The discussion surrounding the Value-Added Tax (VAT) and federalism in Nigeria has ignited vigorous debate, particularly concerning the collection, administration, and distribution of funds among the three tiers of government. At its core, a conflict exists between centralised VAT administration and the principles of fiscal federalism, which provide states with financial autonomy. While the federal government controls VAT collection and redistribution through the Federal Inland Revenue Service (FIRS), a few states, especially Lagos and Rivers, argue for state-level administration, citing economic disparities and unfair revenue sharing. This study aims to examine the historical evolution of VAT in Nigeria, analyse its impact on federalism, identify key challenges, and explore the prospects for a reformed tax regime aligned with best governance practices. Using a qualitative research methodology, the study relies on secondary data from government reports, court rulings, tax laws, and comparative analysis of federal tax systems in other countries. Findings reveal that Nigeria’s centralised VAT system limits state fiscal independence, creates legal uncertainties, and affects business confidence due to multiple taxation risks. Furthermore, the study highlights the inequities in VAT revenue distribution, which disadvantage economically productive states. The study strongly recommends constitutional reforms that establish a dual VAT system, enabling both federal and state governments to impose and administer VAT within their respective jurisdictions. These reforms are urgently needed to enhance economic efficiency and national unity.