Petrol price increase looms in Rotich’s new September tax

The Treasury is on course to introducing a 16 per cent value added tax (VAT) on petroleum products, setting up consumers for another round of pump price increases even as global crude price continues its slide to the bottom.

Treasury secretary Henry Rotich told the Business Daily that no decision had been made to defer the coming into force of the tax in September, and that this would only change in the event of compelling reasons.

The VAT Act 2013 gave a three-year transition period, up to September 2016, when the tax on all petroleum products would start to apply.

Mr Rotich said Kenyans have a chance to make representations to the Treasury on the issue during the drafting of the Finance Bill 2016.

The Bill, to be presented to Parliament in June, will outline the various taxation measures the government wants MPs to approve for the upcoming fiscal year.

“Once we get those representations our team sits and looks at the pros and cons of what has been presented,” Mr Rotich said, adding that a request can be made to Parliament to change the law should there be a justification.

Parliament, Mr Rotich said, had in 2013 decided not to exempt petroleum products from VAT but gave the three-year transition period. The minister said the circumstances under which the law was passed have not changed since 2013 but prices of fuel have actually come down.

It is expected that the VAT on petroleum products will be a major issue this year given the impact it will have on transport and household budgets.

Transportation of goods to markets, running of diesel-powered machinery, operating farm machines like tractors and movement of people across the country are among everyday activities that could be affected by the price increase.

Besides motorists, families and airlines are also set to see the prices of kerosene, cooking gas and jet fuel go up by 16 per cent if MPs fail to extend the period of exemption.

READ: Kerosene, cooking gas and travel to cost more in VAT regime

Raising the cost of kerosene and cooking gas will hit households hard as these two are used for cooking and lighting across the country.

Airlines will also need to brace for higher running costs with jet fuel, one of the major expenditure points, rising by a similar margin.

The list of items that will be affected includes white spirit, mainly used as a paint thinner, and premium gas oil used for high speed engines.

These changes could dramatically push up inflation given the wide application of petroleum products to run the economy.

Central Bank of Kenya governor Patrick Njoroge last Thursday cited the introduction of higher excise duty on a number of items last year as one of the factors that pushed inflation from 7.32 per cent in November to 8.01 per cent in December, underlining how higher taxation affects the cost of living.

Consumer Federation of Kenya (Cofek) has already indicated its intention to petition the Treasury and MPs to eliminate the VAT on petroleum products or extend the period when the tax will not be applicable.

Cofek is counting on 2016 being an electioneering season to have Parliament pass the pro-consumer extension.

The imposition of VAT on petroleum is expected to add fuel to the current complaints that punitive taxes have denied Kenyans the benefits of rock bottom crude oil prices.

Government taxes account for 54 per cent of the total price of every litre of super petrol, which translates to Sh48.15.

The Energy Regulatory Commission (ERC), which sets fuel prices every month, has been accused of failing to pass on the full benefits of the low crude prices that now stand below $30 per barrel.

READ: Pain at the pump as ERC fails to pass on drop in global oil prices

But the ERC has defended itself saying that the taxes, which are a fixed component and depreciation of the shilling, were partly to blame for the lower-than-expected drop in prices this month.

Joseph Ng’ang’a, the ERC director-general, said that at the current price of Sh88.64 per litre of petrol, only Sh40.49 is a variable cost.

“This (depreciation of the shilling) eroded the gains that would otherwise have been realised from the declining crude prices,” Mr Ng’ang’a added.

VAT-driven increase in fuel prices will be the third in the space of 15 months, highlighting the burden that the Jubilee government has placed on motorists to fund its ballooning budget.

The government imposed an additional Sh3 per litre of fuel in road maintenance levy with the last June Budget. In December, the excise duty on diesel increased from Sh8.24 per litre to Sh10.3 per litre.

Super petrol is this month retailing at Sh88.64 per litre in Nairobi, with diesel selling at Sh76.70. If VAT were applicable currently, it would push up the current price of a litre of petrol by Sh14.18 to Sh102.8.

Similarly, the price of diesel would go up by Sh12.27 to sell at Sh88.97 a litre.

In a document sent to the International Monetary Fund last year, the Treasury said that it expects to “increase VAT revenue by about 0.3 per cent of GDP (gross domestic product) per year.”