The Federal Government has approved the exemption of small businesses, manufacturers and farmers from paying withholding tax as a way of reducing the tax burden on businesses.

Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele, disclosed this in a post on his official X handle on Tuesday.

He announced that President Bola Tinubu has approved the new withholding tax regime for the country with the official gazette expected to be signed in the coming days. The FG also introduced key changes to the previous tax regime such as reduction of rates for businesses with low margins and measures to curb evasion.

According to him, the erstwhile withholding tax system introduced in 1978 had challenges such as the ambiguity necessitated by the increase in transactions that it covered, thereby increasing the list of multiple taxes, inequity, straining the working capital of businesses with low margins, among others.

The tax expert further stated that key changes introduced to the rewritten withholding tax regime include reduced rates for businesses with low margins, measures to curb evasion and tax avoidance, exemption of small businesses from withholding tax, clarity on the timing of deductions and key terms among others.

He wrote: “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 regime expanded over time to cover more transactions, various ambiguities and complications crept in. This resulted in many businesses, especially SMEs, being exposed to excessive burden of compliance and a strain on the working capital of low-margin businesses.”

“As part of the ongoing fiscal policy and tax reforms, a new withholding tax regime has been approved. The key changes introduced are to address the identified challenges and specifically include:”

1) Exemption of small businesses from Withholding Tax compliance

2) Reduced rates for businesses with low margins

3) Exemptions for manufacturers and producers such as farmers

4) Measures to curb evasion and minimise tax avoidance

5) Ease of obtaining credit and utilisation of tax deducted at source

6) Changes to reflect emerging issues and adopt global best practices

7) Clarity on the timing of deduction and definition of key terms