FG Exempts Small Businesses, Manufacturers, Farmers From Paying Withholding Tax

In order to reduce the tax burden on businesses, the Federal Government has approved the exemption of small businesses, manufacturers and farmers from paying withholding tax.

This was disclosed in a statement on the official X handle of the Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, on Tuesday.

He noted that the government has also introduced key changes to the previous tax regime such as reduction of rates for businesses with low margins and measures to curb evasion.

According to Oyedele, President Bola Tinubu has given his approval for the country’s new withholding tax regime, and the formal gazette is anticipated to be signed in the near future. He said that there were issues with the previous withholding tax system, which was implemented in 1978. 

These included uncertainty resulting from the rise in transactions covered by the system, which led to an increase in the number of taxes, unfairness, and a burden on the working capital of companies with thin profit margins.

Withholding tax is a technique for pre-collection of income tax, with deductions made at different rates depending on the transaction, ranging from 5% to 10%. The next month’s returns are due 21st.

The first month’s penalty for filing late is N25,000, and the penalty for each further month of non-compliance is N5,000. Oyedele went on to say that the revised withholding tax regime has several significant modifications, such as lower rates for companies with thin profit margins, steps to stop tax evasion and avoidance, exemptions for small firms from withholding tax, clarification on the timing of deductions and important terms, etc.

He stated, “Withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions.”

“As the regime expanded over time to cover more transactions, various ambiguities and complications crept in. This resulted in many businesses, especially SMEs, being exposed to excessive burden of compliance and a strain on the working capital of low-margin businesses.

“As part of the ongoing fiscal policy and tax reforms, a new withholding tax regime has been approved. The key changes introduced are to address the identified challenges and specifically include the exemption of small businesses from Withholding Tax compliance and reduced rates for businesses with low margins.

“Exemptions for manufacturers and producers such as farmers, measures to curb evasion and minimise tax avoidance.

“Ease of obtaining credit and utilisation of tax deducted at source, changes to reflect emerging issues and adopt global best practices and clarity on the timing of deduction and definition of key terms.”

The executive order that was just approved is the second of five that are intended to lower inflation and increase tax income.