How SMEs Can Unlock Growth from Withholding Tax Exemption

Omolabake Fasogbon

Barring any last minute change, the newly approved tax regime exempting small businesses, manufacturers and farmers from paying Withholding Tax (WHT) would take effect from January 2025.

The Withholding Tax Regulations (2024) specifically includes the exemption of small businesses from WHT compliance and also reduced rates for businesses with low margins. The measure also included specific tax exemptions for manufacturers and producers, such as farmers to support the agricultural sector.

Analysts viewed this measure as a window for small and medium sized enterprises (SMEs) to increase their wealth and possibly, advance from small business to another growth stage. 

They noted in particular that total tax exemption for SMEs with not more than N2million in a relevant month, would have multiplier effects on the economy. 

Originally, the federal government had resolved at this measure to curb evasion and minimize tax avoidance. The implementation of the new structure which is an improvement on the previous regime is seen to reduce tax burden on businesses. 

“This would ease administrative burden and allow SMEs to focus on growth”, affirmed Chairman, Presidential Committee on Fiscal Policy and Tax Reforms, Taiwo Oyedele. 

Although, government’s growth expectations on this measure are not disputed, experts believe that dividends would only become visible if players embrace discipline. 

 Managing Consultant at CSDC Consulting, Akinyele Oladeji, stated that the new scheme no doubt boasts massive gains for SME operators, including cost reduction, cash flow improvement, increased profit margin and financial stability, amongst others. 

Putting it further into perspective, Oladeji, citing case of a contractor where government assumes a profit margin of 20 percent, said the contractor is expected to file 30 percent of the profit as WHT, often paid on his behalf. 

“Let’s assume a contract’s total sum is N100, 000 and expected profit is N20, 000, the WHT would then be N6, 000,” he enlightened. 

Continuing, he said, “But government is now saying that if your contract is not more than N2 million in a month, don’t pay us, keep your money. This is a laudable step that will further simulate the informal sector where the SMEs operate.

 “In a country where 56 percent of the economy is in the informal sector, where unemployment rate is high and where SMEs are crucial to sustainable and inclusive growth, simulating the sector is tantamount to boosting the majority, hence rewarding”, he said. 

Speaking further, Oladeji said it behooves on players to make good use of the opportunity. 

“For instance, if you have been paying a WHT of certain amount and government suddenly ask you to stop paying, it is not an open cheque for extravagance or frivolities, it is simply for you to reorder your business and see to managing the token for growth. This is the expectation of government and a way to appreciate its gesture by contributing to the economy”, he enlightened. 

On how best to harness savings from the exemption, he simply advised reinvesting it back into business, which he said can happen in several ways. 

“You may want to use it to acquire more equipment, develop your workforce in terms of training,  invest on marketing to further promote your business or use in debt payment for those who are servicing any”, he suggested. 

The tax expert again submitted that government was wise with the new regime given the anticipated effects in the long run. 

“Although government is giving to SMEs, it is not losing, rather empowering the sector for multiple impacts. Besides, you can trust government to explore other revenue streams. For instance, government has just increased the windfall tax on banks’ foreign exchange (FX) gains to 70 percent — from the proposed 50 percent. This was initially 30 percent. This sure translates to massive redistribution of wealth”, he added.