The distribution of value-added tax (VAT) revenue in Nigeria has once again come under scrutiny. New data from Agora Policy shed light on the significant disparities between states’ contributions to the VAT pool and their subsequent allocations.
The report, based on figures from the Federation Accounts Allocation Committee (FAAC) for 2024, has reignited debates about fiscal fairness, equity, and systemic reform, further fueling the controversy surrounding the proposed tax reform bills.
Introduced in 1993 to replace the Sales Tax, VAT has become a cornerstone of Nigeria’s non-oil revenue collection, administered by the Federal Inland Revenue Service (FIRS). Despite its critical role in boosting revenue, the formula for VAT distribution has been a source of longstanding controversy. Under the current framework, revenue is shared as follows:
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- 50% based on equality among all states
- 30% based on population
- 20% based on derivation (the state where the VAT was generated)
This formula, while ostensibly designed to promote national cohesion and reduce regional disparities, has been criticized for its perceived inequity, particularly by states that generate significant VAT revenue but receive only a fraction in return.
The disparities highlighted by the 2024 FAAC data have amplified the controversy surrounding proposed reforms to Nigeria’s tax system. A tax and fiscal policy committee led by Taiwo Oyedele recently recommended a revised VAT-sharing formula:
- 20% based on equality
- 60% based on derivation
- 20% based on population
The proposed formula aims to address inequities by granting higher revenue shares to states based on their contributions. However, the Nigeria Governors’ Forum (NGF) rejected this proposal, instead suggesting an alternative formula:
- 50% based on equality
- 30% based on derivation
- 20% based on population
While both formulas diverge in emphasis, they have sparked heated debates, with critics arguing that the NGF’s proposal does little to address the systemic imbalances inherent in the current framework.
The controversy surrounding these proposals is rooted in the glaring disparities in VAT contributions and allocations, which are seen by many as emblematic of deeper fiscal inequities across Nigeria’s geopolitical regions.
Disparities in Contributions and Allocations
The 2024 data reveals a stark imbalance in VAT remittances. Lagos state, Nigeria’s economic powerhouse, contributed N2.75 trillion to the VAT pool—nearly half of the total VAT revenue generated. Despite this, the state received only N460 billion in return, representing just 16.7 percent of its contributions.
Similarly, Rivers state, another major contributor, generated N832 billion but received only N186.6 billion, or 22.4 percent of its input.
In sharp contrast, states with minimal contributions to the VAT pool often receive allocations far exceeding their input:
- Kano State: Contributed N77.7 billion but received N117.1 billion.
- Katsina State: Contributed N22 billion but was allocated N85.6 billion.
- Abia State: Contributed N8.68 billion and received N63.78 billion—a 734.8 percent return.
- Imo State: Contributed N4.38 billion but received N70.7 billion—a 1,613 percent return.
| State | Contribution (?) | Received (?) | % Received |
|---|---|---|---|
| Lagos | 2.75 trillion | 460.1 billion | 16.74% |
| Rivers | 832.7 billion | 186.7 billion | 22.42% |
| Oyo | 272.4 billion | 116.8 billion | 42.89% |
| Kano | 77.8 billion | 117.2 billion | 150.70% |
| Delta | 73.4 billion | 80.7 billion | 110.00% |
| Bayelsa | 64.7 billion | 63.4 billion | 98.08% |
| Edo | 53.5 billion | 72.3 billion | 135.08% |
| Anambra | 47.5 billion | 78.0 billion | 164.12% |
| Akwa Ibom | 46.9 billion | 76.1 billion | 162.14% |
| Adamawa | 42.0 billion | 70.4 billion | 167.60% |
| Borno | 35.3 billion | 76.2 billion | 215.82% |
| Niger | 34.8 billion | 74.8 billion | 214.65% |
| Taraba | 32.4 billion | 63.2 billion | 195.40% |
| Kwara | 31.5 billion | 63.6 billion | 201.96% |
| Kaduna | 30.3 billion | 88.5 billion | 292.06% |
| Ekiti | 29.6 billion | 63.5 billion | 214.60% |
| Jigawa | 28.5 billion | 76.7 billion | 268.67% |
| Benue | 26.6 billion | 75.5 billion | 283.79% |
| Ogun | 26.2 billion | 72.1 billion | 275.66% |
| Sokoto | 26.0 billion | 71.9 billion | 276.89% |
| Gombe | 25.4 billion | 62.8 billion | 246.70% |
| Ebonyi | 25.1 billion | 61.4 billion | 244.68% |
| Kogi | 23.6 billion | 68.7 billion | 291.20% |
| Plateau | 22.1 billion | 67.9 billion | 307.08% |
| Katsina | 22.1 billion | 85.6 billion | 387.61% |
| Yobe | 19.8 billion | 61.8 billion | 312.12% |
| Bauchi | 19.6 billion | 77.5 billion | 395.31% |
| Zamfara | 17.8 billion | 67.9 billion | 380.72% |
| Nasarawa | 15.9 billion | 58.2 billion | 365.95% |
| Enugu | 15.4 billion | 67.5 billion | 438.66% |
| Osun | 14.8 billion | 68.6 billion | 463.81% |
| Ondo | 13.8 billion | 68.6 billion | 496.81% |
| Cross River | 9.4 billion | 64.2 billion | 686.54% |
| Kebbi | 8.8 billion | 66.6 billion | 758.54% |
| Abia | 8.7 billion | 63.8 billion | 734.76% |
| Imo | 4.4 billion | 70.7 billion | 1,612.85% |
Regional Breakdown of VAT Disparities
Across Nigeria’s geopolitical zones, the disparities are equally pronounced:
- South-West: Led by Lagos, the zone contributed N3.11 trillion (the largest share of VAT revenue) but received only N849.71 billion—27.4 percent of its contributions.
- South-South: Contributed N1.08 trillion but was allocated N543.49 billion—50.3 percent of its contributions.
- North-West: Contributed N211.27 billion but received N574.32 billion—271.8 percent of its contributions.
- North-East: Contributed N174.50 billion and received N411.84 billion—236 percent of its contributions.
- North-Central: Contributed N154.54 billion but received N408.66 billion—a 264.4 percent return.
- South-East: Contributed the least (N101.09 billion) but received N341.46 billion—a 337.8 percent return.
Collectively, southern states, driven by economic hubs like Lagos and Rivers, contributed N4.28 trillion to the VAT pool but received only N1.73 trillion—40.5 percent of their contributions. In contrast, northern states contributed N540.31 billion but received N1.39 trillion, representing a 258.2 percent return.
Tax Reform Debates
The glaring inequities in VAT distribution have become a central point of contention in Nigeria’s ongoing tax reform discussions. Advocates for reform argue that the current system disincentivizes revenue generation by states while disproportionately rewarding those that contribute less.
This controversy has significant implications for Nigeria’s broader fiscal policies. The Oyedele-led committee’s recommendations, which emphasize derivation, have the potential to incentivize states to strengthen their revenue-generation mechanisms. However, political resistance from influential groups, including the NGF, underscores the challenges of achieving consensus on reform.
The debates over VAT distribution have also fueled broader concerns about Nigeria’s federal structure and the need for fiscal federalism. Many believe that the current system perpetuates dependency on federal allocations, undermining states’ capacity to sustain independent economic growth.
