A significant change in revenue distribution under the Federation Accounts is expected to take effect next month, as proceeds from January collections are shared, with states and local governments projected to receive higher statutory allocations under a new tax administration regime.
The revised framework alters the distribution of major tax components, directing a larger share of federally generated tax revenue to subnational governments across the country.
Under the new arrangement, revenues from Pay As You Earn and Personal Income Tax will now accrue entirely to state governments. In addition, 90 per cent of Value Added Tax collections will be allocated to the subnational tier, with 55 per cent going to states and the Federal Capital Territory, while 35 per cent will be shared among local governments.
The revenue-sharing formula also provides that 26.7 per cent of Company Income Tax will flow to states, alongside an equivalent 26.7 per cent share of Petroleum Profit Tax. Local governments, operating under the control of state governments, will receive 20.6 per cent of both Company Income Tax and Petroleum Profit Tax.
This expansion of revenue sources for states and councils builds on gains recorded after the removal of fuel subsidy by the Tinubu Administration shortly after it assumed office in 2023. Savings from the subsidy removal were subsequently distributed among the three tiers of government for development purposes.
For example, allocations shared by the federal, state and local governments rose to N1.928 trillion last November, compared with N786.161 billion shared in the month immediately before the subsidy was removed.
Sources familiar with developments at the Federation Accounts Allocation Committee told The Nation that preparations would soon begin to modify revenue-sharing templates to reflect the new inflows, once official activities resume after the New Year holidays.
A senior official said technical teams would commence “the reconfiguration of the sharing templates to reflect these new tax accruals,” adding that the changes represent one of the most notable fiscal developments for subnational governments in recent times.
“With the new tax regime, the state governments are going to receive more money from the tax components of the Federation Accounts than they did in 2025 and before,” the source said.
Beyond increasing revenue volumes, the new law also introduces a revised method for distributing VAT proceeds among states and local government councils. Under the arrangement, 50 per cent of the VAT pool will be shared equally, while 20 per cent will be allocated based on population, and the remaining 30 per cent distributed according to actual consumption levels recorded across states.
Despite expectations that the enhanced revenue inflows will strengthen subnational finances, the tax framework also introduces stricter compliance obligations and penalties. The Nigeria Tax Administration Act 2025 outlines extensive sanctions in Chapter Four, covering general tax offences as well as violations specific to the petroleum sector.
Under the general provisions, failure to register with the appropriate tax authority or obtain a Taxpayer Identification Number constitutes an offence. Penalties are also prescribed for failure to file tax returns within statutory timelines or to maintain proper accounting records.
The Act further addresses obligations related to tax deductions at source. Failure to deduct taxes such as PAYE or Withholding Tax when required, as well as failure to remit deducted taxes to the appropriate authority, attracts penalties.
Additional offences include obstructing authorised officers in the performance of their duties, denying access to premises for tax purposes, submitting false or fictitious claims for tax or VAT refunds, impersonating tax officials, or attempting to induce officers to neglect their responsibilities. Infractions involving tax stamps and related documents are also covered, as is failure to grant access for the deployment of approved tax technology or fiscalisation systems, particularly in relation to VAT.
A general penalty applies in situations where no specific sanction is stipulated under the law.
For companies engaged in upstream and midstream petroleum operations, the Act introduces sector-specific compliance requirements, including timely submission of estimated and actual returns, prompt payment of petroleum-related taxes, and settlement of royalties on petroleum or mineral resources. In severe cases of persistent non-compliance, the law allows for recommendations for the revocation of operating licences or leases.
The legislation also expands the enforcement powers of tax authorities, including the imposition of fixed penalties and interest on outstanding taxes, as well as the authority to distrain, allowing for the seizure and sale of a taxpayer’s goods, chattels or land to recover unpaid liabilities.
However, Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reform Committee, said such measures would only be applied after the completion of due legal processes.
The Act also permits tax authorities to compound certain offences, enabling administrative settlement rather than full prosecution, while preserving the right to prosecute offenders in a court of competent jurisdiction where necessary.
As implementation draws closer, officials believe the combination of increased tax-based revenues and stricter enforcement measures will significantly alter fiscal relations within the federation, placing greater financial responsibility and opportunity in the hands of state and local governments.
(NATION)
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