New Tax Law: State-by-State Breakdown of VAT Sharing Formula
- Nigeria's new VAT formula boosts states' share to 55%, marking a pivotal shift in fiscal federalism
- Federal Government’s VAT allocation drops from 15% to 10%, yielding a revenue shift of N461.27bn to states
- States and local governments forecast significant gains, while concerns about revenue gaps from VAT rate persist
Nigeria’s fiscal landscape is set for a major shift in 2026 as a new Value Added Tax sharing formula takes effect under the recently enacted National Tax Acts.
The change, approved by the Federal Executive Council and captured in the 2026–2028 Medium-Term Expenditure Framework and Fiscal Strategy Paper, significantly increases the share of VAT revenue flowing to states, reinforcing the push toward deeper fiscal federalism.
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Under the new framework, the 36 states are projected to receive a combined N5.07tn from VAT in 2026, representing 55 per cent of the total distributable VAT pool of N9.23tn. This marks a sharp increase from the N3.47tn allocated to states in 2025.
Federal government’s reduced share
One of the most notable changes is the reduction in the Federal Government’s VAT share from 15 per cent to 10 per cent, effective January 2026.
As a result, the Federal Government’s VAT allocation is expected to decline to N922.53bn in 2026, down from N1.04tn in 2025, despite strong growth in the overall VAT pool.
Had the old formula remained in place, the Federal Government would have earned an estimated N1.38 trillion from VAT in 2026.
The revised allocation, therefore, implies a notional revenue shift of about N461.27bn away from the centre to subnational governments, assuming revenue targets are met.
States, local governments gain more ground
The five percentage point increase in states’ VAT share translates directly into higher inflows. States will collectively gain the same N461.27bn that the Federal Government forgoes, lifting their allocation to N5.07tn in 2026.
Local Governments, whose share remains unchanged at 35 per cent, are also set to benefit from the expanding VAT base, with expected receipts rising to N3.23tn from N2.43tn in 2025.
This redistribution underscores a structural change rather than a temporary adjustment, as future projections maintain the same ratios.
Medium-term VAT outlook
The fiscal projections show VAT revenue continuing its upward trajectory. The VAT pool is forecast to grow to N10.87tn in 2027 and N13.28tn in 2028.
Applying the new formula, the Federal Government’s VAT receipts are expected to rise modestly to N1.09tn in 2027 and N1.33tn in 2028, driven purely by nominal growth.
States, however, stand to gain far more in absolute terms, with projected VAT allocations of N5.98tn in 2027 and N7.30tn in 2028. Local Governments are expected to receive N3.81tn and N4.65tn over the same period.
Pressure from shrinking main revenue pool
While VAT collections are rising, the broader Federation Account faces headwinds.
The main distributable revenue pool, largely driven by oil receipts, company income tax, and customs duties, is projected to shrink sharply from N60.26tn in 2025 to N41.06tn in 2026.
Under the existing sharing formula, the Federal Government’s allocation from this pool is expected to fall by about N10.1, from N31.74 to N21.63.
States and Local Governments will also see significant declines in their shares, highlighting why VAT is becoming an increasingly critical revenue source for subnational governments.
Stamp duty revenue adds support
Another bright spot for states is stamp duty revenue, previously known as the Electronic Money Transfer Levy.
The distributable pool from this source is projected to double to N456.07bn in 2026, following growth in digital transactions.
Using the same 10:55:35 sharing formula as VAT, states are expected to receive N250.84bn in 2026, up sharply from N114.43bn in 2025. This trend is projected to continue through 2028 as electronic payments deepen across the economy.
Warnings on VAT rate policy
Despite the gains from redistribution, experts warn of potential revenue gaps.
The Nigeria Economic Summit Group and the International Monetary Fund have both cautioned that maintaining the current VAT rate could lead to revenue shortfalls, even with improved efficiency and enforcement.
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According to a report by Punch, the IMF estimates that the decision not to raise the VAT rate could reduce consolidated government revenue by up to 0.5 per cent of GDP, placing pressure on both federal and subnational budgets.
While the delay is justified by concerns over poverty and food insecurity, analysts note that states may need to strengthen internal revenue generation to fully capitalise on their increased VAT share.
Overall, the new VAT formula marks a decisive shift in Nigeria’s fiscal structure, positioning states and local governments as the primary beneficiaries of consumption-driven taxes from 2026 onward.
FG unveils Nigerians exempted from paying Income Tax
Legit.ng earlier reported that the Federal Government has announced major personal income tax exemptions that will take effect from January, offering relief to millions of low-income earners as enforcement of Nigeria’s new tax reforms begins.
Under the reforms, individuals earning up to about N100,000 per month will no longer be required to pay personal income tax.
The announcement was made by Taiwo Oyedele, chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, who said the changes had been designed to reduce hardship, improve fairness, and reset the relationship between citizens and the tax system.
Source: Legit.ng
