By Favour Pius
Value Added Tax (VAT) allocations to states surged by 74 per cent year-on-year to ₦423 billion in January 2026, reflecting improved tax collections and the impact of ongoing fiscal reforms aimed at boosting non-oil revenue.
Data from the Federation Account Allocation Committee (FAAC) showed that the sharp increase represents a significant jump from the ₦243 billion shared among states in January 2025, underscoring the growing importance of consumption tax as a stable revenue source for subnational governments.
The rise in VAT revenue comes amid intensified efforts by the Federal Inland Revenue Service (FIRS) to expand the tax net, improve compliance, and leverage technology to track transactions across the formal and informal sectors.
Industry analysts attribute the strong performance to a combination of factors, including inflation-driven increases in the prices of goods and services, improved remittances from businesses, and stricter enforcement measures targeting tax evasion.
Nigeria’s VAT, currently charged at 7.5 per cent, has increasingly become a critical lifeline for states, many of which continue to grapple with declining allocations from oil revenues and rising fiscal pressures.
Under the existing revenue-sharing formula, VAT proceeds are distributed among the three tiers of government, with states receiving a significant portion based on factors such as population, equality, and derivation.
Economic experts say the latest figures highlight a gradual shift in Nigeria’s fiscal structure, where internally generated revenue and consumption taxes are playing a more prominent role in public finance.
“This growth in VAT collections reflects both economic realities and policy direction,” a Lagos-based economist said. “With oil revenues remaining volatile, governments are turning to more sustainable sources like VAT to fund their obligations.”
However, analysts caution that part of the increase may be nominal rather than real, as rising inflation continues to push up the cost of goods and services, thereby inflating tax receipts without necessarily translating into improved purchasing power or economic welfare.
The development also comes at a time when states are under pressure to meet rising recurrent expenditures, including salaries, infrastructure commitments, and debt servicing obligations.
For many state governments, the boost in VAT allocation is expected to provide short-term fiscal relief and support budget implementation, particularly in the first quarter of the year when revenue inflows are often constrained.
From an industry perspective, tax experts note that sustained growth in VAT collections will depend on continued reforms in tax administration, digitalisation of the economy, and efforts to formalise informal sector activities.
They argue that expanding the tax base, rather than increasing tax rates, remains the most viable path to improving revenue without stifling economic activity.
“There is still significant untapped potential in Nigeria’s VAT system,” a tax consultant noted. “If compliance improves and more businesses are brought into the net, collections could rise further without placing additional burden on existing taxpayers.”
The surge in VAT revenue also reflects broader macroeconomic adjustments, including exchange rate reforms and changes in consumption patterns, which have influenced the value of taxable transactions across sectors.
Nevertheless, concerns remain over the distribution and utilisation of these funds, with calls for greater transparency and accountability at the state level to ensure that increased allocations translate into tangible development outcomes.
As Nigeria continues its push for fiscal sustainability, stakeholders believe that strengthening tax systems, enhancing compliance, and promoting economic growth will be key to maintaining the upward trajectory in VAT revenues and reducing dependence on oil earnings.
