SMEs Gain Financial Relief as FG Exempts Them from Withholding Tax
The Federal Government has decided that small businesses, manufacturers, and farmers no longer need to pay withholding tax to reduce their tax burden.
Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, shared this update on his official X handle on Tuesday.
He mentioned that the government has made significant changes to the previous tax system. These include lower tax rates for businesses with small profit margins and new measures to prevent tax evasion.
President Bola Tinubu has approved the new withholding tax rules, and the official announcement will be made soon.
Oyedele explained that the old withholding tax system, started in 1978, had problems. It covered more and more transactions over time, leading to confusion and a long list of taxes. This made it hard for businesses with small profit margins to manage their finances.
Withholding tax is a way to collect income tax in advance. It is deducted at rates between 5% and 10%, depending on the transaction. Businesses must submit their tax returns by the 21st of the following month. If they are late, they face a penalty of N25,000 for the first month and N5,000 for each additional month.
Oyedele highlighted the key changes in the new withholding tax system: lower rates for low-margin businesses, steps to prevent tax evasion, exemption of small businesses from withholding tax, and clear rules on when to deduct tax and other important terms.
He stated, “Withholding tax was introduced into the Nigeria tax system in 1977 to serve as an advance payment of income tax on specified transactions.”
“As the system expanded over time to cover more transactions, it became confusing and complicated. This caused many businesses, especially small and medium enterprises (SMEs), to struggle with compliance and financial strain.”
The new withholding tax system is part of ongoing tax reforms. It aims to solve these problems by exempting small businesses from withholding tax, lowering rates for low-margin businesses, and including exemptions for manufacturers and farmers. The reforms also aim to prevent tax evasion and make it easier for businesses to use the tax they have already paid.
This recent approval is the second of five planned executive orders to help reduce inflation and increase tax revenue.
