Nigeria’s fiscal structure presents many contradictions, but few are as striking as the paradox surrounding Value Added Tax (VAT) contributions and allocations among states. Regions known for intense entrepreneurial activity, sprawling markets and thriving industrial clusters often appear to contribute far less to national VAT receipts than expected.

At the same time, states with comparatively smaller or less visible commercial activity sometimes receive significantly higher allocations.

The disparity, according to economist Professor Chiwuike Uba, raises fundamental questions about the relationship between economic vibrancy and tax revenue, as well as the fairness of Nigeria’s revenue distribution framework.

Recent data compiled by the Federation Account Allocation Committee (FAAC) and Agora Policy on 2024 VAT collections highlights the magnitude of the imbalance.

Nigeria’s commercial capital, Lagos State, generated an estimated N2.75 trillion in VAT in 2024, yet received only N460.11 billion in allocation, representing 16.74 per cent of the revenue it produced.

By contrast, several states received allocations many times larger than their contributions.

For instance, Abia State contributed N8.68 billion but received N63.78 billion, about 734 per cent of its contribution. Enugu State generated N15.39 billion but obtained N67.54 billion, representing roughly 438 per cent of its input.

The disparity is even more striking in Imo State, which contributed just N3.34 billion but received N53.83 billion, equivalent to more than 1,600 per cent of its contribution.

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A similar pattern appears across parts of northern Nigeria. Bauchi State contributed N19.59 billion but received N77.47 billion, while Katsina State generated N12.86 billion and obtained N66.91 billion. Zamfara State contributed N9.59 billion yet received N58.46 billion, and Nasarawa State generated N14.59 billion but received N64.74 billion.

Other examples further illustrate the anomaly. Cross River State contributed N8.44 billion but received N57.96 billion, about 686 per cent of its contribution, while Kebbi State generated N7.59 billion yet received N57.58 billion, roughly 758 per cent of what it produced.

At first glance, the numbers appear baffling. How can states with smaller industrial bases appear to outperform major commercial hubs in VAT contributions? Why do bustling commercial centres such as Aba and Onitsha appear almost invisible in official VAT statistics?

According to Uba, the answer lies less in the strength of local economies and more in the structure of Nigeria’s VAT administration.

“VAT is fundamentally a consumption tax, yet its administration depends largely on where companies file their returns rather than where the economic activity actually takes place,” he explained.

Large companies operating across multiple states typically maintain VAT registration in a single administrative location. Consequently, transactions that physically occur in one state may be recorded in another for tax purposes. This structural feature means that substantial economic activity occurring in commercial hubs may ultimately be credited elsewhere.

Another contributing factor is the concentration of federal institutions in several northern states. Universities, military formations and other federal establishments generate procurement spending through registered contractors who comply fully with VAT regulations.

Even where private sector activity is relatively modest, these formal procurement systems ensure that VAT transactions are properly documented and captured within the national revenue data.

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By contrast, the South-East’s economy remains heavily dominated by informal enterprise networks. Cities such as Aba, Onitsha and Umuahia host some of the most vibrant commercial markets in West Africa, supporting thousands of manufacturers, wholesalers and retailers.

Yet much of this trade occurs through cash transactions without formal VAT registration or structured invoicing.

“The entrepreneurial energy in these markets is enormous. “But because many businesses operate informally, a significant portion of their economic activity never appears in the official VAT system”, Uba noted.

The spatial disconnect between production and consumption further deepens the paradox. Aba, widely regarded as a major manufacturing hub for footwear, garments and leather goods, produces items that often move through wholesalers in Lagos, Port Harcourt and Abuja before reaching consumers.

Because VAT is recorded where invoices are issued, the tax revenue generated by goods produced in Aba may ultimately be credited to the states where distributors are registered rather than where the products were manufactured.

The data, therefore, highlights a crucial distinction between entrepreneurial vibrancy and formally taxable activity. While cities such as Aba and Onitsha remain among Africa’s most dynamic trading centres, their fiscal contribution appears disproportionately small because a large share of transactions occurs outside the formal tax framework.

Addressing the imbalance will require a combination of policy reforms and structural economic changes.

Uba argued that Nigeria must prioritise the formalisation of its vast informal sector through simplified VAT registration procedures, compliance incentives and practical training for small businesses on invoicing and record-keeping.