Nigerian Government Approves Withholding Tax Exemptions for Manufacturers, SMEs, and Farmers

In a move to enhance tax administration and stimulate economic growth, the Nigerian federal government has approved exemptions from tax at source for manufacturers, small businesses, and farmers.

This new withholding tax regime is designed to alleviate the tax burden on businesses by reducing rates and eliminating multiple taxes and tax inequity.

This significant policy shift was announced by Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, via his X (formerly Twitter) handle on Tuesday. Oyedele explained that the withholding tax system, introduced in 1977, initially served as an advance payment of income tax on specified transactions. It was intended to ensure a steady flow of revenue to the government and to curb tax evasion.

However, over time, the withholding tax regime expanded to cover more transactions, leading to ambiguities and complications. These complexities have particularly burdened small and medium-sized enterprises (SMEs), which have faced excessive compliance challenges, such as difficulties in obtaining refunds for excess withholding tax and the lack of exemption thresholds, which promoted tax inequity.

Background: The Tax Reform Committee

The Presidential Fiscal Policy and Tax Reforms Committee was established last year as part of the government’s broader efforts to eliminate multiple taxation and promote ease of doing business in Nigeria.

The committee’s mandate includes reviewing the existing tax framework, identifying areas for reform, and making recommendations to streamline tax processes. This initiative aligns with the government’s commitment to improving the business environment and fostering economic growth.

Key Features of the New Withholding Tax Regime

The revamped withholding tax regime aims to address these issues by exempting small businesses from withholding tax compliance and reducing rates for businesses with low margins. According to Oyedele, the new regime includes several key reforms:

1. Exemptions for Manufacturers and Producers: Farmers and other producers will benefit from tax exemptions, which are expected to promote growth in the agricultural sector and manufacturing industries.
2. Evasion and Avoidance Measures: New measures will be implemented to curb tax evasion and minimize tax avoidance, ensuring a more equitable tax system.
3. Ease of Obtaining Credit: The reforms will simplify the process of obtaining credit and utilizing tax deducted at source, making it easier for businesses to manage their finances.
4. Global Best Practices: The new regime will incorporate changes to reflect emerging issues and adopt global best practices, ensuring Nigeria’s tax system remains competitive and fair.
5. Clarity and Definition: There will be clearer guidelines on the timing of deductions and definitions of key terms, reducing ambiguities and making compliance easier for businesses.

Oyedele noted that the approved regulation would soon be published in the official gazette, formalizing the new withholding tax regime. This publication will provide detailed guidelines and further clarity on the implementation of the reforms.

Understanding Withholding Tax

Withholding tax, also known as retention tax, is an amount withheld by the payer (such as an employer or financial institution) from payments made to another party (such as an employee or investor). This withheld amount is then remitted directly to the government on behalf of the recipient. It is commonly applied to income sources such as wages, dividends, interest, and royalties, ensuring that taxes are collected at the source rather than relying on recipients to pay taxes separately.

Challenges Ahead

While the intention behind these reforms is widely applauded, significant challenges remain. One of the most pressing issues is that many of the taxes paid by small businesses are imposed and enforced by non-state actors. These actors, often operating with the backing of local authorities, have created a parallel tax system that places an additional burden on businesses in the informal sector.

Over the years, there has been a lack of political will to address this trajectory. The entrenchment of these non-state actors in the tax collection process means that even with the federal government’s reforms, businesses may still face multiple and often illegal tax demands. Many believe that the presence of these non-state actors complicates the government’s efforts to streamline tax administration and promote ease of doing business.

Against this backdrop, many believe that the success of the new withholding tax regime will depend not only on the reforms themselves but also on the government’s ability to enforce these changes and eliminate the influence of non-state actors in the tax system.