Proponents see the new VAT sharing formular as a step toward equitable distribution, addressing long-standing imbalances, while critics worry about potential disruptions to state finances and autonomy.
The Presidency asserts that these changes are part of broader fiscal reforms led by the Presidential Committee on Fiscal Policy and Tax Reforms to strengthen the nation’s tax system and ensure fair resource allocation.
These reforms are expected to modernize the tax framework and address inefficiencies that have historically hindered economic growth and resource allocation.
Tax bill debates take effect
One of the proposed bills recently presented to the nation’s lawmakers seek to revise Nigeria’s VAT sharing formula by reducing the federal government’s allocation from 15% to 10% while incorporating the derivation principle into state-level allocations.
The reform seeks to equitably distribute revenues while offering tax exemptions for small businesses and individuals to boost grassroots economic growth.
However, critics warn it may deepen regional economic disparities, particularly disadvantaging northern states that heavily depend on federal allocations.
This perceived imbalance has fueled concerns that the reforms may exacerbate the divide between the wealthier southern states and the economically fragile northern regions, deepening tensions within Nigeria’s federal structure.
Under the new model, 60% of VAT revenue will be allocated to the state where goods and services were consumed, 20% distributed based on population, and the remaining 20% equally shared among all states.
The proposed shift from a revenue distribution model based on company remittance locations to one emphasizing consumption patterns has faced backlash, particularly from northern state governors.
Critics argue that the derivation-based model unfairly benefits southern states, exacerbating economic disparities and threatening Nigeria’s fiscal federalism.
The resistance to VAT reforms has exposed a deeper issue: the over-reliance of some states on federal allocations rather than actively developing their internal revenue-generating capacities.
An analysis of revenue data from Nigeria’s Federation Account Allocation Committee (FAAC) reveals significant disparities in the redistribution of VAT proceeds among states.
A report by CableIndex, shared on its X account, highlighted inequalities in VAT contributions and disbursements for the period of January to December 2024.
The analysis categorizes states based on the proportion of VAT revenue they received relative to their contributions, shedding light on distortions in the federal allocation system.
The table below outlines the top five VAT-contributing states and the five lowest contributors in Nigeria, along with the amounts they received during the period;
| Highest contributors | ||||
|---|---|---|---|---|
| Rank | State | Contribution | Allocation | % |
|
1 |
Lagos |
2.75 trillion |
460.1 billion |
16.74 |
|
2 |
Rivers |
832 billion |
186.6 billion |
22.40 |
|
3 |
Oyo |
272.2 billion |
116.8 billion |
42.90 |
|
4 |
Kano |
77.7 billion |
117.19 billion |
150.70 |
|
5 |
Delta |
73.39 billion |
80.73 billion |
110.00 |
| Lowest contributors | ||||
| Rank | State | Contribution | Allocation | % |
|
1 |
Imo |
4.38 billion |
70 billion |
1,613 |
|
2 |
Abia |
8.6 billion |
63.7 billion |
734.8 |
|
3 |
Kebbi |
8.77 billion |
66.5 billion |
758.5 |
|
4 |
Cross River |
9.36 billion |
64.25 billion |
686.5 |
|
5 |
Ondo |
14.79 billion |
68.62 billion |
463.8 |
The table highlights significant disparities in VAT contributions and allocations among Nigerian states in 2024, showcasing the imbalance in the country’s revenue-sharing system.
- Top Contributors: Lagos contributed ₦2.75 trillion but received only ₦460.1 billion (16.74%). Rivers (₦832 billion) received 22.40%, while Delta and Kano received allocations exceeding their contributions by 110% and 150.70%, respectively.
- Low Contributors: Imo contributed ₦4.38 billion but received ₦70 billion, 1,613% of its contribution. Other low contributors like Abia and Kebbi also received about 734% and 758% of what they contributed during the period.
Key Insights
States like Lagos and Rivers, which generate significant VAT revenue due to their industrial and commercial activities, receive allocations that are only a fraction of their contributions.
Conversely, states with low VAT contributions, such as Imo and Abia, receive allocations far exceeding their input, highlighting the redistributive nature of Nigeria’s federal revenue-sharing formula.
This distribution, based on principles of equity rather than derivation, highlights the contentious debate about reforming Nigeria’s fiscal federalism to address perceived imbalances.
