The Federal Government has approved the exemption of small businesses, manufacturers, and farmers from paying withholding tax, aiming to reduce the tax burden on businesses.
Additionally, significant changes have been introduced to the previous tax regime, including reduced rates for businesses with low margins and measures to curb tax evasion.
Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, announced on his official X handle that President Bola Tinubu has approved the new withholding tax regime. The official gazette is expected to be signed in the coming days.
Oyedele highlighted that the previous withholding tax system, introduced in 1978, faced challenges due to the increasing complexity and number of transactions it covered, leading to multiple taxes, inequity, and straining the working capital of low-margin businesses.
Withholding Tax is a method of collecting Income Tax in advance, deducted at rates ranging from 5% to 10% based on the transaction. Returns are due by the 21st of the following month, with penalties for late filing being N25,000 for the first month and N5,000 for each subsequent month of non-compliance.
Key changes to the new withholding tax regime include reduced rates for businesses with low margins, measures to curb tax evasion and avoidance, exemption of small businesses from withholding tax, and clarity on the timing of deductions and key terms.
Oyedele stated, “Withholding tax was introduced into the Nigerian tax system in 1977 to serve as an advance payment of income tax on specified transactions. As the regime expanded over time to cover more transactions, various ambiguities and complications crept in. This resulted in many businesses, especially SMEs, being exposed to excessive compliance burdens and a strain on the working capital of low-margin businesses.”
He added, “As part of the ongoing fiscal policy and tax reforms, a new withholding tax regime has been approved. The key changes introduced are to address the identified challenges and specifically include the exemption of small businesses from Withholding Tax compliance and reduced rates for businesses with low margins. Other exemptions apply to manufacturers and producers such as farmers, with measures to curb evasion and minimize tax avoidance. Additionally, there are improvements to ease obtaining credit and utilizing tax deducted at source, changes to reflect emerging issues, adoption of global best practices, and clarity on the timing of deductions and definition of key terms.”
This approval is the second of five planned executive orders aimed at reducing inflation and increasing tax revenue.
