Senate Approves New VAT Sharing Formula, Strengthens Tax Reform with Passage of Two Key Bills

The Nigerian Senate has approved two key Tax Reform Bills aimed at overhauling the country’s tax system. This is part of a broader effort to modernize the nation’s tax framework and ensure greater accountability and compliance. The newly passed bills are the Joint Revenue Board (Establishment) Bill, 2025, and the Nigeria Revenue Service (Establishment) Bill, 2025. The bills were approved after deliberations in a closed session and are now set for concurrence with the House of Representatives before they can be signed into law by President Bola Tinubu.

A major change in the reform involves the distribution of Value Added Tax (VAT) revenue. Under the new sharing formula, the federal government will receive 10%, while states and the Federal Capital Territory (FCT) will get 55%, and local governments will receive 35%. This marks a significant shift from the previous distribution, where the federal government received 15%, and states got 50%. The Senate’s move is aimed at increasing state revenues, which could help in addressing fiscal challenges at the local government level.

The bills also bring clarity to the concept of “derivation” in tax allocation, shifting it to a “place of consumption” model. This means taxes will now be distributed based on where goods and services are consumed rather than where they are produced. This change in the Tax Administration Act aims to ensure a more equitable tax allocation that takes into account population, equality, and consumption patterns, with a more refined formula for local government allocations.

Additionally, the new tax system introduces more stringent penalties for non-compliance, with fines and possible imprisonment for failure to register, file returns, or remit taxes. For example, businesses that fail to register within a month could face fines of N100,000, while continuing non-compliance could lead to further penalties. The penalties also include imprisonment for up to three years for severe tax offenses, signaling a tougher stance on tax evasion.

Senate President Godswill Akpabio praised the finance committee for its work on the bills and assured that the new tax system would benefit all Nigerians. He dismissed concerns that the reform might favor certain regions, emphasizing that the new laws were designed with national inclusivity in mind. Akpabio expressed optimism that the passage of the bills would improve Nigeria’s tax collection system and promote economic growth across the country.

Source: The Sun