This study examined the effect of VAT on the performance of SMEs in Nigeria, with a specific focus on profitability, cash flow, business growth, and compliance cost. The study was driven by the increasing concerns that VAT obligations may impose financial and operational burdens on SMEs, thereby affecting their sustainability and contribution to economic development. A survey research design was adopted, and primary data were collected through structured questionnaires administered to 360 SME owners and managers across Nigeria’s South East geopolitical zone. The data were analyzed using descriptive statistics, correlation analysis, and multiple regression techniques, with the variables measured using averaged Likert-scale responses. The findings revealed that VAT has a significant negative effect on profitability, cash flow, and business growth while exerting a significant positive effect on compliance costs. The results further indicated that VAT accounts for a substantial proportion of variations in SME performance indicators, confirming its critical role in shaping business outcomes. These findings are consistent with the ability to pay theory and the resource-based view, which emphasize the importance of aligning tax obligations with firms’ financial capacity and resource availability. The study concludes that while VAT is essential for revenue generation, its current structure poses challenges to Nigerian SME performance. It recommends introducing SME-friendly VAT policies, flexible payment systems, and simplified compliance procedures to enhance business sustainability and growth.