Decentralising VAT could lead to over 50 percent revenue loss for Nigerian States

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Decentralising VAT collection could slash State revenues by over 50%, Fiscal Policy Chief Warns

Johannesburg, South Africa – The decentralisation of Value Added Tax (VAT) collection in Nigeria could result in a revenue loss of more than 50% for all states, according to Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee. This warning came in response to concerns raised by the Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) regarding the VAT revenue-sharing formula proposed in tax reform bills currently under review in the National Assembly.

In a detailed statement on Wednesday, Oyedele highlighted the critical importance of ongoing tax reforms to promote inclusive economic growth and addressed the RMAFC’s objections.

He urged constructive engagement to resolve disputes surrounding VAT administration, particularly the ongoing legal battle between Rivers and Lagos states and the federal government over control of VAT revenues.

Oyedele explained that VAT, introduced in 1993 to replace the sales tax previously administered by states, was centralised for efficiency. However, it remains fundamentally a state tax. Currently, the Federal Inland Revenue Service (FIRS) collects VAT centrally, distributing the revenue according to a formula that allocates 15% to the federal government, 50% to state governments, and 35% to local governments.

“The decentralisation of VAT collection would fragment the system, reduce compliance, and significantly shrink the revenue pool,” Oyedele said. “This could lead to a revenue loss exceeding 50% for all states, severely impacting their ability to fund essential development projects.”

In 2022, Nigeria collected more than ₦2.5 trillion (£5.3 billion) in VAT revenues, a 21% increase from the previous year. States rely heavily on these funds for critical services, including infrastructure, education, and healthcare. For instance, Lagos alone generated ₦700 billion (£1.5 billion) in VAT revenue, accounting for over 50% of the national total. Rivers followed with ₦180 billion (£386 million), while several northern states collectively generated less than ₦100 billion (£215 million).

The decentralisation debate has brought regional economic disparities into sharp focus. Economically vibrant states such as Lagos and Rivers argue for greater control over VAT generated within their borders, while less industrialised states depend on redistributed funds to sustain their economies.

Oyedele warned that decentralisation could exacerbate these disparities, creating fiscal imbalances that undermine national unity.

“The legal battles over VAT are a distraction from the broader goal of fiscal sustainability and inclusive growth,” Oyedele noted. “Instead of decentralisation, we should focus on reforms that improve compliance, broaden the tax base, and ensure equitable resource allocation.”

As Nigeria undertakes comprehensive tax reforms, Oyedele called for a balanced approach that safeguards efficiency while addressing regional inequalities. He emphasised the need for collaboration among the federal government, states, and the private sector to build a robust and equitable tax system.

“The reforms must create a framework that ensures all stakeholders benefit equitably while maintaining the integrity of the VAT system,” he added.

Experts have warned that drastic policy shifts could destabilise state revenues. Instead, they advocate strengthening tax administration, increasing compliance rates, and introducing targeted adjustments to the revenue-sharing formula to address disparities.

With Nigeria’s tech and industrial hubs generating the lion’s share of VAT, the outcome of the National Assembly’s deliberations on the tax reform bills will shape the country’s fiscal landscape. Stakeholders are keenly watching for resolutions that balance efficiency, equity, and sustainable development in Africa’s largest economy.

This debate underscores the critical interplay between governance, economic policy, and regional equity in Nigeria’s efforts to achieve inclusive growth.