Nigeria's fiscal architecture is undergoing a profound transformation with the implementation of a new Value Added Tax (VAT) revenue sharing formula, set to take full effect from January 2026. This landmark change, enshrined in the National Tax Acts and approved by the Federal Executive Council, represents a decisive move towards greater fiscal federalism, significantly empowering state governments.
A Major Redistribution of National Revenue
The core of the reform is a substantial reallocation of the distributable VAT pool. Under the new framework, the 36 states of the federation will collectively receive 55% of total VAT revenue, a notable increase from their previous share. This translates to a projected sum of N5.07 trillion in 2026, drawn from a total VAT pool estimated at N9.23 trillion. This marks a sharp rise from the N3.47 trillion allocated to states in 2025.
Conversely, the Federal Government's portion has been reduced. Its share drops from 15% to 10%, which is expected to yield N922.53 billion in 2026. Analysts note that had the old formula remained, the Federal Government would have earned approximately N1.38 trillion. Therefore, the revised policy initiates a notional revenue shift of about N461.27 billion from the federal centre to subnational governments.
Medium-Term Projections and Broader Fiscal Context
This redistribution is not a one-off event but a structural shift embedded in the 2026–2028 Medium-Term Expenditure Framework. Projections indicate continued growth in the VAT pool, reaching N10.87 trillion in 2027 and N13.28 trillion in 2028. Consequently, while federal receipts will grow nominally to N1.09 trillion and N1.33 trillion in those years, state allocations are set to surge to N5.98 trillion (2027) and N7.30 trillion (2028).
Local Governments, whose share remains fixed at 35%, will also see their receipts grow from N2.43 trillion in 2025 to N3.23 trillion in 2026, and further to N4.65 trillion by 2028, benefiting from the expanding VAT base.
This enhanced focus on VAT comes at a critical time. The main distributable revenue pool from sources like oil, Company Income Tax, and customs duties is forecast to contract sharply from N60.26 trillion in 2025 to N41.06 trillion in 2026. This decline underscores why VAT is becoming an increasingly vital revenue stream for states and local governments.
Additional Gains and Expert Warnings
States are poised to gain further from other revenue streams. The distributable pool from stamp duties, formerly the Electronic Money Transfer Levy, is projected to double to N456.07 billion in 2026. Using the same 10:55:35 sharing formula, states are expected to receive N250.84 billion, a significant jump from N114.43 billion in 2025.
However, economic experts have sounded notes of caution. Bodies like the Nigeria Economic Summit Group and the International Monetary Fund (IMF) warn that maintaining the current VAT rate could lead to revenue shortfalls. The IMF estimates that not raising the VAT rate might reduce consolidated government revenue by up to 0.5% of GDP, creating budgetary pressure at all levels.
While the delay in a rate hike is linked to concerns over poverty and food insecurity, analysts stress that states must now strengthen their internal revenue generation mechanisms to fully capitalize on their increased VAT share and mitigate potential gaps.
This VAT reform coincides with other tax changes, including personal income tax exemptions for individuals earning below approximately N100,000 monthly, as announced by Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms. Collectively, these policies aim to reshape Nigeria's tax landscape, offering relief to low-income earners while redistributing fiscal power to subnational governments.
