The Federal Inland Revenue Service (FIRS) has issued a directive requiring banks, stockbrokers, and other financial institutions to deduct a 10 per cent withholding tax on interest earned from short-term investment securities.
Until now, short-term securities such as treasury bills and similar instruments were exempt from tax, a policy that previously boosted investor returns and encouraged market participation.
According to a Reuters report, the new directive mandates that the tax be deducted at the point of payment on financial instruments including treasury bills, corporate bonds, promissory notes, and bills of exchange.
It remains unclear how much revenue the Federal Government expects to generate from the new measure.
Short-term securities are particularly attractive to investors because of their relatively high yields and low maturity periods. However, the introduction of withholding tax is likely to impact overall net returns for investors.
FIRS, in its statement, clarified that investors will receive tax credits for the amounts withheld unless the deduction qualifies as a final tax. Notably, interest earned on federal government bonds will remain exempt from the levy.
“All relevant interest-payers are required to comply with this circular to avoid penalties and interest as stipulated in the tax law,” FIRS Executive Chairman Zacch Adedeji stated.
The directive marks a shift in the government’s revenue mobilisation strategy as it seeks to broaden its tax base and reduce dependence on oil income.
