New Tax Law Pushing for Fiscal Federalism, Sub-nationals Getting more Resources
The implementation of Nigeria’s new tax law is quietly redefining the country’s fiscal architecture, with states and local governments emerging as the biggest beneficiaries of a revised Value Added Tax (VAT) sharing formula that significantly reduces the Federal Government’s take.
Under the new regime, which comes into force in January 2026, VAT revenue is being redistributed in a manner that strengthens subnational governments, positioning them to collectively earn an estimated ₦5tn annually, while the Federal Government’s share drops to about ₦922bn.
The shift marks one of the most far-reaching outcomes of the ongoing tax reforms, signalling a deliberate move by the Federal Government to devolve more financial responsibility—and opportunity—to states and councils that are closer to citizens and local economic activity.
Data reviewed by The Punch indicate that the revised VAT framework reflects a policy recalibration aimed at aligning revenue with consumption patterns, which predominantly occur at the state and local government levels.
A senior revenue official familiar with the policy said the reform was driven by long-standing complaints from governors and council chairmen that the old VAT structure constrained development and deepened dependency on federal allocations.
“You cannot continue to centralise consumption-based revenue when service delivery is largely a subnational responsibility,” the official said.
With the new formula, states are expected to enjoy greater fiscal headroom to fund education, healthcare, infrastructure and security, sectors that have come under intense pressure amid rising population growth and shrinking federal transfers.
Analysts say the VAT reform could also alter the political economy of governance, forcing state governments to become more accountable to residents who generate the revenue through consumption.
“This reform changes the conversation,” said a Lagos-based public finance analyst. “States will no longer have Abuja as their first excuse. The money is coming closer to the people, and expectations will rise.”
The Federal Government, for its part, appears prepared to absorb the revenue reduction, banking on improved efficiency in other tax streams, including company income tax, customs duties and non-oil revenues.
Officials argue that the centre’s reduced VAT share does not amount to fiscal weakening but rather reflects a more balanced allocation of national resources in line with economic realities.
However, the reform is unfolding against a backdrop of public anxiety over taxation, with widespread misinformation fuelling fears that the new laws will impose heavier burdens on ordinary Nigerians.
Government sources insist that the VAT changes are not designed to punish low-income earners, noting that VAT remains a consumption tax and that essential goods and services continue to enjoy exemptions.
Still, labour unions and civil society groups have warned that without strict oversight, the anticipated ₦5tn VAT inflow may fail to deliver tangible improvements in living standards.
Some state governments have already begun internal projections based on the new formula, with finance commissioners describing it as a potential game-changer for budget planning and debt management.
“This could reduce our borrowing significantly if managed well,” a northern state official said, adding that predictability in VAT revenue would improve capital project execution.
As the January 2026 rollout approaches, attention is shifting from projections to performance—whether states and councils will translate the VAT windfall into visible development or reinforce public scepticism about taxation and governance.
What is clear, analysts say, is that the new VAT law has moved Nigeria closer to fiscal decentralisation, placing greater responsibility on subnational governments to justify the taxes Nigerians pay with results they can see and feel.
Culled from Punch