FG exempts small businesses, farmers, others from withholding tax

The federal government has approved exemptions of tax at source for manufacturers, small businesses and farmers in its renewed effort to promote an effective tax administration,.

The new withholding tax regime will ease the burden of businesses through reduction of rates and eradication of multiple taxes and tax inequity.

This is known in a statement made available by Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee on his X handle on Tuesday.

Oyedele stated that withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions.

He added that it was designed to provide the government with regular revenue flow and to serve as a means of curbing tax evasion.

According to him, as the regime expanded over time to cover more transactions, various ambiguities and complications crept in, resulting in many businesses, especially SMEs, being exposed to excessive burden of compliance.

Among some of the challenges were obtaining refunds for excess withholding tax, lack of exemption threshold and promotion of tax inequity.

However, the new withholding tax regime aims to exempt small businesses from withholding tax compliance while reducing rates for businesses with low margins.

Oyedele stated that the reforms would allow “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”.

He noted the approved regulation is expected to be published in the official gazette soon.

Withholding tax, often referred to as retention tax, is an amount withheld by the payer (usually an employer or a financial institution) from payments made to another party (typically an employee or an investor).

This withheld amount is then remitted directly to the government on behalf of the recipient. It’s commonly applied to income such as wages, dividends, interest, and royalties, ensuring that taxes are collected at the source rather than relying on recipients to pay taxes separately.