Withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions.
The President Bola Tinubu-led Nigerian government through the Presidential Committee on Fiscal Policy and Tax Reforms, has announced the gazetting of the new Deduction of Tax at Source (Withholding) Regulations, 2024.
The Chairman of the tax reforms committee, Taiwo Oyedele, who made this known on Wednesday said that the new tax withholding regime (Regulations) granted rates reduction and full exemption from Withholding Tax to small businesses, including SMEs and manufacturers and producers like farmers, with annual turnover not exceeding N25 million.
Withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions.
It was designed to provide the government with regular revenue flow and to serve as a means of curbing tax evasion.
Oyedele stated that 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 an excessive burden of compliance and a strain on the working capital of low-margin businesses.”
He said that other unintended consequences include ambiguities regarding persons required to comply, eligible transactions, applicable rates, and timing of the obligation for remittance, among others.
Others are treating the deduction as a separate tax, thereby adding to the list of multiple taxes and cost of doing business; challenges regarding obtaining refunds for excess withholding tax; lack of exemption threshold making the cost of compliance by taxpayers and cost of enforcement by the tax authority uneconomical; some emerging and contemporary issues are not properly addressed, and the overall structure of the withholding tax regime promoted tax inequity.
He however noted that 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: Exemption of small businesses from Withholding Tax compliance. 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. Clarity on the timing of deduction and definition of key terms.”
Oyedele added, “The commencement date of the new Regulations is 30th September 2024, while implementation begins on 1st January 2025 to allow for a minimum of 90 days notice required for tax changes in line with the 2017 National Tax Policy.
“However, there is a provision permitting the FIRS (Federal Inland Revenue Service), with the approval of the Finance Minister, to issue guidelines for the implementation of the Regulations and where appropriate, permit early application of the Regulations from 1st July, 2024.
“The essence of this provision is to enable persons who wish to adopt the Regulations early to do so given that it is generally providing reliefs to businesses rather than imposing a burden.”