Tax law: VAT hits record N1tn as new sharing era begins
Nigeria’s Value Added Tax pool crossed the N1 trillion mark for the first time in a single month, marking a fiscal milestone under the country’s restructured tax regime. Fresh documents presented at the February meeting of the Federation Account Allocation Committee (FAAC) show that VAT collections for January 2026 rose sharply, reshaping revenue flows among the three tiers of government.
The data indicate that gross VAT revenue stood at N1.08tn in January, up from N913.96bn recorded in December 2025 — an 18.5 per cent month-on-month increase. After statutory deductions and adjustments, the net distributable VAT amounted to N1.00tn, compared to N846.51bn shared in December.
The development underscores the impact of sweeping reforms introduced under the new National Tax Acts, which took effect on January 1, 2026. Analysts say the record performance signals improved compliance and stronger economic activity, though it also highlights structural tensions over revenue allocation.
New sharing formula alters fiscal balance
January marked the first full month of implementation of the revised VAT sharing formula. Under the new framework, 10 per cent of net VAT accrues to the Federal Government, 55 per cent to state governments, and 35 per cent to Local Governments.
Previously, the Federal Government retained 15 per cent, states received 50 per cent, and Local Governments maintained their 35 per cent share.
From the N1.00tn net VAT distributed in January, the Federal Government received N100.32bn. States collectively shared N551.77bn, while Local Governments obtained N351.13bn.
Under the former 15 per cent formula, the Federal Government would have received about N150.48bn from the same distributable pool. The shift therefore represents an estimated N50bn reduction in federal VAT inflow for the month.
Conversely, states benefited from a corresponding increase of roughly N50bn due to the upward revision of their allocation ratio.
In December, federal VAT receipts stood at N126.98bn. January’s N100.32bn allocation reflects a decline of over 21 per cent compared to the previous month, largely attributable to the new formula rather than reduced collection.
States emerge major beneficiaries
The restructured sharing template has significantly strengthened subnational fiscal positions. State governments saw their collective VAT allocation rise from N423.25bn in December to N551.77bn in January — a 30.4 per cent increase.
Local Governments also recorded gains, receiving N351.13bn compared to N296.28bn in December, reflecting an 18.5 per cent rise.
Beyond VAT, the broader FAAC disbursement summary shows total funds available for distribution in January stood at N3.04tn across revenue lines. After total deductions of N1.14tn, net distributable revenue amounted to N1.90tn. Of this figure, N896.78bn came from statutory revenue, while VAT accounted for N1.00tn.
When statutory revenue and VAT allocations were combined, the Federal Government received N525.23bn, states N767.29bn, and Local Governments N517.28bn. The 13 per cent derivation allocation stood at N90.19bn.
Lagos maintains dominance in VAT generation
A breakdown of VAT distribution among states reveals a continued concentration of economic activity in Lagos State. Lagos recorded a gross VAT allocation of N111.22bn for January. After deductions of N9.89bn, the state retained N101.34bn as net VAT. Its Local Governments collectively received N70.57bn.
Non-import VAT generation data further highlight the disparity. Of the N913.47bn in non-import VAT collected nationwide in January, Lagos alone generated N533.40bn — representing 58.39 per cent of total collections.
Other notable contributors included Oyo (N67.18bn), Rivers (N66.35bn), the Federal Capital Territory (N39.73bn), and Bayelsa (N34.62bn). States such as Kano, Katsina, Delta, and Kaduna also ranked among top recipients.
At the lower end of the allocation scale were Ebonyi, Ekiti, Taraba, and Nasarawa, each receiving below N10bn in gross VAT allocation.
Although 50 per cent of the states’ distribution formula is based on equality, the 30 per cent population and 20 per cent derivation components continue to widen allocation disparities between high-activity and lower-activity states.
Rising cost of collection
Higher VAT receipts were accompanied by increased administrative costs. The Nigeria Revenue Service’s 4 per cent cost of collection rose to N43.33bn in January from N32.72bn in December.
Deductions to the North East Development Commission Project Account (3 per cent) climbed to N31.20bn, while the 0.5 per cent allocation to the Revenue Mobilisation Allocation and Fiscal Commission increased to N5.42bn.
Combined, these statutory deductions amounted to N36.61bn in January, up from N30.89bn the previous month.
Reform outlook and revenue debate
The new VAT performance comes amid broader fiscal reform discussions led by the Presidential Fiscal Policy and Tax Reforms Committee chaired by Taiwo Oyedele. The committee projects that states could earn over N4tn annually from VAT beginning in 2026 if the current trajectory is sustained.
However, debates persist over whether the current VAT rate should be adjusted. The Nigeria Economic Summit Group has warned that maintaining the existing rate without upward revision could result in revenue shortfalls.
Similarly, the International Monetary Fund, in its recent Article IV consultation, noted that retaining the current rate may reduce consolidated government revenue by up to 0.5 per cent of GDP.
The Federal Government has defended its decision not to raise the VAT rate for now, citing elevated poverty levels and food insecurity, alongside the incomplete rollout of social protection mechanisms.
States urged to invest wisely
Economic analysts argue that increased allocations must translate into measurable improvements in infrastructure, healthcare, education, and agricultural productivity. While VAT has historically been a modest contributor to federal revenue, it is increasingly central to subnational budgets.
Experts emphasize that states should avoid overreliance on statutory transfers and instead expand internally generated revenue bases through economic diversification and investment-driven growth.
With VAT collections already surpassing budget benchmarks by over N288bn in January alone, fiscal authorities will closely monitor trends in subsequent months. If the performance is sustained, 2026 could become a defining year in Nigeria’s intergovernmental revenue architecture — one where VAT reshapes fiscal autonomy at the state and local levels.
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