Federal Government’s VAT share drops to 10% under new tax laws, while states and councils gain bigger slice of growing revenue pool
The 36 states of the federation are projected to receive a combined N5.07 trillion from Value Added Tax (VAT) revenue in 2026, following the implementation of a new VAT sharing formula introduced under the National Tax Acts.
The revised allocation framework is contained in the 2026–2028 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper, recently approved by the Federal Executive Council (FEC).
Under the new tax regime, which takes effect from January 2026, the Federal Government’s share of VAT revenue will be reduced from 15 per cent to 10 per cent, while states’ allocation will increase from 50 per cent to 55 per cent. Local governments will retain their 35 per cent share.
Projections in the fiscal framework show that the Federal Government’s VAT revenue is expected to decline to N922.53 billion in 2026, compared with N1.04 trillion in 2025, despite a significant expansion in the overall VAT pool.
The projected N922.5 billion represents 10 per cent of the anticipated N9.23 trillion distributable VAT revenue for 2026, confirming the full implementation of the revised sharing formula.
In 2025, when the previous formula was still in effect, the Federal Government received 15 per cent of a VAT pool projected at N6.95 trillion. Had that formula been retained in 2026, the Federal Government’s VAT allocation would have risen to approximately N1.38 trillion.
Instead, with the reduced 10 per cent share, the Federal Government is expected to receive N922.5 billion, representing a difference of N461.27 billion. This amount effectively reflects the revenue now redirected to states under the new allocation structure, assuming the VAT revenue target is achieved.
As a result of the five percentage point shift, states’ total VAT allocation is projected to rise to N5.07 trillion in 2026, up sharply from N3.47 trillion in 2025. This represents 55 per cent of the N9.23 trillion VAT pool, compared with 50 per cent of N6.95 trillion the previous year.
Local governments, whose allocation ratio remains unchanged at 35 per cent, are projected to receive N3.23 trillion in 2026, an increase from N2.43 trillion in 2025.
While the year-on-year growth in VAT revenue provides some buffer for the Federal Government, the data indicates that the bulk of future VAT growth will now structurally benefit subnational governments, in line with the policy objective of strengthening fiscal federalism.
Further projections in the MTEF/FSP show that the VAT pool is expected to expand to N10.87 trillion in 2027 and N13.28 trillion in 2028. Based on the 10 per cent allocation, the Federal Government’s VAT revenue is projected to rise to N1.09 trillion in 2027 and N1.33 trillion in 2028.
Over the same period, states are expected to receive N5.98 trillion in 2027 and N7.30 trillion in 2028, while local governments are projected to collect N3.81 trillion and N4.65 trillion, respectively.
Beyond VAT, projections show a sharp contraction in the main Federation Account, which is largely funded by oil revenue, company income tax, and customs duties. The total distributable revenue from this pool is expected to decline from N60.26 trillion in 2025 to N41.06 trillion in 2026, representing a drop of N19.2 trillion.
Under the existing revenue-sharing formula 52.68 per cent for the Federal Government, 26.72 per cent for states, and 20.60 per cent for local governments the Federal Government’s allocation from the main pool is projected to fall from N31.74 trillion in 2025 to N21.63 trillion in 2026, a reduction of about N10.1 trillion.
States’ allocations from the main pool are expected to decline from N16.10 trillion to N10.97 trillion, while local governments’ share is projected to drop from N12.41 trillion to N8.46 trillion.
Although a gradual recovery is expected in subsequent years, with the main pool projected to rise to N45.67 trillion in 2027 and N50.90 trillion in 2028, Federal Government revenues from this source are still expected to remain below 2025 levels.
Another growing revenue stream is stamp duty revenue, previously known as the Electronic Money Transfer Levy (EMTL). The distributable stamp duty pool is projected to increase from N228.85 billion in 2025 to N456.07 billion in 2026.
Using the same sharing formula as VAT, 10 per cent to the Federal Government, 55 per cent to states, and 35 per cent to local governments, the Federal Government is expected to receive N45.61 billion in 2026, up from N34.33 billion the previous year.
States’ stamp duty revenue is projected to nearly double to N250.84 billion, compared with N114.43 billion in 2025, while local governments are expected to receive N159.62 billion, up from N80.10 billion.
The increase has been attributed to the expansion of electronic payment systems and the growing adoption of digital financial services nationwide.
Looking ahead, stamp duty revenue is projected to rise further to N579.82 billion in 2027 and N752.45 billion in 2028, with corresponding increases across all tiers of government.
The new VAT sharing formula, combined with rising stamp duty collections, underscores a broader shift in Nigeria’s public finance structure, positioning states and local governments as the primary beneficiaries of consumption-based taxes.
Meanwhile, concerns remain over potential revenue gaps at the federal level. The Nigeria Economic Summit Group (NESG) has warned that the Federal Government could face revenue shortfalls if the VAT rate is not increased as part of ongoing tax reforms.
Similarly, the International Monetary Fund (IMF) has cautioned that maintaining the current VAT rate could result in an immediate revenue loss of up to 0.5 per cent of GDP, even as it acknowledged the government’s decision to delay a rate hike due to rising poverty and food insecurity.
Speaking recently, the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Taiwo Oyedele, noted that states could generate over N4 trillion annually from VAT starting in 2026, raising critical questions about how the additional funds will be utilised.
“The question,” he said, “is whether the money will simply be spent—or strategically invested.”
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