The Federal Government has approved an exemption from paying withholding tax for small firms, manufacturers, and farmers. This move is part of a larger series of improvements aimed at reforming the tax system, including lower rates for low-margin enterprises and steps to combat tax cheating.
Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, announced on his official X handle on Tuesday morning that President Bola Tinubu has approved the new withholding tax regime. The official gazette formalizing these changes is expected to be signed in the coming days.
Oyedele highlighted that the previous withholding tax system, introduced in 1978, had become problematic due to the increased number of transactions it covered. This expansion led to multiple taxes, inequity, and strained the working capital of businesses with low margins.
“Withholding Tax is a method of collecting Income Tax in advance, deducted at rates ranging from 5 to 10 percent based on the transaction,” Oyedele explained. “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.”
The newly approved withholding tax regime introduces several key changes to address these challenges. The reforms include reduced rates for businesses with low margins, measures to curb evasion and tax avoidance, and exemptions for small businesses, manufacturers, and farmers. Additionally, the new regime provides clarity on the timing of deductions and definitions of key terms.
“Withholding tax was introduced into the Nigerian tax system in 1977 as an advance payment of income tax on specified transactions,” Oyedele noted. “Over time, as the regime expanded to cover more transactions, ambiguities and complications emerged. This resulted in many businesses, especially SMEs, being exposed to excessive compliance burdens and strained working capital.”
He continued, “As part of the ongoing fiscal policy and tax reforms, the new withholding tax regime has been approved. The key changes are designed to address the identified challenges and include the exemption of small businesses from withholding tax compliance and reduced rates for businesses with low margins. Other changes include exemptions for manufacturers and producers, such as farmers, measures to curb evasion, and minimize tax avoidance.”
The updated regime also aims to ease the process of obtaining credit and utilizing tax deducted at source, reflect emerging issues, adopt global best practices, and provide clarity on the timing of deductions and definitions of key terms.
This latest approval marks the second of five planned executive orders intended to reduce inflation and grow tax revenue. The Federal Government’s comprehensive approach seeks to create a more equitable and efficient tax system that supports economic growth and development.
