Nigeria’s VAT Sharing Debate: Who Gets More, Who Loses Money?

By Ugo Inyama

Nigeria’s VAT system is best understood as a communal well. The well may sit in one place, but it is dug by many hands. Some contribute labour, others provide tools, while others maintain the channels that keep the water flowing. Everyone drinks from it because everyone contributes to filling it. To argue that access should depend solely on the well’s physical location is to ignore the shared effort that made the water available in the first place.

That metaphor captures the heart of Nigeria’s VAT debate.

Public discussion often focuses on what consumers pay at the till. That framing misses the real argument. The more consequential issue begins after VAT is collected: who controls the pool, who benefits most from the sharing formula, and which states quietly subsidise the rest of the federation.

VAT is collected centrally, pooled nationally, and redistributed across the three tiers of government. The controversy, therefore, is not whether VAT should exist, but whether its distribution reflects economic reality while still holding the federation together.

Lagos and the Reality of VAT Generation

No fact exposes this tension more clearly than Lagos.

In 2024, Lagos State generated roughly ₦2.75 trillion in VAT, accounting for about 54% of total VAT collected nationwide. No other state comes close. Yet Lagos receives only a modest share through statutory allocation. VAT is easiest to collect where transactions are formal, digital, invoiced, and traceable. Lagos has those systems at scale. Many other states do not.

Telecoms companies, banks and other service industries account for large volumes of VAT centrally at head office level, and most of those head offices are located in Lagos, even though their operations span the country. Add Nigeria’s major ports, customs services, regulatory agencies, multinational headquarters, and dense financial infrastructure serving the whole federation, and the picture becomes clearer.

Economic activity exists everywhere in Nigeria, but VAT capture does not. As a result, VAT appears to be generated mainly in Lagos even when consumption occurs across the country.

This outcome is structural, not accidental. Nor is it attributable to any exceptional compliance culture unique to Lagos residents. In Nigeria, as in most countries, VAT is a national pool tax rather than a location-based tax. Lagos is where the wellhead sits, but the water flows in from nationwide pipes of labour, trade, production, and consumption.

Why VAT Reform Is Back on the Table

Two pressures are driving renewed calls for reform.

First, oil revenue has become increasingly volatile, while debt servicing obligations continue to rise. Consumption taxes are therefore being viewed as a more reliable and predictable source of public revenue.

Second, high-performing states are questioning a system in which they generate large volumes of VAT but receive relatively little in return. What was once a technical fiscal formula has become a political test of Nigeria’s federal arrangement.

VAT now stands in for a larger question: should Nigeria reward contribution more strongly, or prioritise redistribution above all else?

Who Gains from Reform

Any reform that places greater weight on derivation or formal economic capture will favour states with large, traceable, and institutionally embedded economies.

Lagos remains the clearest beneficiary. Rivers is likely to follow, driven by oil and gas services, logistics, and formal contracting. Abuja benefits from government services, construction, hospitality, and organised retail.

Ogun and Oyo occupy a strategic middle ground. Their proximity to Lagos provides access to ports, airports, and federal transport corridors, combined with lower land costs. These advantages have supported manufacturing, logistics, and warehousing. Under a system that rewards formal activity, these states would retain more VAT generated locally.

The logic is consistent. Infrastructure attracts formal businesses. Formal businesses generate VAT. VAT follows systems, not sentiment.

Who Is Likely to Lose

The more uncomfortable question is who stands to lose if VAT reform shifts further towards derivation.

States with limited formal economies, weak administrative capacity, and low transaction traceability are most exposed. This includes many states in the North East, parts of the North West, and sections of the North Central region, where economic life is dominated by subsistence activity, informal trade, agriculture, and dependence on public sector spending.

In these states, consumption is real but poorly captured. Markets function and goods move, but much of that activity sits outside formal invoicing and digital payment systems. Under the current formula, these states benefit significantly from equality and population-based sharing. Any reduction in those components would reduce their relative receipts unless matched by rapid improvements in infrastructure and administrative systems.

Some South South states also face risk where oil-related services have declined and diversification has been limited. As downstream activity weakens, VAT capture falls, exposing structural vulnerability.

The South East is not immune and currently ranks among the lowest VAT contributors. This is not due to a lack of economic activity, but how that activity is structured and captured. Unlike the South West, South East states host few corporate headquarters, no major seaports, and limited large-scale, formally structured service industries where VAT collection is automatic. Economic life is spread across markets, transport services, small manufacturing clusters, wholesale and retail trade, hospitality, and construction.

Although the region has high commercial energy, the dominance of small and fragmented enterprises limits VAT capture, as many operate below the VAT registration threshold. This reflects policy design rather than any refusal to contribute to the national pool.

This is not a judgment on effort or enterprise. It is a structural outcome of how VAT works. VAT rewards formality, scale, and traceability.

Conclusion

Nigeria’s VAT sharing debate is ultimately about incentives.

States that invest in infrastructure to formalise transactions, and scale enterprises into the formal economy will appear stronger under any VAT system. States that do not will continue to look economically weak on paper, regardless of how vibrant their markets are in reality.

The communal well could remain open, but those who deepen the channels and maintain the flow will inevitably draw more water. VAT reform is coming, but it need not be abrupt. A phased transition will be necessary to give states time to strengthen capacity, formalise economic activity, and invest in systems that improve VAT capture. The real contest is not who argues the loudest, but who adapts fastest.

*Ugo Inyama writes from African Digital Governance Centre, Manchester, UK
e: Ugo@africandgc.org
w: www.africandgc.org