CEM REPORT, FINANCE | The Federal Government is proposing significant changes to Withholding Tax (WHT) regulations, aiming to simplify compliance and ease the burden on businesses.
The Presidential Committee on Fiscal Policy and Tax Reforms, led by Chairman Taiwo Oyedele, revealed this at a public consultation workshop in Lagos to discuss the proposed modifications to the National Tax Policy.
Withholding Tax (WHT)
Withholding Tax is a system where a portion of income is deducted at the source, acting as an advance payment of income tax. While intended to streamline tax collection, Oyedele acknowledged the complexities of the current WHT system in Nigeria.
“We found withholding tax to be the most challenging for businesses to comply with due to its complexity,” he stated.
He elaborated on the committee’s goals for reforming WHT regulations:
“Our objectives include simplifying the tax system, reducing the burden on businesses, and promoting competitiveness, equity, and ease of compliance. We also want to deter tax avoidance and detect tax evasion while aligning with global practices.”
Relief Measures for Manufacturers, Farmers, and Small Businesses
The proposed reforms offer significant relief for specific sectors. Oyedele announced a complete exemption from WHT for manufacturers.
“We have created an exemption for manufacturers – so if you’re a manufacturer, don’t worry about withholding tax,” he declared.
This move aims to boost the manufacturing sector, a critical driver of economic growth and job creation.
Farmers, who provide essential inputs to manufacturers, will also benefit. “If you provide input to manufacturers like farmers, don’t worry about withholding tax,” Oyedele confirmed.
This exemption recognizes the vital role farmers play in the manufacturing value chain and seeks to incentivize increased agricultural production.
Breakdown of Exempting Sectors
The proposed reforms offer substantial relief for specific sectors. Oyedele outlined key changes:
Exemption for Manufacturers: Businesses engaged in manufacturing will be entirely exempt from Withholding Tax.
Exemption for Farmers Supplying Manufacturers: Farmers who provide inputs to manufacturers, a crucial part of the supply chain, will also benefit from a WHT exemption.
Reduced Rates for Real Businesses: Recognizing the often-slim margins of legitimate businesses, the committee proposes a significant reduction in WHT rates to as low as 2% for companies producing goods and services.
Exemption for Small Businesses: Businesses with a turnover below N50 million will be exempt from Withholding Tax altogether. This exemption aims to ease the tax burden on smaller players in the economy.
Oyedele emphasized the imminent implementation of these changes, stating, “The proposal has already been signed and will be made public in a few days.”
Encouraging Registration with Tax Authorities
The committee also addressed the issue of businesses not registered with the Corporate Affairs Commission (CAC). The committee proposed a stricter approach for businesses not registered with the Corporate Affairs Commission (CAC).
Oyedele explained, “For businesses not registered with the CAC, tax agents should deduct 200% of the normal tax rate for them for non-registration as a check to make companies and businesses register.”
This significant penalty aims to incentivize businesses to formalize their operations and contribute to a more transparent and accountable business environment.
Current Withholding Tax Landscape in Nigeria
For context, it’s important to understand the current Withholding Tax system in Nigeria as administered by the Federal Inland Revenue Service (FIRS). Here’s a breakdown:
Function: Withholding Tax acts as a method of collecting income tax in advance.
Rates: The rate varies depending on the transaction, typically ranging from 5% to 10%.
Filing: Businesses are required to file Withholding Tax returns by the 21st day of each month following the deduction.
Penalty for Late Filing: Failure to file WHT returns on time incurs a penalty of N25,000 for the first month and N5,000 for each subsequent month of non-compliance.
The proposed reforms aim to address these complexities and penalties, fostering a more streamlined and business-friendly tax environment.
Expected Impact of the Tax Reforms
The proposed tax reforms are expected to have a positive impact on various aspects of the Nigerian economy:
Reduced Compliance Burden: Simpler WHT regulations and exemptions will free up valuable time and resources for businesses, allowing them to focus on core operations and growth.
Enhanced Competitiveness: Lower tax burdens, particularly for manufacturers and small businesses, can increase their competitiveness in the domestic and international markets.
Increased Formalization: The disincentive for non-registration through higher WHT rates is expected to encourage businesses to formalize their operations, expanding the tax base and boosting government revenue.
If You Ask Me
The proposed changes to Withholding Tax regulations in Nigeria represent a significant step towards simplifying tax administration and fostering a more conducive environment for business growth. Exempting manufacturers, farmers, and small businesses from WHT, coupled with reduced rates for legitimate businesses, demonstrates the government’s commitment to supporting key sectors of the economy. While the full impact of these reforms remains to be seen, they hold the potential to unlock significant economic potential in Nigeria.
The proposed reforms are expected to be officially announced within a few days. While details are still emerging, the news has been met with cautious optimism by the Nigerian business community. Experts believe that simplifying WHT and reducing the tax burden on key sectors like manufacturing and agriculture could have a positive impact on economic growth and job creation. However, some concerns remain regarding the effectiveness of the proposed penalty for non-registered businesses and the potential administrative challenges of implementing the new system.
The coming days will be crucial as Nigerians await the official release of the reformed WHT policy. The success of these reforms will depend on clear communication, efficient implementation, and a commitment to ongoing monitoring and evaluation.
