Nigerian Government Overhauls Withholding Tax, Grants Exemptions to Farmers and SMEs

The Federal Government has approved a new, business-friendly withholding tax regime aimed at easing the compliance burden on businesses, particularly small and medium enterprises (SMEs) and farmers, according to Taiwo Oyedele, chairman of the Presidential Fiscal Policy and Tax Reforms Committee.

Announcing the approval via his official X handle, Oyedele highlighted key changes designed to simplify compliance and support business growth.

Withholding Tax (WHT) in Nigeria serves as a prepayment of Income Tax, deducted at rates between 5 percent and 10 percent depending on the transaction, according to the Federal Inland Revenue Service (FIRS). Returns are due by the 21st of the following month, with late filings penalized at N25,000 for the first month and N5,000 for each subsequent month.

Introduced into Nigeria’s tax system in 1977, WHT was intended as an advance payment of income tax on specified transactions. While it provided a steady revenue stream and helped curb tax evasion, the regime had expanded over time, becoming increasingly complex and burdensome.

Oyedele noted that the complexity of the regime led to ambiguities regarding compliance, eligible transactions, applicable rates, and the timing of remittance. Small businesses, in particular, faced excessive compliance burdens that strained their working capital.

The newly approved regime aims to address these challenges with several key changes:

1. Exemption for SMEs: SMEs are now exempt from withholding tax compliance, reducing their administrative burden and allowing them to focus on growth.
2. Reduced Rates for Low-Margin Businesses: Businesses operating on low margins will benefit from reduced withholding tax rates, easing financial pressures.
3. Support for Agriculture: Specific exemptions for manufacturers and producers, such as farmers, have been introduced to support the agricultural sector.
4. Curbing Evasion: Measures to curb tax evasion and minimize tax avoidance have been implemented, ensuring a fairer tax system.
5. Simplified Processes: The reforms will simplify the process for businesses to obtain credit and utilize tax deducted at source, improving liquidity.
6. Alignment with Global Best Practices: The changes address emerging issues and align with global best practices, ensuring the tax system remains contemporary and effective.
7. Clarity on Deductions: The reforms provide clarity on the timing of deductions and the definition of key terms.

Oyedele indicated that the approved regulations are expected to be published in the official gazette in the coming days.