Rise in VAT Earnings and Shift in Revenue Distribution
The total Value Added Tax (VAT) earnings for January reached N1.08tn, marking a significant increase compared to the previous month. This rise coincided with the implementation of a new sharing formula, which changed how the proceeds are distributed among the Federal Government, states, and Local Governments.
According to documents obtained by The PUNCH, the Nigeria Revenue Service (NRS) collected N1.08tn in VAT during January 2026, up from N913.96bn in December 2025. The increase of N169.20bn represents an 18.5 per cent growth month-on-month. However, not all of this amount was available for distribution due to deductions at source.
Deductions amounted to N79.94bn in January, compared to N67.45bn in December, leaving a net VAT of N1.00tn for distribution. In contrast, the net VAT shared in December stood at N846.51bn, resulting in a month-on-month increase of N156.72bn, or 18.5 per cent.
New Sharing Formula and Its Impacts
January marked the first full month under the revised VAT sharing formula. Under the new structure, 10 per cent of net VAT goes to the Federal Government, 55 per cent to state governments, and 35 per cent to Local Governments. Previously, the Federal Government received 15 per cent, while states and Local Governments received 50 per cent and 35 per cent respectively.
If the old formula had been used, the Federal Government would have received about N150.48bn from the N1.00tn net VAT shared in January. Instead, it received N100.32bn, reflecting a shortfall of roughly N50.16bn. Conversely, states saw their share increase to N551.77bn, up from N501.61bn under the previous system.
Local Governments also benefited, receiving N351.13bn in January, compared to N296.28bn in December. The cost of collection rose alongside the higher VAT pool, with the NRS VAT cost of collection increasing to N43.33bn in January from N32.72bn in December.
Breakdown of VAT Allocations
The new sharing formula has led to significant changes in revenue distribution across states. Lagos emerged as the largest beneficiary, with a gross VAT allocation of N111.22bn in January. After deductions, it retained N101.34bn as state net VAT, with local governments collectively receiving N70.57bn.
Other top beneficiaries included Oyo with N24.04bn, Rivers with N23.57bn, Kano with N17.37bn, and the FCT-Abuja with N15.76bn. At the lower end of the scale, Ebonyi received N9.45bn, Ekiti N9.83bn, Taraba N9.37bn, and Nasarawa N9.77bn.
The non-import VAT collections for January stood at N913.47bn, compared to N721.83bn in December. Lagos alone generated N533.40bn in non-import VAT, accounting for 58.39 per cent of the total.
Economic Concerns and Reforms
While the new VAT sharing formula is expected to boost state revenues, economic analysts have raised concerns about how these funds will be utilized. Prof Segun Ajibola, a former Chairman of the Chartered Institute of Bankers of Nigeria, emphasized that the Federal Government has historically focused on other revenue sources, such as capital gains tax and excess duties.
Dr Ayo Teriba, CEO of Economic Associates, noted that VAT originally belonged to states but was centralized for ease of collection. He argued that the Federal Government should retain a stronger share due to its responsibilities. However, he urged states to focus on unlocking internal revenue rather than relying solely on statutory allocations.
Future Projections and Challenges
The PUNCH reported that the 36 states of the federation could receive an estimated N5.07tn as their share of VAT in 2026 under the new sharing formula. This development is outlined in the 2026–2028 Medium-Term Expenditure Framework and Fiscal Strategy Paper approved by the Federal Executive Council.
However, with VAT earnings exceeding projections in January and February, states may earn more than N5.07tn if the current trend continues throughout the year. Despite this, the Nigeria Economic Summit Group warned that the Federal Government could face revenue shortfalls if it does not increase the VAT rate as part of ongoing tax reforms.
The International Monetary Fund (IMF) highlighted the potential impact of maintaining the current VAT rate, noting that it could lead to a revenue shortfall of up to 0.5 per cent of GDP. While the decision not to raise the VAT rate is seen as reasonable given high poverty and food insecurity, it may force subnational governments to either reduce spending or seek alternative financing.
State Revenue and Accountability
Economic analysts have called on state governments to intensify efforts to unlock internal revenue as their allocations increase. They emphasized the need for transparency in the use of these funds, urging states to set up desks to account for the increased VAT allocations and make reports public.
States like Enugu have been cited as models for effectively unlocking revenue through initiatives that do not rely on taxing people. Analysts encouraged other states to emulate this approach, focusing on improving internal revenue generation rather than depending solely on statutory allocations.
