Nigeria: Private Educational Institutions: Why Are They Not Taxable?

Last Updated: 16 February 2016
Article by Yomi Olugbenro

Perhaps, what is required in Nigeria is categorization of the educational institutions into proprietary educational institutions and not-for-profit educational institutions. The proprietary may be allowed to charge higher fees and be subjected to tax as appropriate while the not-for-profit institutions continue to operate charging reasonable tuition fees and enjoying full tax exemption

"Ask me my three main priorities for government and I tell you education, education, and education". This was Rt Hon. Tony Blair of United Kingdom in October 1996. As far as Nigeria is concerned, the level of infrastructural deficit has made education just one of the critical priorities. There are three other priorities in power, housing and transport in no particular order of importance. For instance, Nigeria has an estimated $300 billion infrastructure gap which the current government needs to finance.

The reality today in Nigeria is one in which private educational institutions are thriving at the expense of the public educational institutions. The one time pride primary and secondary are now shadows of themselves. Many are littered with dilapidated structures and reek of neglect. Interventions and salvage missions by alumni organisations are the stories of these institutions at the moment. The uncertain school calendar has also made the tertiary institutions most unattractive and have increased the number of Nigerian freshmen/undergraduates involved in educational pilgrimages outside the country.

The relevance of an educational system in which private educational institutions complement educational service delivery in a competitive manner cannot be over-emphasised. Nigeria's literacy rate is 69.1% and the country has 54% of her citizens between the ages of 15 and 39. It is important that Nigeria must continue to be a learning society, develop talents and raise the ambitions of the youth. It is important also that Nigerian children should continue to be able to not only "gain the basic tools for life and work in schools [but also] to learn the joy of life: the exhilaration of music, the excitement of sport, the beauty of art, the magic of science as well as learn the value of life i.e. what it is to be responsible citizens who give something back to their community."

Apart from stable curriculum, private educational institutions charge significantly high fees relative to the public educational institutions. The incidence of high tuition and other related fees has provoked the concern whether or not such institutions are taxable in Nigeria.

In Nigeria, the provisions of section 23(1)(c) of Companies Income Tax Act, Cap C.21, Laws of the Federation of Nigeria (LFN) 2007 (as amended) ('CITA') provide that 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 shall be exempt from tax. However, CITA provides for taxation of passive income (dividend, interest, rent or royalty) when earned by such educational institutions.

The recent ruling of the Tax Appeal Tribunal (TAT) sitting in Lagos in the case of American International School of Lagos (AIS) v. Federal Inland Revenue Service (FIRS) has brought the question whether or not private educational institutions should be taxable full round circle.

In this suit, AIS had contended that as an educational institution, it is exempted from payment of company income tax and tertiary education tax on the grounds that it is a company limited by guarantee and engaged solely in educational activities of a public character.

FIRS submitted that the fees charged by AIS was high and not affordable to all Nigerians and therefore does not qualify as educational institutions of a public character envisaged under Section 23(1) of CITA.

TAT ruled in favour of AIS on the grounds that its income are generated from the provision of educational services and there was no evidence that any part of the society is denied access to its services.

Public character is not specifically defined by CITA but connotes benefits of Nigerians in general especially the public. Educational institutions in Nigeria are generally incorporated as companies limited by guarantee. This form of incorporation are widely used for charities and other not-for-profit companies. The implication is that they are not expected to distribute their profits to their members but retain the surplus funds for providing academic programs.

The challenge of how to fund the 2016 budget may warrant the need to review the exemption of income list under section 23 of CITA with a view to determining items of income whose current exemption status may have to be rolled back.

In the interim, it may be worthwhile to probe closely in relation to private educational institutions the following:

  1. whether the profits are directly or indirectly distributed;
  2. the extent the income and property are applied solely towards the promotion of its object;
  3. how the income from commercial activities are accounted for;
  4. the extent of compliance with the accounting reporting requirements; and
  5. compliance with section 55 of CITA in terms of annual returns.

Perhaps, what is required in Nigeria is categorization of the educational institutions into proprietary educational institutions and not-for-profit educational institutions. The proprietary may be allowed to charge higher fees and be subjected to tax as appropriate while the not-for-profit institutions continue to operate charging reasonable tuition fees and enjoying full tax exemption. FIRS may need to examine and/or re-examine the activities of these institutions from time to time to ensure that their primary purpose has not been compromised.



2. Nigerian Bureau of Statistics

3. Op Cit 1

4. Proprietary is activity carried out with the intention of making profit. Proprietary educational institution means for-profit education.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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