Tax law: N5tn VAT windfall for states as new formula begins

The 36 states of the federation are set to receive an estimated N5.07tn as their share of Value Added Tax in 2026, following the commencement of a new VAT sharing formula introduced under the National Tax Acts, findings by SOCIETY WATCH have shown.

This development is contained in the 2026–2028 Medium-Term Expenditure Framework and Fiscal Strategy Paper approved by the Federal Executive Council.

According to the fiscal framework, the implementation of the new National Tax Acts from January 2026 will reduce the Federal Government’s VAT share from 15 per cent to 10 per cent, while the states’ share rises from 50 per cent to 55 per cent, and Local Governments continue to receive 35 per cent.

According to the projections in the MTEF/FSP document, the Federal Government’s VAT allocation is expected to drop to N922.53bn in 2026, down from N1.04tn in 2025, even as the VAT pool itself grows significantly year on year.

The projected N922.5bn allocation to the Federal Government represents 10 per cent of the anticipated N9.23tn distributable VAT revenue for 2026, confirming the full implementation of the new formula.

Under the previous formula used in 2025, the Federal Government received 15 per cent of the VAT pool, which was projected at N6.95tn for that year. The difference in share means the Federal Government will now receive five percentage points less of a larger pool.

If the previous 15 per cent formula had been retained in 2026, the Federal Government’s VAT share would have amounted to approximately N1.38tn. With only 10 per cent allocated under the revised law, the Federal Government is projected to receive N922.5bn.

The difference between the two figures is N461.27bn, which represents what the Federal Government may forfeit to the states as a result of the revised allocation ratio, if the revenue target is met.

The five percentage point shift in VAT share from the Federal Government to states is projected to give states an additional N461.27bn in 2026, pushing their collective allocation to N5.07tn, up from N3.47tn in 2025.

The 2026 figure represents 55 per cent of the N9.23tn pool, compared to the 50 per cent share of the N6.95tn pool in 2025. Local Governments, whose VAT share remains unchanged at 35 per cent, are expected to collect N3.23tn in 2026, up from N2.43tn in 2025.

The year-on-year growth in total VAT revenue, from N6.95tn to N9.23tn, provides some cushion to the Federal Government, even as it absorbs the loss in its percentage share. However, the data also makes it clear that the bulk of the VAT growth is now structurally flowing to subnational governments under the new tax law, which aims to deepen fiscal federalism.

Further projections in the fiscal document show that the VAT pool is expected to increase to N10.87tn in 2027 and N13.28tn in 2028. Applying the 10 per cent share, the Federal Government’s VAT revenue is projected to rise to N1.09tn in 2027 and N1.33tn in 2028.

These nominal increases reflect the expanding VAT base but do not reverse the structural shift in distribution. By contrast, the states’ 55 per cent share will yield N5.98tn in 2027 and N7.30tn in 2028, while Local Governments are projected to receive N3.81tn and N4.65tn respectively under their constant 35 per cent share.

The long-term trend indicates that state and local governments are now better positioned to benefit from rising VAT collections, especially as tax net expansion and digital enforcement continue to improve.