The Federal Government has approved a new policy to exempt small businesses, manufacturers, and farmers from paying withholding tax. This move aims to lighten the tax burden on these sectors.
In addition to this exemption, significant changes have been made to the previous tax structure. These include reducing tax rates for businesses with lower profit margins and implementing measures to combat tax evasion.
Announcing this development, Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, stated that President Bola Tinubu has endorsed the country’s updated withholding tax regime. The official gazette confirming these changes is expected to be signed soon.
Oyedele highlighted that the old withholding tax system, in place since 1978, had several shortcomings. These included uncertainty due to its broad application across various transactions, leading to a complex web of taxes. This complexity often resulted in unfair treatment and financial strain on businesses with slim profit margins.
Withholding Tax functions as a method of collecting income tax in advance, with rates ranging from 5% to 10% depending on the transaction type. Businesses are required to file returns by the 21st of the subsequent month. Failure to comply incurs penalties, starting at N25,000 for the first month and increasing by N5,000 for each subsequent month of non-compliance.
The revised withholding tax regime introduces several key changes. These include lower tax rates for businesses operating with smaller profit margins, measures aimed at tackling tax evasion and avoidance, exemptions for small businesses, clearer guidelines on when deductions should occur, and precise definitions of key terms.
Oyedele emphasized, “Withholding tax was initially introduced in Nigeria in 1977 to facilitate early payment of income tax on specified transactions.” However, as the system expanded over the years to cover more transactions, it became more convoluted, posing challenges for many businesses, particularly small and medium-sized enterprises (SMEs).
“As part of ongoing fiscal policy and tax reforms, a new withholding tax regime has been approved to address these challenges,” he continued. “The changes are designed to exempt small businesses from withholding tax obligations, lower tax rates for businesses with tight profit margins, and implement measures to enhance compliance and align with international best practices.”
