FG exempts SMEs, farmers, manufacturers from paying withholding tax

As a measure to alleviate the financial strain on companies, the federal government has authorised the exclusion of farmers, small manufacturers, and businesses from paying withholding tax.

It also brought about significant reforms to the prior tax system, including steps to reduce evasion and lower rates for companies with modest margins.

Taiwo Oyedele, who heads the Presidential Committee on Fiscal Policy and Tax Reforms, made the announcement on Tuesday morning via his official X handle. He said that President Bola Tinubu has given his approval to the country’s new withholding tax regime, and that the official gazette is expected to be signed soon after.

He claims that there were a number of problems with the earlier withholding tax system that was put in place in 1978. The expansion of its coverage led to more taxes, which in turn increased ambiguity; there was also unfairness and a burden on the working capital of companies with thin margins.

A withholding tax is a kind of advance income tax collection that deducts a percentage between five and ten percent from a transaction’s total. The following month’s 21st is the deadline for returns. For the first month of non-compliance, the penalty is N25,000; for each consecutive month, the penalty is N5,000.

According to the tax expert, the revised withholding tax regime has several important changes, such as lower rates for low-margin businesses, new safeguards against tax evasion and avoidance, a new exemption for small businesses, more transparency regarding when deductions are valid, and a glossary of important terms.

“We introduced withholding tax into the Nigerian tax system in 1977 to serve as an advance payment of income tax on specified transactions,” according to him.

“Many uncertainties and complexities emerged as the regime grew to encompass more transactions. Compliance became an undue burden for many companies, especially SMEs, and a drain on their working capital.

A new system of withholding taxes has been authorised as part of the continuing revisions to fiscal policy and taxes. Small businesses will no longer be required to comply with withholding taxes, and those with low profit margins will see their rates slashed as part of the major reforms made to address the highlighted difficulties.

There are also “exemptions for manufacturers and producers, such as farmers, and measures to curb evasion and minimise tax avoidance.”

“Clarity regarding the timing of deduction, definition of important terms, and ease of obtaining credit and utilisation of tax deducted at source.”

This most recent green light comes as the second of five anticipated presidential orders aimed at lowering inflation and increasing tax collections.