In a move designed to streamline tax collection and ease the burden on businesses, the Nigerian government has approved a significant overhaul of the country’s withholding tax regime.
This reform, announced by Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, represents a major shift from the previous system, which had been criticized for its complexity and disproportionate impact on small and medium-sized enterprises (SMEs).
This reform aims to address longstanding challenges within the previous system, including ambiguity, multiple taxes, and a burden on low-margin businesses.
Overhauling the Withholding Tax System
The existing WHT system, implemented in 1978, had become outdated and cumbersome. As Oyedele explained, “The regime expanded over time to cover more transactions, various ambiguities and complications crept in.” This resulted in an excessive compliance burden for businesses, particularly Small and Medium Enterprises (SMEs). This ambiguity and complexity led to issues such as:
Multiple Taxes: The ever-growing list of transactions covered by withholding tax created a sense of multiple taxation for businesses.
Inequity: The system disproportionately impacted SMEs and businesses with low margins, hindering their growth potential.
Strained Working Capital: WHT requirements placed a significant burden on businesses’ cash flow, limiting their ability to invest and operate effectively.
Key Changes in the New Regime
The newly approved WHT regime aims to address these concerns and create a more business-friendly tax environment. Here are some of the key changes introduced:
Exemption for Small Businesses: Small businesses will be entirely exempt from withholding tax compliance, freeing up valuable resources and simplifying their tax obligations.
Reduced Rates for Low-Margin Businesses: Businesses with low profit margins will benefit from reduced withholding tax rates, easing their financial burden.
Exemptions for Manufacturers and Producers: Manufacturers and producers, including farmers, will be exempt from withholding tax, providing a significant boost to these critical sectors of the Nigerian economy.
Curbing Evasion and Tax Avoidance: The new regime includes measures to prevent tax evasion and minimize tax avoidance practices, ensuring a fairer and more efficient tax system.
Improved Tax Credit Utilization: The revised system aims to streamline the process of obtaining credit and utilizing tax deducted at source, improving cash flow for businesses.
Alignment with Global Standards: The new regime incorporates emerging best practices in withholding tax collection, ensuring Nigeria remains competitive in the global market.
Clarity and Transparency: The reform introduces clear definitions of key terms and clarifies the timing of tax deductions, reducing confusion and simplifying compliance for businesses.
What is Withholding Tax?
Withholding tax acts as an advance payment of income tax, deducted at source during specific transactions. The previous system, implemented in 1977, faced criticism for its complexity and burden on businesses, particularly those with low margins.
Legislative Action
While some aspects of the reform can be implemented through executive orders, Oyedele acknowledged the need for legislative amendments. The committee has submitted five draft executive orders and ten amended bills to the National Assembly for consideration. These comprehensive measures aim to address loopholes stemming from the constitution itself.
Related: Tax Reforms: Withholding Tax Relief for Manufacturers and Farmers
If You Ask Me
The revamped withholding tax regime is expected to have a positive impact on the Nigerian business landscape. By reducing compliance burdens, offering exemptions, and promoting clarity, the reform aims to stimulate economic growth, empower SMEs, and create a more conducive environment for investment and job creation. This reform, coupled with ongoing efforts towards broader tax reform, signifies the Nigerian government’s commitment to fostering a more prosperous and sustainable business ecosystem
