Drawing the line fairly between NGOs and tax

Nigeria’s decision to draw a clearer tax line between charitable organisations and commercial activities is, in principle, a step in the right direction. But if poorly implemented, the same policy could unintentionally weaken organisations providing essential services to some of the nation’s most vulnerable citizens.

The issue is not whether Non-Governmental Organisations (NGOs) should obey tax laws – they should. The real question is whether the government can distinguish between an organisation exploiting its non-profit status for commercial gain and one struggling to generate modest income simply to keep its charitable mission alive.

The Nigeria Tax Act 2025, which took effect on January 1, 2026, maintains tax exemptions for organisations involved in educational, religious and charitable activities of a public character, provided their profits are not derived from a trade or business carried on by the organisation. A distinction that is important.

An NGO receiving donations, grants or membership contributions to provide free healthcare, education, shelter or other social services should not ordinarily be treated in the same way as a commercial enterprise. Such organisations are performing functions that the government itself may otherwise have to finance.

The problem arises when an NGO begins operating businesses.

Consider an organisation caring for more than 100 children and supporting university students. Donations and family contributions may not always cover food, accommodation, education and healthcare. Establishing a fish farm, garri-processing venture or another small enterprise can therefore be a practical attempt to create sustainable funding.

It would be unfair to automatically regard such efforts as evidence that the organisation has abandoned its charitable purpose.

At the same time, the government cannot ignore the possibility of abuse.

Nigeria has a long history of businesses and individuals exploiting institutional loopholes to minimise tax liabilities. If simply registering an organisation as a non-profit were enough to shield every commercial activity from taxation, legitimate businesses would be placed at a disadvantage.

That is why the principle behind the new regime is sound: tax exemption should be tied to purpose and activity, not merely to an organisation’s name.

The danger lies in how that principle is applied. The definition of trade or business is broad, covering activities from which income is generated regardless of their scale or duration. For large and sophisticated organisations with accountants, lawyers and tax advisers, determining their obligations may be manageable.

For small community-based NGOs, it could be a nightmare.

Many of these organisations operate on shoestring budgets. They may have no dedicated financial officers, let alone tax specialists. Requiring them to navigate complex distinctions between charitable income and taxable business income could divert scarce resources away from the people they exist to serve.

There is also the danger of discouraging self-sufficiency.

Government should not create a system in which an NGO is effectively encouraged to remain permanently dependent on donations because establishing a modest income-generating project could trigger tax complications. Sustainable philanthropy should be encouraged, not punished.

Indeed, an organisation that generates income transparently to finance its social programmes may be more sustainable than one entirely dependent on unpredictable donations.

The answer, therefore, is not blanket exemption and certainly not blanket taxation.

The Nigeria Revenue Service should develop clear guidelines defining the circumstances under which income-generating activities undertaken by NGOs become taxable. The rules should take into account the scale of the activity, its relationship with the organisation’s charitable purpose, how profits are used and whether the activity competes directly with ordinary commercial businesses.

There should also be simplified compliance procedures for small NGOs. Yearly filing requirements may be necessary for transparency, but the government should ensure that compliance does not become so expensive or complicated that smaller organisations are forced out of operation.

Equally important is accountability, as NGOs enjoying tax privileges must demonstrate that their resources are genuinely being applied to their stated objectives. Financial statements, proper records and transparent reporting should be encouraged. Tax exemption should never become a licence for financial opacity.

The government should also consider incentives for NGOs that establish social enterprises whose proceeds are demonstrably reinvested into charitable programmes. Rather than viewing every income-generating activity with suspicion, policymakers should recognise that social enterprises can help reduce dependence on donations and strengthen the non-profit sector.

Finally, the new tax regime presents both an opportunity and a risk. Its strength is that it can improve accountability, close loopholes and ensure that genuine commercial businesses do not hide behind non-profit structures. Its weakness is that an overly rigid interpretation could impose unnecessary burdens on organisations already struggling to provide services in an environment of limited funding.

Nigeria needs a tax system that is firm enough to prevent abuse but flexible enough to recognise reality.

An NGO running a substantial commercial enterprise should not expect its profits to automatically enjoy charitable protection. But a small organisation processing garri or operating a fish pond simply to feed children in its care should not be treated as though it were a profit-driven corporation.

The line must be drawn carefully.