Key Points
- Key sectors, including small businesses, manufacturers, and farmers, are exempt from withholding tax, reducing their tax burden and administrative hassle.
- Businesses with low-profit margins benefit from reduced withholding tax rates.
- The exemption will stimulate growth and innovation, create a fairer and more transparent tax system, and ease working capital strain for businesses.
- New measures aim to tighten loopholes and minimise tax avoidance.
- This initiative aims to boost the competitiveness and sustainability of key economic sectors, ultimately contributing to Nigeria’s economic growth.
The Nigerian government’s decision to grant a withholding tax exemption to small businesses, manufacturers, and farmers represents a crucial step in bolstering the competitiveness and sustainability of these vital economic sectors.
This initiative is an indication of the government’s dedication to easing the tax burden on businesses, thereby promoting an environment conducive to growth and innovation.
Easing the Burden on Small Businesses
The withholding tax exemption is part of a broader overhaul of the tax framework aimed at supporting businesses with low-profit margins. The government has reduced tax rates for these businesses and introduced measures to combat tax evasion, striving to create a fairer and more transparent tax system.
These reforms are essential for ensuring that businesses can thrive and contribute effectively to the country’s economic development.
Understanding Withholding Tax
Withholding tax serves as an advance payment of income tax, deducted at the source when a payment is made to a beneficiary. It is an advance payment against the ultimate income tax liability of the taxpayer or company.
Official Announcement and Key Changes
Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, announced on his official X handle that President Bola Tinubu has approved the new withholding tax regime. The official gazette is expected to be signed in the coming days.
Also read: Tinubu Gives Oyedele’s Tax Reforms Committee 18% Tax to GDP Ratio Target
Oyedele highlighted that the previous withholding tax system, introduced in 1978, faced challenges due to the complexity and expansion of covered transactions, leading to multiple taxes and straining the working capital of businesses with low margins.
Reforms in the Withholding Tax Regime
The key changes in the new withholding tax regime include:
- Reduced Rates for Low-Margin Businesses: The tax rates have been reduced to alleviate the strain on businesses operating with low-profit margins.
- Exemption for Small Businesses: Small businesses are now exempt from withholding tax compliance, providing significant relief and reducing administrative burdens.
- Support for Manufacturers and Farmers: Manufacturers and producers, including farmers, are exempt from withholding tax, fostering growth in these critical sectors.
- Measures to Combat Evasion and Avoidance: The new regime includes stringent measures to curb tax evasion and minimise tax avoidance.
- Improved Credit Access and Tax Utilisation: The reforms facilitate easier access to credit and better utilisation of tax deducted at source.
- Global Best Practices and Clarity: The updated regulations reflect emerging issues, adopt global best practices, and provide clear guidelines on the timing of deductions and key terms.
Official Publication and Implementation
The approved regulation will soon be published in the official gazette, marking the implementation of these transformative changes.
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Oyedele stressed that the new regime addresses the previous challenges, reduces compliance burdens, and supports the working capital needs of businesses with low margins, especially SMEs.
The withholding tax exemption and the associated reforms are poised to enhance the economic landscape, enabling small businesses, manufacturers, and farmers to flourish and significantly contribute to Nigeria’s economic growth.