In this article, we have examined the companies’ income tax obligations of educational institutions prior to the FA21 amendment, the implications of the FA21 amendment and the impact of the policy changes introduced.
Upon the subject of education, I can only say that I view it as the most important subject which we as a people may be engaged in.- Abraham Lincoln
Education is not only essential but a necessity for human advancement. According to Wikipedia, an educational institution is a place where people of different ages gain an education, including preschools, childcare, primary-elementary schools, secondary-high schools, and universities.
Over the years, there have been several policy reforms that have directly or indirectly impacted the educational sector in Nigeria. The most recent policy reform is the amendment of Section 23(1)(c) of the Companies Income Tax Act (CITA) by the Finance Act 2021 (FA21). This amendment has begun to raise controversies among stakeholders and the general populace.
Pre-Finance Act 2021
Prior to the FA21, Section 23(1)(c) of 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.” Consequently, the profits of companies that provided educational services of a public character should be exempted from Companies Income Tax (CIT). However, the tax authority had a different interpretation of the provision of the tax law, thereby resulting in disputes. These disputes led to the cases between American International School Lagos (AIS) vs Federal Inland Revenue Service (FIRS) and another case between Best Children International School Limited (BCIS) vs FIRS.
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 CIT. The court, however, dismissed the FIRS arguments, holding that AIS is registered as a company limited by guarantee, therefore, should be qualified for the exemption provided by Section 23 (1)(c ) of CITA.
The ruling was quite different in the case between BCIS vs FIRS, where the court ruled in favour of FIRS on the basis that BCIS is a profit-making company limited by shares and should be liable to CIT according to the provisions of CITA. The court also held that only companies limited by guarantee qualify for the exemption in Section 23(1)(c ) of CITA. Dissatisfied with the judgement, BCIS proceeded to the Court of Appeal (COA), but the COA upheld the decision of the FHC and held that since BCIS is profit-making, it does not qualify for the exemption under Section 23(1)(c) of CITA.
Finance Act 2021 Amendment
Now that the FA21 has amended Section 23(1)(c), it is essential to examine the new provisions. The FA21 amendment deleted the word “educational” from Section 23(1)(c) of CITA. On the surface, one may hastily conclude that all educational institution will now be subject CIT. This is why many stakeholders and taxpayers are asking questions like - “are all educational institutions now liable to CIT?”
Note that based on a combined reading of the two decided cases above, it can be concluded that the legal form of an educational institution was the primary basis for qualifying for the CIT exemption. Hence, educational institutions set up as limited by guarantee should enjoy the exemption from CIT. Would that basis remain valid with the deletion of the word “educational” from Section 23(1)(c) by the FA21 amendment?
From a fundamental point of view, the amendment by FA21 suggests that profit derived from educational activities will now be liable to CIT. This leads to another question - on what basis would an educational institution registered as company limited by guarantee or incorporated trustee be subject to tax, considering that they do not make profits for distribution to members or promoters? It is necessary to examine this question because the basis for determination of CIT is profit from business activities. It is our opinion that the answer to this question will to a large extent resolve the ongoing controversy. Another question that comes to mind is - on what basis would the profits of an educational institution registered as an incorporated trustee, business name or partnership be subject to tax, considering that they are not subject to income tax under CITA? The simple answer to this is that they are not liable to income tax under CITA. But will this not amount to unfair treatment of the various education institutions?
While these question remains unanswered, we would dive into the likely implications of this amendment to educational institutions and the Nigerian educational sector.
Implications of the Amendment on Education in Nigeria
The implications of the FA21 amendment could be far-reaching for privately-owned educational institutions when considering the present condition of the educational sector in Nigeria, with particular emphasis on government-owned educational institutions. Private educational institutions have cushioned the effect of the present challenges in the educational sector, such as poor teachers’ welfare, inadequate of infrastructure, poor governance, poor funding, amongst others.
Millions of Nigerians have accessed quality education with the help of these private institutions. The implications of subjecting the privately-owned educational institutions to income tax could result in the increased tax burden for the educational institutions. And since most educational institutions do not make profit, the supposed income tax would be included in its books as additional expense item which would be passed on to pupils and students in the form of tuition. This would amount to taking one step forward and several backwards because while tax revenue would increase, private education would become more expensive and outside the reach of majority of the populace. It would also amount to subjecting educational institutions to income tax on an unfair basis, since most educational institutions are non-profit making and a good number of them are registered as incorporated trustee, business name or partnership.
Although this amendment may lead to additional revenue for the government, it could have more devastating consequences for the educational sector in Nigeria. The existing educational challenges would likely worsen and affect more Nigerian as the impact of the FA21 may lead to an increased demand for government educational institutions that most certainly has inadequate and over-stretched facilities and lack the resources to cater to the rapidly growing population.
Notwithstanding the pressure to generate increased revenue to fund the budget and run the economy, it is pertinent for government to always consider the far-reaching impacts of policy changes on the general populace.
Director, Tax & Regulatory Services
Manager, Tax & Regulatory Services
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