In a landmark move that will make states earn more and reshape Nigeria’s fiscal landscape, the Senate has passed two of four crucial Tax Reform Bills, approving a new revenue-sharing formula for Value Added Tax (VAT) while retaining the current 7.5% VAT rate.
The new VAT distribution formula shifts the balance in favor of states and local governments. Under the proposed law, the Federal Government will now receive 10% of VAT proceeds, while 55% will go to states and the Federal Capital Territory, and 35% to local governments. This marks a major shift from the existing formula, which gives 15% to the Federal Government, 50% to states, and 35% to local governments.
Senate President Godswill Akpabio announced that the remaining two bills would be considered in plenary today. The approved bills, part of a broader tax overhaul, are the Nigeria Revenue Service (Establishment) Bill, 2025 and the Joint Revenue Board (Establishment) Bill, 2025. They now await concurrence from the House of Representatives and President Bola Ahmed Tinubu’s assent to become law.
The reforms are designed to modernize Nigeria’s tax system, boost revenue generation, enhance accountability, and ensure equitable distribution of tax proceeds. One of the major updates includes redefining the term “derivation” to align with “place of consumption,” ensuring that VAT revenue is shared based on where goods and services are actually consumed rather than where they are sold or manufactured.
For states, the allocation of VAT will be based on a new formula: 50% by equality, 20% by population, and 30% by place of consumption. Local governments will receive 70% of their share using equality (30%) and the remaining 70% based on population figures.
The Senate also slashed the tax collection fee for revenue agencies from 4% to 2%, especially for oil revenue, after Sen. Seriake Dickson argued that the previous rate led to excessively high collections for agencies.
A major structural change was introduced in the Nigeria Revenue Service Bill, where the President will serve as Chairman of the Board, while an Executive Vice Chairman, subject to Senate confirmation, will lead the Service. Additionally, the bill ensures regional inclusivity by mandating that six Executive Directors be appointed, one from each geopolitical zone, rotating to prevent concentration of power within any single state.
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Clause 4 of the bill expands the responsibilities of the Revenue Service to include assessing corporate taxpayers, collaborating with ministries to reform outdated tax regimes, and enabling actions such as tracing, freezing, and seizing assets derived from tax fraud or evasion. Clause 13(2) mandates that the Secretary to the Board must be a qualified financial or legal expert, not below Deputy Director level, and annual reports must be submitted within three months of each fiscal year’s end.
The Senate also approved stringent penalties for tax default. Individuals and companies that fail to register for taxes will face fines starting from N100,000, with continued penalties of N50,000 monthly. Failing to file returns attracts N200,000 in the first month and N50,000 monthly thereafter. Failure to keep proper records will cost individuals N10,000 and companies N100,000, while failing to remit taxes can lead to fines and imprisonment of up to three years.
Senate President Akpabio praised the Finance Committee and a group of “elder senators” for navigating the contentious provisions through dialogue and consultation. He dismissed claims that the new tax laws were designed to favor specific regions, affirming that the reforms are tailored to benefit all Nigerians equally.
With the passage of these bills, Nigeria moves one step closer to a more transparent, efficient, and inclusive tax system that empowers states and ensures fairer revenue distribution in line with modern economic realities.
