FG Exempts Electricity Companies from Withholding Tax Payments

The Federal Government has announced that all electricity companies, including generation and distribution companies (GenCos and DisCos), are now exempt from withholding tax payments.

This change is outlined in the new withholding tax regulation signed by Wale Edun, the Minister of Finance.

Effective from July 1, 2024, the revised withholding tax regulation was proposed by the tax and fiscal policy committee led by Taiwo Oyedele, the chairman of the committee.

The document categorizes electricity and gas companies as part of the “manufacturing” and “production” sectors, thereby exempting them from withholding tax.

The document’s Interpretation section provides several key definitions. It specifies that “the Act” refers to the Capital Gains Tax Act, Companies Income Tax Act, Petroleum Profits Tax Act, or the Personal Income Tax Act.

An “across-the-counter transaction” is defined as any transaction conducted without a formal contractual relationship, where payment is made immediately in cash or electronically. “Connected persons” is defined according to the Income Tax (Transfer Pricing) Regulations 2018.

Additionally, “manufacturing” or “production” includes assembling a final product or creating a part/component using raw materials or other inputs, including labour and production overheads. For these regulations, energy production—including electricity, gas, and petroleum products—is classified as manufacturing.

Withholding Tax (WHT) serves as a prepayment of Income Tax, deducted at rates between 5 percent and 10 percent, depending on the type of transaction, according to the Federal Inland Revenue Service (FIRS). Introduced in 1977, WHT was initially aimed at advancing income tax payments on specified transactions.

However, Oyedele explained that over the years, the withholding tax regime had expanded and become increasingly complex, creating ambiguities around compliance, eligible transactions, applicable rates, and remittance timing.

The newly approved regime seeks to simplify these complexities and introduces several important changes. One notable change is the exemption of Small and Medium Enterprises (SMEs) from withholding tax compliance, reducing their administrative burden and allowing them to focus on growth.

According to Oyedele, these adjustments aim to provide the government with a steady revenue stream while curbing tax evasion, making the tax system more efficient and less burdensome for businesses.

This exemption for the electricity and gas sectors is expected to have a significant impact on Nigeria’s energy industry, potentially lowering operational costs for DisCos and encouraging further investment in the sector.