Nigeria’s 2026 VAT reform: What the shift to consumption means for states

If you’ve been following the tax changes in Nigeria, one of the biggest shifts in the 2026 reforms is how Value Added Tax (VAT) is now being shared.

Before the reform, VAT was mostly tied to the state where a company had its head office.

This meant that states like Lagos benefited hugely because many big companies—from banks to telecom firms and manufacturers—were registered there. Under the old system, it didn’t matter much where the goods were sold, or the services were used.

As long as the company’s headquarters was in Lagos, a large chunk of the VAT collected from that company’s operations across Nigeria went to Lagos.

The new 2026 VAT formula passed by President Bola Tinubu has changed that. It now puts more weight on where the goods and services are actually consumed—that is, where people buy and use them. This is a big deal because the final consumer ultimately pays VAT. The new rule tries to send more of that money back to the state where the spending actually happened.

The opportunity created by the new tax reform

The 2026 VAT reform moved Nigeria in the right direction by linking revenue more closely to actual consumption rather than just company headquarters. This creates a genuine opportunity for states that have strong local economic activity but were previously disadvantaged under the old system.

States with large populations and active markets—such as Kano, Rivers, Ogun, and Abia—now have a better chance of increasing their share. Lagos will likely remain the biggest beneficiary because it continues to be Nigeria’s commercial nerve centre with massive daily spending.

However, its overwhelming dominance has been reduced. Ogun is also well-positioned because of its growing industrial base and proximity to Lagos. The reform rewards states that can demonstrate real spending and economic activity within their borders. It reduces the old advantage that purely head-office states enjoyed and gives states with strong local consumption a fairer chance.

The case for stronger incentives

However, there is still a major weakness in the current setup. Even with the new formula, VAT continues to be shared through a complex national calculation. While this is fairer than before, it still weakens the direct incentive for states to grow their local economies aggressively.

If a state is the one creating the environment and driving the spending that generates VAT, it should keep a larger portion of what it creates. The current sharing arrangement, while improved, still dilutes the reward for states that invest in infrastructure, attract businesses, and formalise their markets. When states know they will keep a greater share of the VAT they generate, they become more serious about building real economic capacity.

This includes improving roads, security, power supply, and creating better conditions for businesses and consumers. True development comes from building capacity locally, not from depending entirely on monthly federal allocations.

How states can improve VAT collection under the new reform

The shift to a consumption-based model presents a real opportunity for states. Still, they must take deliberate action to benefit from it. Simply waiting for monthly allocations will not be enough. States need to actively increase both the generation and proper attribution of VAT within their borders.

To do that, they should focus on the following steps:

Formalise the informal sector: A large portion of economic activity in many states happens in informal markets. States like Abia (Aba), Kano, Anambra (Onitsha), and Lagos should launch aggressive campaigns to register traders and small businesses. This includes mass issuance of Tax Identification Numbers (TINs), simplified registration processes, and working directly with market associations.

Bringing informal traders into the formal system will significantly increase VAT collection: Under the new formula, 30% of VAT allocation is based on consumption. States must work closely with the Nigeria Revenue Service (NRS) to ensure accurate data on where goods and services are actually consumed. This requires better coordination, investment in digital systems, and requiring large distributors to report the final destination of goods.

Invest in infrastructure and create business-friendly environments: States that build good roads, improve electricity supply, and develop industrial parks and markets will attract more businesses and increase local spending. Ogun State has already benefited from its proximity to Lagos and industrial development. Other states can replicate this by creating the right conditions for businesses to thrive and for money to circulate locally.

Strengthen collaboration with the Nigeria Revenue Service: States should establish dedicated liaison teams with the IRS. This includes sharing local economic data, identifying unregistered businesses, and pushing for accurate place-of-consumption reporting. Without strong collaboration, states risk losing out on the benefits of the new formula.

Focus on high-consumption sectors: States should prioritise sectors that generate frequent transactions, such as retail markets, telecommunications, hospitality, transportation, and financial services. Encouraging local production and consumption also helps keep more economic activity—and the resulting VAT—within the state.

The 2026 VAT reform has opened a window of opportunity: States that move quickly to formalise their informal sectors, improve data collection, invest in infrastructure, and create business-friendly environments will benefit the most. Those that continue to rely solely on allocations without building real economic activity risk falling further behind. At the end of the day, the states that treat VAT generation as a local responsibility—rather than just waiting for federal sharing—will be the ones that grow stronger and more self-reliant in the years ahead.