Nigeria’s fiscal landscape is filled with paradoxes, but few are as striking as the story of Value Added Tax (VAT) allocation across states. Regions known for intense entrepreneurial activity, dense trading networks, and vibrant industrial clusters often appear to contribute surprisingly little to national VAT receipts. Meanwhile, states with smaller economies or less visible commercial activity sometimes receive disproportionately higher allocations. This apparent contradiction raises fundamental questions for policymakers. Are VAT contributions truly reflective of economic productivity? Does the current allocation framework reward states fairly? And more importantly, how can fiscal policy be structured to ensure that vibrant economic ecosystems are properly recognized within the revenue system?
Recent data from the Federation Account Allocation Committee (FAAC) and Agora Policy on 2024 VAT collections highlights the scale of this paradox. Lagos, Nigeria’s undisputed commercial hub, generated an astonishing ₦2.75 trillion in VAT in 2024 yet received only ₦460.11 billion in allocation. This represents just 16.74 percent of what the state generated. By contrast, several states received allocations that far exceeded their contributions. Abia State contributed ₦8.68 billion but received ₦63.78 billion, representing about 734 percent of its contribution. Enugu State contributed ₦15.39 billion yet received ₦67.54 billion, representing roughly 438 percent of its contribution. Imo State’s disparity is even more dramatic. It contributed only ₦3.34 billion but received ₦53.83 billion, which amounts to more than 1,600 percent of its contribution.
A similar pattern is visible across several northern states. Bauchi contributed ₦19.59 billion but received ₦77.47 billion. Katsina contributed ₦12.86 billion but received ₦66.91 billion. Zamfara contributed ₦9.59 billion yet received ₦58.46 billion. Nasarawa contributed ₦14.59 billion but received ₦64.74 billion. Other states also display notable disparities. Cross River contributed ₦8.44 billion but received ₦57.96 billion, representing about 686 percent of its contribution, while Kebbi contributed ₦7.59 billion but received ₦57.58 billion, which amounts to roughly 758 percent of what it generated.
At first glance, these figures appear counterintuitive. How can states with relatively smaller industrial bases outperform major commercial hubs in VAT contributions? Why do highly active markets in cities such as Aba and Onitsha appear almost invisible in official VAT statistics? The answer lies not in the strength or weakness of these economies, but in the structure of VAT administration and reporting in Nigeria.
VAT is fundamentally a consumption tax, yet its administration relies heavily on the location where a VAT-registered entity files its returns rather than where the underlying economic activity occurs. Companies operating across multiple states often maintain registration in a single administrative location. As a result, transactions that physically occur in one state may be recorded in another for VAT purposes. This structural feature means that a significant share of economic activity taking place in major commercial centres may ultimately be credited to entirely different states.
Another important factor is the presence of federal institutions and formal procurement systems in several northern states. Many of these states host federal universities, military formations, and other government establishments. Procurement associated with these institutions is typically conducted through registered contractors who comply with VAT regulations. Even when surrounding private sector activity is modest, these transactions generate formally recorded VAT receipts because they pass through structured procurement and accounting processes.
In contrast, the South-East, despite its intense commercial dynamism, is dominated by micro, small, and medium enterprises that operate within highly informal networks. Markets in cities such as Aba, Onitsha, and Umuahia represent some of the most vibrant trading ecosystems in West Africa. These markets support thousands of manufacturers, wholesalers, and retailers who generate substantial economic value every day. Yet much of this activity takes place through cash-based transactions without formal VAT registration or standardized invoicing. Consequently, a significant portion of economic activity remains invisible within official VAT records.
Donor-funded and project-based interventions also contribute to the pattern. Development programmes, particularly in parts of northern Nigeria, often implement agricultural, infrastructure, or humanitarian projects through registered contractors. Because these contractors operate within formal procurement systems and maintain proper tax documentation, VAT generated from these transactions is recorded and captured within official data even when the broader economic impact may be limited compared to large informal markets elsewhere.
The spatial disconnect between production and consumption further deepens the paradox. Aba, for example, is widely recognized as a manufacturing hub for footwear, leather goods, garments, and household products. However, many of these goods pass through wholesalers or distributors located in cities such as Lagos, Port Harcourt, and Abuja before reaching final consumers. Because VAT is typically recorded where invoices are issued, the tax revenue associated with goods produced in Aba may ultimately be credited to the states where distributors are registered rather than where the goods were manufactured.
The data, therefore, reveals a crucial distinction between entrepreneurial vibrancy and taxable formal activity. Cities such as Aba and Onitsha remain among the most entrepreneurial economic zones in Africa, generating employment, innovation, and regional trade networks. Yet their contribution to VAT appears disproportionately small because a large share of transactions occurs outside the formal tax system. Conversely, states with smaller private sector economies may appear to perform better in VAT statistics simply because a higher proportion of transactions occurs within formal administrative frameworks.
Addressing this paradox requires a combination of institutional reforms and broader economic policies. Nigeria must first place greater emphasis on formalizing its vast informal commercial sector. Simplified VAT registration procedures, targeted compliance incentives, and practical training on invoicing and record-keeping can help integrate small and medium enterprises into the formal tax system without imposing excessive regulatory burdens. As more businesses adopt formal accounting practices, the visibility of economic activity within the VAT system will improve.
At the same time, the VAT allocation framework deserves careful review. The current system reflects the location where VAT returns are filed more strongly than where economic activity actually occurs. A more balanced approach could incorporate additional indicators such as business density, industrial output, and the scale of commercial activity across states. Aligning the allocation framework more closely with the geography of production and consumption would help reduce existing distortions.
Technology also offers a powerful pathway for modernizing VAT administration. Electronic invoicing systems, digital filing platforms, and integrated transaction reporting mechanisms can improve transparency and enhance revenue capture. In high-volume commercial centres, digital payment systems and point-of-sale integrations could help ensure that transactions are properly recorded while maintaining the efficiency of everyday business operations.
Finally, strengthening infrastructure and the broader industrial ecosystem will support the transition toward greater formalization. Reliable electricity, improved transportation networks, and better access to industrial financing will enable businesses to expand operations, integrate into formal supply chains, and adopt standardized accounting practices. Over time, these improvements will make it easier for thriving commercial regions to translate their economic dynamism into measurable fiscal contributions.
Ultimately, the story told by Nigeria’s VAT data is not one of weak economic performance in entrepreneurial regions. Rather, it reflects the structural realities of how economic activity is captured within the fiscal system. Cities such as Aba, Onitsha, and Lagos continue to power Nigeria’s commercial economy, generating employment, innovation, and trade across the country. Yet much of their dynamism remains underrepresented in official VAT statistics due to informality, registration patterns, and the design of the tax allocation framework.
Recognizing and addressing this gap is essential for building a revenue system that accurately reflects the true structure of Nigeria’s economy. When fiscal institutions capture economic activity more effectively, they not only improve revenue performance but also create incentives that reward productivity, encourage compliance, and support sustainable national development.
