Taxing the Future: The uncertainty surrounding tax liability for all private educational institutions in Nigeria

The major question left unanswered after the enactment of the Finance Act of 2021 has been whether all private educational institutions in Nigeria are now liable to pay company income tax to the federal Inland Revenue service of Nigeria.

Before the enactment of the Finance Act of 2021, Section 23 (1)(c) of the Companies Income Tax Act, (CITA) provided for the exemption of “the profits of any company engaged in ecclesiastical, charitable or educational activities of a public character in so far as such profits are not derived from a trade or business carried on by such company.”

As a consequence, the profits of companies that provided educational services of a public character were exempted from Companies Income Tax, notwithstanding the dispute this position created that led to litigation between American International School Lagos (AIS) vs Federal Inland Revenue Service (FIRS) in 2014 and another case between Best Children International School Limited (BCIS) vs FIRS in 2018.

In the case between AIS vs FIRS, the FIRS argued that the services provided by AIS were not of a public character as the services are not available for all Nigerians to use, and as such, profit derived should be liable to tax. The court, however, dismissed the FIRS arguments, holding that AIS is registered as a company limited by guarantee and, therefore, should be qualified for the exemption provided by Section 23 23(1)(c) of CITA. and that FIRS did not prove that: (a) any segment of the public was excluded from the educational services provided by the AIS; (b) any profits or income were distributed to the directors or guarantors of AIS; or (c) AIS generates income from any sources other than the provision of educational services.

On another hand, the court ruled in favour of FIRS in the case between BCIS vs FIRS, where the court ruled that BCIS is a profit-making company limited by shares and should be liable to company income tax according to the provisions of CITA. The court also held that only companies limited by guarantee or incorporated trustees qualify for the exemption in Section 23 (1) (c) of CITA.

The resolution of the disputes led to a clear consensus among private education stakeholders and practitioners regarding the legal framework and direction of tax exemption for educational institutions. The combined implication of the above precedent and existing laws before the Finance Act of 2021, was that for a company to be exempted under Section 23 (1) (c) of the CITA and other Laws in Nigeria, it must prove three things:

1. It is engaged in ecclesiastical, charitable, or educational activities of a public character.
2. The profits the company makes from its activities are not from a trade or business carried on by the organisation and
3. A company limited by shares is for profit making and must pay taxes. The fact that the company is a school or educational institution would not be sufficient to benefit from the tax exemptions.

This consensus was further supported by the enactment of the Finance Act of 2020 which defines “public character” as used in the CITA to mean an organization or institution — (i). that is registered under relevant law in Nigeria;(ii) does not distribute or share its profit in any manner to members or promoters.

However, the above position is no longer the case with the enactment of the 2021 Finance Act. which has amended Section 23(1)(c) of CITA, the amendment deleted the word “educational” from the Pre 2021 Section 23(1)(c) of CITA. the implication is that companies carrying out educational activities in Nigeria may be subject to income tax. Furthermore, the FIRS in the information circular dated August 2023, has gone ahead to insist as follows:

• That the profit derived from any company engaged in educational activity will be subjected to income tax, irrespective of their incorporation status under the Companies and Allied Matters Act (CAMA) or whether such profit is distributed to its shareholders or not and that schools, educational institutions and other companies that are engaged in educational activities are required to pay income tax on their profits.
• That educational institution includes childcare, pre-schools basic/elementary schools, secondary/high schools, and universities.
• That the classification of all educational institutions should be on an annual turnover basis as used for other commercial and profit-based small, medium or large companies categorized by the CAMA.
• That exemptions shall be admitted where an educational institution can demonstrate that its educational activities are charitable. That is, it must satisfy the following three conditions.

1. It solves educational needs on grounds of kindness and benevolence,
2. without charging fees, and
3. any surplus/profit is ploughed back into the educational activity.

The Federal Inland Revenue circular made a lot of bold assumptions taking advantage of the uncertainty created by the 2021 Finance Act. This legislative and administrative attitude towards private education does not seem like a good way of revenue generation as this could have far more negative consequences to the already terrible situation of education in the country.

From a legal perspective, section 7 of the 2021 Finance Act, which significantly modified Section 23 of the CITA by deleting the word ‘education’ among the charitable objects of a public character conflicts with the already existing laws. Particularly, the CAMA section 26 and 838 which particularly prohibits the distribution of profit and mandates all Incorporated trustees and limited guarantee companies to automatically plough back its operating surplus to its charitable objectives. Moreover, the third schedule to the Personal Income Tax Act (PITA) still retains the exemption granted to educational institutions from personal income taxation.

Another remarkable legal issue is that whenever any administrative arm of government exercises power beyond what has been conferred upon it by the law, such action is said to be ultra vires and is subject to judicial review, the FIRS information circular has made a lot of bold assumptions and even gone ahead to specify conditions for granting tax exemptions to institutions beyond what has already been provided in already existing laws. The practical application of these assumptions and directives can be fraught with conflicts, subjective interpretations and potentially leading to legal dispute. As these recent legal issues have not yet been challenged in a court of law and there are chances that section 7 of the 2021 Finance Act and the accompanying FIRS circular might end up as a subject matter of litigation soon.

From a public policy viewpoint, there are several arguments against taxing private educational institutions; private educational institutions often provide significant public benefits, such as educating future leaders, fostering innovation, and contributing to societal development. Taxing these institutions could reduce their ability to offer scholarships, invest in research, and maintain high educational standards as institutions operate on tight budgets, relying heavily on tuition fees and donations. Imposing taxes could lead to increased tuition fees, making education less accessible to students from lower-income families thereby negatively affecting funding and investment in education.

The FIRS has shown a poor understanding of what constitutes charitable objects of public character. In the social sector and non-profit management, charging a fee for services no matter the sector (educational, health, sports, religious etc.) does not amount to creating a business turnover in the sense of making a profit, technically such amounts are regarded as operating surplus rather than profit. In many European and African countries, private schools and NGOs receive substantial government subsidies

Given Nigeria’s perennial budget deficit, the government is always eager to increase revenue from various sectors. However, considering the challenges in the education sector and the need for human capital development, imposing an income tax on educational activities might deter potential investors, raise the cost of education, and generate only minimal additional revenue for the government. This could further deteriorate the state of education in Nigeria, as the government has struggled to meet public demand for quality and accessible education. The education sector in Nigeria faces numerous challenges, including insufficient government funding and inadequate human and material resources. Therefore, stakeholders in this sector should advocate for a review of the 2021 Finance Act in future Finance Acts to create more opportunities for education funding and investment.

Chima is a (NFP) Not-for-Profit Management Expert and the secretary of Ikota Educational Foundation.