Tax Law: N5 Trillion VAT Windfall for States as New Formula Begins

Nigeria’s 36 states are poised for a major fiscal boost in 2026 as a revised VAT revenue-sharing formula takes effect under the new National Tax Acts, creating what analysts describe as a ₦5 trillion windfall for subnational governments. 

According to data in the 2026–2028 Medium-Term Expenditure Framework and Fiscal Strategy Paper approved by the Federal Executive Council, states’ share of the Value Added Tax (VAT) pool is set to rise significantly — a structural shift aimed at deepening fiscal federalism and strengthening the financial capacity of state governments. 

What Has Changed in the VAT Formula?

Under the previous formula used in 2025, VAT collections were distributed with 15 % going to the Federal Government, 50 % to states, and 35 % to Local Governments. In 2026, that structure changes to:

Federal Government: 10 %

States: 55 %

Local Governments: 35 % 

This adjustment means the Federal Government takes a smaller slice of the VAT revenue, while states — collectively — receive a larger share of the expanding VAT pool. 

Because the VAT pool itself is projected to grow from about ₦6.95 trillion in 2025 to ₦9.23 trillion in 2026, states are expected to receive roughly ₦5.07 trillion — up sharply from the ₦3.47 trillion they were due to collect under the old formula. 

What This Means for States and Local Governments

The revenue bump arrives at a time when many state governments are looking to expand programs in education, health, infrastructure, and security.

Proponents of the new tax law — including fiscal policy experts — argue that:

The higher VAT share empowers states to fund essential public services without over-dependence on federal allocations.

Local governments will also benefit as their 35 % share continues unchanged, but now based on a larger VAT pool.

The new structure rewards states with stronger consumption-based activity, encouraging economic development. 

However, analysts have also cautioned that states must use the windfall responsibly, investing in productive sectors rather than expanding recurrent expenditures. Achieving long-term development gains from this revenue increase hinges on prudent budgeting and transparency. 

Impact on the Federal Government

The Federal Government’s VAT receipts in 2026 are projected at ₦922.5 billion, down from an estimated ₦1.04 trillion in 2025 under the old distribution formula. Although this represents a decrease in federal VAT receipts, the overall national VAT pool is larger, meaning total VAT inflows remain significant at the national level. 

Economists have noted that while this structural shift benefits states, the Federal Government must ensure its broader fiscal strategy adapts — particularly in light of other revenue pressures and the need for sustainable growth. 

Broader Fiscal Reform Context

The revised VAT sharing formula is part of a wider overhaul of Nigeria’s tax system, which also includes reforms aimed at modernising revenue services and expanding compliance. These reforms — enacted in 2025 and implemented from January 2026 — reflect a long-term policy direction meant to strengthen revenue mobilisation and fiscal autonomy at subnational levels. 

Observers say that if states strategically deploy their increased VAT earnings toward infrastructure, human capital development, and security, the change could have significant implications for Nigeria’s federal fiscal landscape. If mismanaged, however, there is a risk that the revenue boost will not translate into tangible improvements for citizens.

Conclusion

The new VAT sharing formula marks a significant moment in Nigeria’s tax reform journey — one that redistributes fiscal capacity in favour of states and local governments. With an estimated ₦5 trillion windfall, state governments have an unprecedented opportunity to enhance service delivery and drive regional development.

The spotlight now turns to how these funds are used: for growth, stability, and citizen well-being, or for expanded government overheads.