Rewriting Nigeria’s Fiscal Map with a New VAT Sharing Formula

By Zekeri Idakwo Laruba

In what may become one of the most consequential reforms of Nigeria’s fiscal system, President Bola Tinubu has signed into law a new Value Added Tax (VAT) sharing formula that dramatically alters how revenues are distributed across the country’s three tiers of government.

The reform is already generating robust debate across Nigeria’s regions, as it introduces a bold revenue-sharing model intended to promote equity, efficiency, and economic competitiveness—though not without controversy.

Under the newly approved structure, the federal government will receive 10 percent of VAT revenues, while states and local governments will take 55 percent and 35 percent, respectively. This marks a significant departure from previous arrangements and reflects a broader push toward decentralization and fiscal federalism.

But beyond the headline figures lies a more complex and potentially contentious formula for how states share their portion of the revenue. The 55 percent allocated to the 36 states will be shared based on three metrics: 50 percent by equality (distributed equally among all states), 20 percent by population, and 30 percent by consumption—meaning the place where goods and services are actually used.

In practice, states with higher levels of consumer activity will receive a larger share. For fiscal policy experts and advocates of tax reform, this shift is not only logical but long overdue. By tying part of the allocation to actual consumption rather than crude derivation or population figures, the law incentivizes states to grow their internal markets.

States now have tangible reasons to attract businesses, encourage consumer spending, and formalize commercial activities, knowing these efforts will directly influence their share of VAT revenue. “This reform aligns with global best practices,” one economist close to the process noted. “It promotes accountability, encourages healthy competition, and rewards performance over politics.”

Yet, the political backlash has been immediate and pointed. Stakeholders from less industrialized northern states argue that the consumption-based formula tilts heavily in favor of the South, especially urbanised states like Lagos, Rivers, and Oyo, which already dominate VAT collections. They warn that the new model could deepen Nigeria’s longstanding regional economic disparities.

These concerns are not without merit. Under the new system, high-consuming states stand to benefit even more, while others risk falling further behind, relying solely on the equality and population metrics to stay afloat. Civil society groups and regional coalitions in the North have described the reform as “imbalanced,” calling for broader consultations and adjustments before implementation.

Some political leaders have even hinted at possible legislative amendments that could reduce the consumption weighting or increase the equality portion, in a bid to protect economically weaker states. Nonetheless, supporters of the new law argue that merit-based revenue sharing is the path to national growth.

“You can’t keep rewarding inertia,” a reform advocate said. “This is about realigning incentives. If states want bigger slices of national revenue, they should earn it through performance and innovation.” The new VAT formula is set to take effect in January 2026, allowing time for governments at all levels to prepare.

Already, some state governments are establishing internal tax and consumption data units to ensure they are better positioned under the new system. More than just a fiscal adjustment, the new VAT structure signals a philosophical shift in Nigeria’s approach to federalism.

For decades, the emphasis was on equal sharing, often disconnected from contribution or need. The new approach attempts to balance fairness with performance, and social equity with economic logic. If properly implemented—with transparency, administrative efficiency, and public awareness—it could mark a significant turning point in Nigeria’s search for a more responsive and responsible fiscal system.

Still, much depends on how the federal government manages the discontent the policy has triggered, and whether it can listen without backtracking. What is clear, however, is that Nigeria’s national conversation around tax, fairness, and development has been reignited—and the outcome could reshape the country’s fiscal destiny.

Zekeri Idakwo Laruba is the Assistant Editor PRNigeria and Economic confidential. [email protected]