The Federal Government of Nigeria has taken a significant step to alleviate the tax burden on small businesses, manufacturers, and farmers by approving an exemption from withholding tax.
This decision marks a major shift in the country’s tax policy aimed at fostering economic growth and reducing compliance costs for smaller enterprises.
Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, announced the approval in a statement shared on his official X handle on Tuesday. Oyedele detailed that the new measures are part of a broader set of reforms designed to improve the tax system and address various challenges of the previous regime.
The withholding tax system, established in Nigeria in 1978, has faced criticism over the years for several issues. As the scope of withholding tax expanded, it became increasingly complex, creating ambiguities and increasing the tax burden on businesses, particularly small and medium-sized enterprises with low profit margins.
The system, which required income tax to be paid in advance based on a percentage of transactions, led to significant compliance challenges and strained the working capital of many businesses. Late filing penalties under the old system included a N25,000 fine for the first month and N5,000 for each additional month of non-compliance.
In his statement, Oyedele explained the need for reform, saying, “Withholding tax was introduced into the Nigerian tax system in 1977 to serve as an advance payment of income tax on specified transactions.” He noted that the expansion of the regime over time resulted in various complications, stating, “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.”
The new withholding tax regime, approved by President Bola Tinubu, includes several key changes. These reforms involve reducing tax rates for businesses with low margins, introducing measures to combat tax evasion and avoidance, and exempting small businesses from withholding tax obligations. Additionally, the regime aims to streamline the tax process by clarifying the timing of deductions and defining key terms more precisely.
Oyedele further elaborated, “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 minimize tax avoidance, ease of obtaining credit and utilization 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.”
This latest reform represents the second of five planned executive orders aimed at reducing inflation and boosting tax revenue in Nigeria. The official gazette for the new withholding tax regime is expected to be signed in the coming days, marking the beginning of this new chapter in the country’s tax policy.
