The Federal Government has approved the exemption of small businesses, manufacturers, and farmers from paying withholding tax as part of efforts to reduce the tax burden on businesses.
This decision introduces significant changes to the existing tax regime, including reduced rates for businesses with low margins and measures to curb tax evasion.
The development was made known on Tuesday by Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, who 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 explained that the previous withholding tax system, introduced in 1978, faced challenges such as ambiguity and an expanded scope that increased the list of multiple taxes and created inequities. This strained the working capital of businesses with low margins.
Withholding Tax, a method of collecting Income Tax in advance, is deducted at rates ranging from 5% to 10% based on transactions. Returns are due by the 21st of the following month, with penalties for late filing set at N25,000 for the first month and N5,000 for each subsequent month of non-compliance.
Key changes to the rewritten withholding tax regime include reduced rates for businesses with low margins, measures to curb evasion and tax avoidance, and the exemption of small businesses from withholding tax. The new regime also provides 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, various ambiguities and complications crept in, resulting in excessive compliance burdens for many businesses, especially SMEs, and straining the working capital of low-margin businesses.”
He added that the new withholding tax regime aims to address these challenges by specifically exempting small businesses and providing reduced rates for businesses with low margins.
Other changes include exemptions for manufacturers and producers such as farmers, measures to curb evasion and minimise tax avoidance, ease of obtaining credit and utilising tax deducted at source, updates to reflect emerging issues and global best practices, and clarity on the timing of deductions and definitions of key terms.
This latest approval is the second of five planned executive orders aimed at reducing inflation and growing tax revenue.