In a move to enhance tax administration and stimulate economic growth, the Nigerian federal government has approved exemptions from tax at source for manufacturers, small businesses, and farmers.

This new withholding tax regime is designed to alleviate the tax burden on businesses by reducing rates and eliminating multiple taxes and tax inequity.

This significant policy shift was announced by Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, via his X (formerly Twitter) handle on Tuesday. Oyedele explained that the withholding tax system, introduced in 1977, initially served as an advance payment of income tax on specified transactions. It was intended to ensure a steady flow of revenue to the government and to curb tax evasion.

However, over time, the withholding tax regime expanded to cover more transactions, leading to ambiguities and complications. These complexities have particularly burdened small and medium-sized enterprises (SMEs), which have faced excessive compliance challenges, such as difficulties in obtaining refunds for excess withholding tax and the lack of exemption thresholds, which promoted tax inequity.

Background: The Tax Reform Committee

The Presidential Fiscal Policy and Tax Reforms Committee was established last year as part of the government’s broader efforts to eliminate multiple taxation and promote ease of doing business in Nigeria.

The committee’s mandate includes reviewing the existing tax framework, identifying areas for reform, and making recommendations to streamline tax processes. This initiative aligns with the government’s commitment to improving the business environment and fostering economic growth.

Key Features of the New Withholding Tax Regime

The revamped withholding tax regime aims to address these issues by exempting small businesses from withholding tax compliance and reducing rates for businesses with low margins. According to Oyedele, the new regime includes several key reforms:

1. Exemptions for Manufacturers and Producers: Farmers and other producers will benefit from tax exemptions, which are expected to promote growth in the agricultural sector and manufacturing industries.
2. Evasion and Avoidance Measures: New measures will be implemented to curb tax evasion and minimize tax avoidance, ensuring a more equitable tax system.
3. Ease of Obtaining Credit: The reforms will simplify the process of obtaining credit and utilizing tax deducted at source, making it easier for businesses to manage their finances.
4. Global Best Practices: The new regime will incorporate changes to reflect emerging issues and adopt global best practices, ensuring Nigeria’s tax system remains competitive and fair.
5. Clarity and Definition: There will be clearer guidelines on the timing of deductions and definitions of key terms, reducing ambiguities and making compliance easier for businesses.

Oyedele noted that the approved regulation would soon be published in the official gazette, formalizing the new withholding tax regime. This publication will provide detailed guidelines and further clarity on the implementation of the reforms.

Understanding Withholding Tax

Withholding tax, also known as retention tax, is an amount withheld by the payer (such as an employer or financial institution) from payments made to another party (such as an employee or investor). This withheld amount is then remitted directly to the government on behalf of the recipient. It is commonly applied to income sources such as wages, dividends, interest, and royalties, ensuring that taxes are collected at the source rather than relying on recipients to pay taxes separately.

Challenges Ahead

While the intention behind these reforms is widely applauded, significant challenges remain. One of the most pressing issues is that many of the taxes paid by small businesses are imposed and enforced by non-state actors. These actors, often operating with the backing of local authorities, have created a parallel tax system that places an additional burden on businesses in the informal sector.

Over the years, there has been a lack of political will to address this trajectory. The entrenchment of these non-state actors in the tax collection process means that even with the federal government’s reforms, businesses may still face multiple and often illegal tax demands. Many believe that the presence of these non-state actors complicates the government’s efforts to streamline tax administration and promote ease of doing business.

Against this backdrop, many believe that the success of the new withholding tax regime will depend not only on the reforms themselves but also on the government’s ability to enforce these changes and eliminate the influence of non-state actors in the tax system.

The National Bureau of Statistics (NBS) has revealed a dramatic surge in the average retail price of petrol in Nigeria, reporting a figure of N769.62 per liter in May 2024. This represents a staggering 223.21% increase from the N238.11 per liter recorded in May 2023 and a 9.75% rise from April 2024’s price of N701.24.

The significant hike follows the removal of petrol subsidies by President Bola Tinubu on May 29, 2023.

The NBS report, titled “Premium Motor Spirit (Petrol) Price Watch (May 2024),” highlights substantial regional variations in petrol prices across Nigeria. Jigawa State reported the highest average retail price at N937.50 per liter, followed by Ondo and Benue States, with N882.67 and N882.22 per liter, respectively. In contrast, Lagos, Niger, and Kwara States experienced the lowest average prices at N636.80, N642.16, and N645.15 per liter, respectively.

On a zonal level, the North-West Zone had the highest average retail price of N845.26 per liter, whereas the North Central Zone recorded the lowest at N695.04 per liter.

The removal of petrol subsidies has significantly impacted inflation rates in Nigeria. According to the NBS, the inflation rate surged to 33.95% as of May 2024, with food inflation soaring to 40%. There is concern that this economic strain will further be compounded as the rising landing cost of Premium Motor Spirit (PMS) further impacts the price of goods and services, weighing further down on the government’s ability to subsidize PMS.

Findings reveal that the landing cost of PMS increased by 46.8% year-on-year to N1,026.71 per liter in May 2024, up from N545.83 per liter in May 2023. This landing cost does not include additional charges such as deport-related fees, transportation logistics, and marketers’ margins, bringing the total delivery cost at filling stations to nearly N1,052.39 per liter, assuming an exchange rate of N1,510 to a dollar.

The Weight of Subsidy Payments Amidst Government’s Financial Struggles

Despite the government’s official stance of having removed petrol subsidies, the current pricing strategy indicates otherwise. The Nigerian National Petroleum Company Limited (NNPCL) continues to sell petrol at approximately N568 per liter at its retail outlets, a significant markup from the N238 per liter price of May 2023. Compared to the N1,052.39 per liter landing cost, there is a discrepancy suggesting that the government is effectively subsidizing petrol to the tune of over N400 per liter to maintain current pump prices.

The Dangote Refinery Challenge

A key part of Nigeria’s strategy to manage fuel subsidies was the operation of the Dangote Refinery, which was anticipated to significantly curtail the need for imported petrol and thus reduce subsidy payments. However, the refinery’s potential has been undermined by insufficient crude oil supply.

The NNPC, which holds a 20% equity stake in the Dangote Refinery, is required to provide a sufficient amount of crude oil. Still, Nigeria’s overall poor oil production has hindered this process. The refinery is struggling to secure the crude needed to operate at full capacity, delaying its ability to impact the subsidy situation meaningfully.

The Government’s Dilemma

The Nigerian government faces a challenging dilemma. On the one hand, the continued payment of petrol subsidies is financially untenable given the country’s heavy reliance on loans to fund its operations. On the other hand, the complete removal of these subsidies risks triggering widespread civil unrest.

The economic hardship following the subsidy removal has been profound, with many Nigerians facing increased living costs without a corresponding increase in income.

For many Nigerians, the spike in petrol prices has translated directly into higher costs for transportation, food, and other essentials. Businesses are also feeling the pinch, with increased operational costs leading to higher prices for consumers. The inflationary pressures have eroded purchasing power, leaving many families in a precarious financial situation.

How Much Longer Can the Government Pay?

The ongoing subsidization of petrol raises critical questions about the sustainability of such financial practices. With Nigeria’s government heavily reliant on loans to sustain its operations, the economic feasibility of continuing these subsidies is under scrutiny.

Against this backdrop, many Nigerians are increasingly concerned about how much longer the government can afford to subsidize petrol amidst escalating economic pressures and declining oil revenues.