VAT reform pays off as states secure N2.37tn allocation

State governments received N2.37 trillion from Value Added Tax (VAT) allocations in the first half of 2026, representing a 23.5 percent increase from the N1.92 trillion they received during the same period in 2025.

The increase followed the introduction of a new VAT sharing formula, which shifted an estimated N219.72 billion from the Federal Government’s allocation to the states.

According to an analysis of Federation Account Allocation Committee (FAAC) reports, VAT remained one of Nigeria’s biggest sources of government revenue. It accounted for 31.2 percent of the N14.08 trillion shared among the federal, state and local governments between January and June 2026.

A total of N4.39 trillion generated from VAT was distributed during the six-month period, up from N3.84 trillion shared in the first half of 2025, representing a 14.3 percent increase.

Out of the N4.39 trillion shared, state governments received N2.37 trillion, local government councils got N1.51 trillion, while the Federal Government received N431.43 billion.

The highest VAT allocation to states came from January 2026 revenue, which was shared in February. States received N551.77 billion from that allocation. The figure later dropped to N340.52 billion and N283.47 billion in the following months as VAT collections slowed.

However, allocations increased again in April, with states receiving N410.90 billion. They got N378.83 billion in May before the amount rose to N407.40 billion in June.

Compared to the same period in 2025, states recorded higher VAT allocations in five out of six months. January saw the biggest increase, rising from N359.39 billion in 2025 to N551.77 billion in 2026.

The improvement was driven by stronger VAT collections and the implementation of the Nigeria Tax Act, which came into effect on January 1, 2026.

Under the old VAT sharing formula, the Federal Government received 15 percent of VAT revenue, states got 50 percent, while local governments received 35 percent.

The new law reduced the Federal Government’s share to 10 percent and increased the states’ share to 55 percent, while local governments continued to receive 35 percent.

Based on the N4.39 trillion shared during the first half of 2026, the revised formula transferred about N219.72 billion from the Federal Government to state governments.

If the old formula had remained in place, the Federal Government would have received about N651.15 billion, while states would have received around N2.15 trillion. Instead, the Federal Government received N431.43 billion and states got N2.37 trillion.

The new law also changed how VAT revenue is shared among states. Under the current system, 50 percent is distributed equally among states, 20 percent is based on population, and 30 percent is allocated according to where goods and services are consumed.

This replaced the previous method, which largely favoured states where companies maintained their headquarters.