Federal Government Approves New Business-Friendly Withholding Tax Regime

The chairman of the presidential fiscal policy and tax reforms committee, Taiwo Oyedele, announced on Tuesday that the federal government has approved a new business-friendly withholding tax regime.

The announcement was made via his official X handle, and highlighted the changes meant to reduce the administrative burden on businesses, especially small and medium enterprises (SMEs) and farmers.

"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," he wrote on social media before listing the details of the new tax regime.

1. Exemption of small businesses from Withholding Tax compliance.

2. Reduced rates for businesses with low margins.

3. Exemptions for manufacturers and producers such as farmers.

4. Measures to curb evasion and minimize tax avoidance.

5. Ease of obtaining credit and utilization of tax deducted at source.

6. Changes to reflect emerging issues and adopt global best practices.

7. Clarity on the timing of deduction and definition of key terms.

The Federal Inland Revenue Service (FIRS) explained that the Withholding Tax (WHT) acted as an advance payment of income tax, deducted at rates ranging from 5% to 10%, depending on the transaction.

Businesses are required to submit returns by the 21st of the following month, with penalties set at N25,000 for the first month of late filing and N5,000 for each subsequent month.

Oyedele mentioned that the WHT was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions, adding that it was designed to provide the government with regular revenue flow and to serve as a means of curbing tax evasion.

However, it faced various challenges, including many businesses, especially SMEs, being exposed to the excessive burden of compliance and a strain on the working capital of low-margin businesses.

Businesses with low-profit margins will see benefits from lower withholding tax rates, which will help ease financial strains. The new regime also introduces exemptions tailored for manufacturers and producers, including farmers, to support the agricultural sector.

Vice President Kashim Shettima in May explained that the President Bola Ahmed Tinubu-led administration wanted to revamp Nigeria's tax system rather than overburden the citizens.

Earlier this year, FIRS rejected the bill that suggested additional taxes on business owners to raise funds for Child's Online Access Protection.