Have you heard?
The Federal Government introduced a new regulation for Withholding Tax, called the Deduction of Tax at Source (Withholding) Regulations 2024. The Minister of Finance and coordinating minister of the economy, Wale Edun made the Regulation and it took effect from the 1st of July 2024.
If you’ve read our article on the five taxes that every entrepreneur in Nigeria should be aware of, then you might be familiar with the term, ‘Withholding Tax.’ Just in case you haven’t, here’s a brief explanation.
What is Withholding Tax?
It is tax that is paid from the income generated from business transactions. It was introduced into the Nigerian tax system in 1977 to provide the government with regular revenue flow and to curb tax evasion.
Prior to this new regulation, withholding tax was paid by the receiver of income in a given transaction but now, the government has mandated persons making payment for certain transactions to deduct the tax from the sum to be paid, and to remit the tax to the government on behalf of the receiver. Hence, the title of the regulation, “Deduction of tax at source…” The tax is removed before the payment for a contractual agreement is made.
It’s quite similar to the Pay as You Earn (PAYE) system used to deduct personal income tax from employees, except that this involves money that is paid directly to companies or businesses, being deducted by the payer and given directly to the government before payment is made to the companies/businesses.
Here’s a more graphic explanation, assuming Mr. A agreed to provide a service for Mr. B in exchange for money, the new Regulations require Mr. B to deduct the withholding tax on the agreed sum before making payments to Mr. A. Essentially, he would be paying the tax on Mr. A’s behalf to the government.
If you’re like me, then the first question on your mind on hearing this, is probably- Does it apply to everyone? Do I have to deduct withholding tax when I buy goods from the seller at Balogun market? How about my salary, would my employer deduct withholding tax from my salary?
Here’s what the Regulation provides…
Categories of Persons exempted from the Withholding Tax Regulation
The following persons are exempted from Withholding tax obligations:
Individuals
Small Companies or Unincorporated entities whose gross turnover is less than N25,000,0000 provided that (i) the supplier has a valid Tax Identification Number and (ii) the value of the transaction is N2,000,000 or less.
The tax is charged on all Nigerians, both those who are residents and non-residents.
Transactions that are exempted from the Withholding Tax Regulation
The following transactions are exempted from the Withholding tax regulation:
- Across-the-counter transactions: This refers to transactions between parties that do not have an established contractual relationship, in which payment is made on the spot either with cash or by electronic means. For instance, your transaction with the Balogun market seller earlier mentioned or when you randomly pay for a service like a haircut;
- Winnings from a game of chance (betting) or a reality show that promotes entrepreneurship, academics, technological or scientific innovation;
- Supply of petroleum products and its subsidiaries;
- Insurance premium;
- Commission retained by a stock broker;
- Out-of-pocket expenses that are normally expected to be incurred directly by the supplier and are distinguishable from the contract fees;
- Any distribution or dividend payment to a Real Estate Investment Trust (REIT) or Real Estate Investment Company (REIC);
- Compensating payments under a Registered Securities Lending Transaction;
- Interest and fees paid to a Nigerian bank by way of direct debit of the funds which are domiciled with the bank;
- Goods manufactured or materials produced by the person making the supply;
- Any payment in respect of income or profit that is generally exempted from tax; and
- Imported goods where the transaction does not create a taxable presence in Nigeria for the foreign supplier.
Can I add the tax to the contract price as an extra charge?
The seemingly obvious way to circumvent this new law would be for businesses to include the tax as part of the contract sum to be paid to them. So using our scenario above, Mr. A would simply add an extra cost to the bill that he gives Mr. B to pay, right?
Well no, the Regulation states in paragraph 3, that the tax cannot be included in the contract price as a separate price or an extra cost. The tax is a deduction from the original amount of the contract.
Procedure for Deduction of Tax at source
Generally, the deduction is to be made at the point of payment and where the recipient (business or company) of the payment does not have a valid Tax Identification Number, the payer is required by the Regulation to deduct twice the amount of the tax to be paid.
After the tax is deducted, the payer is required to remit the money to the relevant tax authority, either;
- The Federal Inland Revenue Service (FIRS) before the 21st day of the month following the month of payment; or
- The State Inland Revenue service, not later than the 30th day of the month following the month of payment.
Here’s a useful article on the step-by-step guide to payment of tax in Nigeria.
Receipts
Once deduction is made from any payment, a receipt and a statement for the tax deducted, must be issued to the receiver of the payment as evidence of the tax paid. The receipt serves as evidence of tax payment on the transaction and can be used by the payment receiver to claim tax credits.
Assuming a payer deducts the tax and issues the receipt to the receiver of the payment but fails to remit the tax to the government, the receiver of the payment is still entitled to the tax credits. The receipt suffices as evidence of payment, and so the unremitted tax becomes a liability to the person that made the deduction, and it is recoverable with applicable penalty and interest.
Penalty for evading withholding tax
Any person who fails to make a deduction at source or to remit the deduction made to the relevant tax authorities on or before the due date is liable upon conviction, to pay the sum of the tax with an additional 10% of the sum per annum and interest at the prevailing rate of the Central Bank of Nigeria (CBN).
You know the popular statement, ignorance of the law is not an excuse? Well, it’s not just a statement, it’s a fact.
Culled from LawPàdí
