President Bola Tinubu has approved a new withholding tax policy, replacing the 1977 system.
Announced by Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, the policy aims to alleviate burdens on farmers and SMEs.
Key changes include exempting small businesses from withholding tax compliance, reducing rates for low-profit margin businesses, and providing exemptions for producers, especially farmers.
The policy also streamlines credit processes, updates regulations to reflect global practices, and provides clearer guidelines on deductions.
Oyedele identified several issues with the previous withholding tax regime, which evolved to cover more transactions over time, leading to complications and unintended consequences.
According to him: “Businesses, especially Small and Medium Enterprises (SMEs), faced ambiguities regarding compliance, eligible transactions, applicable rates, and remittance timing. This complexity resulted in an excessive compliance burden and strained working capital for low-margin businesses”.
Other identified challenges include previous system treated withholding tax as a separate tax, adding to the list of multiple taxes and increasing the cost of doing business. Obtaining refunds for excess withholding tax was problematic, causing further financial strain on businesses. The lack of an exemption threshold made compliance costs uneconomical for taxpayers and enforcement costs high for tax authorities. Also, the overall structure of the old regime promoted tax inequity, failing to address emerging and contemporary issues effectively.
These reforms address longstanding issues such as excessive compliance burdens, strained working capital for businesses, and difficulties in obtaining tax refunds.
