Withholding tax is a system of taxation that the government use as a means to combat tax evasion or tax avoidance by tax payers. It is an easier way to get more people to pay their tax and at a faster rate.
Withholding tax makes it possible for tax payers to pay the government first before spending their income. This is good as it has been recorded in the time past that lots of people default in paying their tax after spending their income and this result to excess tax liabilities.
See Also: Personal Income Tax Rate in Nigeria
What is Withholding Tax?
Withholding tax also known as retention tax can be defined as the tax that is required by law to be withheld or deducted by the payer of the income from the income of the recipient and remitted to the tax agencies of the government. It is an advance payment of income tax and the evidence to proof that payment of withholding tax was made is the withholding tax credit note that is presented by the employer to the employee to show that money deducted from his/her income was indeed remitted to the government.
Withholding tax is paid by the payer of the income rather than the recipient of the income. It is more advanced than the Value Added Tax (VAT) system but that does not mean that it is separate from it. Withholding tax is withheld or deducted from the income that ought to be paid to the recipient(employees /suppliers).
Withholding tax is treated as payment on account of the recipient’s final tax liability i.e the amount of tax to be paid by the recipient will reduce considerably after the withholding tax paid by the payer of the income is deducted from the final tax liability of the recipient. It should be noted that when a tax is withheld, it should be remitted periodically to the Government Inland Revenue Service who would in return issue a withholding tax credit note for the benefit of the employee/supplier whose income was withheld.
Withholding tax covers business transactions that involves contracts. It does not only applies to employment income but also withholding tax is required from payment of interest or dividends. Withholding tax in relation to a purchaser and supplier, the purchaser will deduct the withholding tax from the invoice issued to the supplier and the money withheld would be remitted by the purchaser to the government. The purchaser will later send a withholding tax credit note to the supplier to show that the money withheld was paid to the respective tax authorities of the government.
Withholding Tax Credit Note is very important to the employee or supplier as it can be used to reduce the total tax to be paid at the end of the year.
A withholding tax credit note includes the credit number, name of the taxpayer (employer/purchaser), the name of the beneficiary (employee/supplier), the date of the transaction and nature of the transaction.
Withholding tax returns are filed for at the end of any given month from which deductions was made.
Rate of Withholding Tax in Nigeria
The rates of withholding tax in Nigeria varies among individuals, companies and corporate bodies. It can be2. 5%, 5% or 10% depending on the the type of transaction and the tax authority responsible for the collection of the tax (Federal Inland Revenue Service or State Inland Revenue Service).
Guidelines on Administration of Withholding Tax in Nigeria
Withholding tax is a tax leveled on income earners but made payable by the payer of the income rather than the recipient of the income. It is intended as an advance payment of tax.
The operation of withholding tax should always be optimized to ensure that taxpayers are not overtaxed and government does not lose revenue.
Contract and business transactions performed outside of Nigeria by non-resident taxpayers will not be liable to withholding tax.
Withholding tax applies to rent, royalties, lease payments on properties at the rate of 10% by non-resident of Nigeria as long as services takes place within the country.
Withholding tax is also applicable to income from government securities and income from bonds or treasury bills.
Withholding tax has to do mainly with transactions involving contract of purchase and as such tax can be collected on a large scale from suppliers.
Withholding tax makes it possible for tax evasion or tax avoidance to be controlled. It is an advance payment of tax i.e part payment made that would be deducted from the total tax liability at the end of the year.
See Also: How to Improve Tax Collection in Nigeria
How to Calculate Withholding Tax in Nigeria
Withholding tax is not difficult to calculate as it has to with the deduction of a certain percentage from the total income. For example, if a company supplies goods and services to another company and the money to be paid is #2, 000,000 then depending on the nature of the transaction 5% or 10% of withholding tax would be withheld by the purchaser which will reflect on the payment invoice.
10% of withholding tax on #2,000,000 is #200, 000 and the total money paid to the supplier would be #1, 800,000 while #200, 000 withholding tax would be remitted to the relevant tax authority of the government.
Problems of Withholding Tax in Nigeria
The problem of withholding tax in Nigeria is the poor administration that leaves a loop hole in the system.
Sometimes the purchaser ends up deducting withholding tax from payment invoice of multiple suppliers but fail to remit it to the relevant tax authority.
Prospects of Withholding Tax in Nigeria
Withholding tax will help in boosting the revenue of the government that would be used in the development of the country.
Withholding tax can help to reduce the total amount of tax liability to be paid at the end of the year.
Withholding tax prevents tax evasion as withholding tax is paid before income is spent.
Withholding tax will help in the growth of businesses that has to do with contract of purchase.
Withholding tax generate revenue for the government as well as reduce the rate of tax evasion or tax avoidance. It is a tax liable to income earners and it is collected by the purchaser in a contract of purchase.
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