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23 August 2023

Exemption from Withholding Tax

Tax exemptions, deductions allowed, reliefs and tax waivers are legal loopholes used by tax accountants to reduce the incidence of tax on their clients. Below are some exemptions available to the taxpayer created within the law to avail the taxpayer his tax paying rights and some of the merits and demerits of the withholding tax administration system.

  1. Dividend, interest, rent, royalty derived from outside Nigeria and brought into Nigeria through government approved channels are exempted from withholding tax. Government Approved Channels are:
  2. The Central Bank of Nigeria
  3. Any bank or corporate body appointed by the minister as authorized dealer under the Second-Tier Foreign Exchange Market Act 1986 or any enactment replacing that Act.
  • Sales in the ordinary course of business i.e. across the counter transactions carried out in the ordinary course of business.
  • Purchases distinct from contract of supplies
  • All imported goods
  • Inter-bank interest
  • Income exempted from income tax
  • Claims in insurance business
  • Interest on Bonds
  • Dividend re-distributed by Holding Companies
  • Transactions that constitute outright sale and purchase of goods
  • Transactions executed in the ordinary course of business, it must be one off e.g. across the counter sale or purchase in the ordinary course of business. Once it becomes habitual or repetitive, the sale or purchase becomes liable to source deductions.

Advantages/Merits of Withholding Tax

  1. It brings unknown taxpayer into the tax net
  2. It widens the tax base and increases the amount of tax revenue collection.
  3. It ensures regular flow of tax revenue to coffers of the government
  4. It reduces the incidence of tax evasion
  5. It helps to educate the tax agent and taxpayers about taxation

Disadvantages/Demerits/Problems of Withholding Tax

  1. It reduces the cash flow of the taxpayer
  2. Taxpayers not being able to enjoy withholding tax suffered due to non-remittance of withholding tax by tax agents.
  3. Problem associated with payment to the wrong tax authority.
  4. Problem associated with wrong application of withholding tax rates.

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