The Nigerian government's plans to restructure Value Added Tax (VAT) revenue-sharing have sparked both support and criticism, with proponents seeing it as a step towards equitable distribution and critics warning of potential disruptions to state finances and autonomy. The reform seeks to equitably distribute revenues and offer tax exemptions for small businesses and individuals to boost grassroots economic growth.

The proposed changes are part of broader fiscal reforms led by the Presidential Committee on Fiscal Policy and Tax Reforms to strengthen the nation's tax system and ensure fair resource allocation. One of the proposed bills recently presented to the nation's lawmakers seeks to revise Nigeria's VAT sharing formula by reducing the federal government's allocation from 15% to 10% while incorporating the derivation principle into state-level allocations.

Under the new model, 60% of VAT revenue will be allocated to the state where goods and services were consumed, 20% distributed based on population, and the remaining 20% equally shared among all states. However, critics argue that the derivation-based model unfairly benefits southern states, exacerbating economic disparities and threatening Nigeria's fiscal federalism.

An analysis of revenue data from Nigeria's Federation Account Allocation Committee (FAAC) reveals significant disparities in the redistribution of VAT proceeds among states. A report by CableIndex highlights inequalities in VAT contributions and disbursements for the period of January to December 2024. The analysis categorizes states based on the proportion of VAT revenue they received relative to their contributions, shedding light on distortions in the federal allocation system.

The table below outlines the top five VAT-contributing states and the five lowest contributors in Nigeria, along with the amounts they received during the period. Lagos contributed ₦2.75 trillion but received only ₦460.1 billion (16.74%). Rivers (₦832 billion) received 22.40%, while Delta and Kano received allocations exceeding their contributions by 110% and 150.70%, respectively. On the other hand, Imo contributed ₦4.38 billion but received ₦70 billion, 1,613% of its contribution. Other low contributors like Abia and Kebbi also received about 734% and 758% of what they contributed during the period.

The disparities in VAT contributions and allocations among Nigerian states in 2024 highlight the imbalance in the country's revenue-sharing system. States like Lagos and Rivers, which generate significant VAT revenue due to their industrial and commercial activities, receive allocations that are only a fraction of their contributions. Conversely, states with low VAT contributions, such as Imo and Abia, receive allocations far exceeding their input, highlighting the redistributive nature of Nigeria's federal revenue-sharing formula.

The debate surrounding VAT reforms has exposed a deeper issue: the over-reliance of some states on federal allocations rather than actively developing their internal revenue-generating capacities. The proposed changes have sparked concerns that the reforms may exacerbate the divide between the wealthier southern states and the economically fragile northern regions, deepening tensions within Nigeria's federal structure.

As the Nigerian government pushes forward with its fiscal reforms, it remains to be seen how the proposed VAT changes will impact the country's economy and regional dynamics. One thing is clear, however: the need for a more equitable and sustainable revenue-sharing system is imperative for Nigeria's long-term growth and development.