New VAT Formula to Deliver ₦5.07tn Windfall to States in 2026

The 36 states of the federation are projected to receive a combined ₦5.07 trillion from Value Added Tax (VAT) in 2026 following the implementation of a new revenue-sharing formula under the National Tax Acts, findings by The PUNCH have shown.

The development is contained in the 2026–2028 Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) recently approved by the Federal Executive Council.

Under the revised VAT allocation formula, which takes effect from January 2026, the Federal Government’s share of VAT revenue has been reduced from 15 per cent to 10 per cent. In contrast, states’ allocation has increased from 50 per cent to 55 per cent, while local governments retain their 35 per cent share.

According to projections in the fiscal document, total distributable VAT revenue is expected to rise sharply to ₦9.23 trillion in 2026, up from ₦6.95 trillion in 2025. Based on the new sharing ratio, the Federal Government is projected to receive ₦922.53 billion in 2026, down from ₦1.04 trillion in the previous year.

The ₦922.53 billion represents 10 per cent of the anticipated VAT pool for 2026, confirming the full implementation of the new formula. Had the former 15 per cent allocation been retained, the Federal Government’s VAT earnings would have stood at about ₦1.38 trillion. The revised formula therefore implies a revenue shortfall of approximately ₦461.27 billion for the Federal Government.

That same amount—₦461.27 billion—is expected to accrue to state governments as a result of the five-percentage-point shift in allocation. Consequently, states’ collective VAT revenue is projected to rise to ₦5.07 trillion in 2026, compared to ₦3.47 trillion in 2025.

Local governments, whose share remains unchanged at 35 per cent, are projected to receive ₦3.23 trillion in 2026, up from ₦2.43 trillion in the previous year.

Although the Federal Government’s percentage share has declined, the strong year-on-year growth in VAT collections provides some cushion. However, the fiscal data clearly show that most of the growth in VAT revenue will now structurally flow to subnational governments under the new tax regime, which is designed to deepen fiscal federalism.

Further projections indicate that the VAT pool will expand to ₦10.87 trillion in 2027 and ₦13.28 trillion in 2028. Applying the 10 per cent allocation, the Federal Government’s VAT revenue is expected to rise to ₦1.09 trillion in 2027 and ₦1.33 trillion in 2028. States, with a 55 per cent share, are projected to earn ₦5.98 trillion in 2027 and ₦7.30 trillion in 2028, while local governments would receive ₦3.81 trillion and ₦4.65 trillion respectively.

Beyond VAT, projections show a sharp decline in the main Federation Account pool—largely driven by oil revenue, company income tax, and customs duties—from ₦60.26 trillion in 2025 to ₦41.06 trillion in 2026, representing a ₦19.2 trillion drop.

Using the existing revenue-sharing formula for the main pool, the Federal Government’s allocation is expected to fall from ₦31.74 trillion in 2025 to ₦21.63 trillion in 2026. States’ share is projected to decline from ₦16.10 trillion to ₦10.97 trillion, while local governments’ allocation would drop from ₦12.41 trillion to ₦8.46 trillion.

Although the main pool is expected to recover slightly to ₦45.67 trillion in 2027 and ₦50.90 trillion in 2028, Federal Government earnings from this source are projected to remain below 2025 levels.

Another component of distributable revenue—stamp duty, formerly known as the Electronic Money Transfer Levy—is projected to increase significantly from ₦228.85 billion in 2025 to ₦456.07 billion in 2026. The sharing formula mirrors that of VAT, with 10 per cent allocated to the Federal Government, 55 per cent to states, and 35 per cent to local governments.

Based on this structure, the Federal Government is expected to receive ₦45.61 billion from stamp duties in 2026, while states will earn ₦250.84 billion and local governments ₦159.62 billion. The growth is attributed to rising electronic transactions and wider adoption of digital financial services.

Commenting on the broader implications of the tax reforms, the Nigeria Economic Summit Group has warned that the Federal Government could face revenue shortfalls if the VAT rate is not increased. The Chief Executive Officer of NESG, Dr Tayo Aduloju, noted that maintaining the current VAT rate while streamlining taxes could weaken government revenue.

Similarly, the International Monetary Fund, in its Article IV Consultation Report on Nigeria, stated that although recent tax reforms represent progress, the decision not to raise the VAT rate could reduce government revenue by up to 0.5 per cent of Gross Domestic Product.

However, the IMF acknowledged the government’s decision to delay a VAT hike, citing rising poverty levels and food insecurity.

Meanwhile, the Chairman of the Presidential Fiscal Policy and Tax Reforms Committee, Mr Taiwo Oyedele, has projected that states could earn over ₦4 trillion annually from 2026 as VAT reforms take effect.

“With VAT reforms kicking in from 2026, states’ share will rise to 55 per cent. That could amount to over ₦4 trillion in 2026,” Oyedele said, adding that the key question would be how effectively the funds are utilised.