes you agree that you know the answer to this popular question: “Why are taxes important?”

An enabling business environment will be almost impossible without all these benefits. This is because tax and business go hand in hand to promote a country’s economy.

While the government works to link tax and business to economic growth, businesses must also agree to pay taxes. This promotes economic growth and increases their chances of thriving in any endeavour.

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