IMF push for Kenya oil tax to cut back pump price relief

The International Monetary Fund (IMF) has asked the Kenyan government to charge value added tax (VAT) on petroleum products, setting up motorists for increased pain at the pump next year.

Charging VAT on petroleum products is one of the conditions Kenya signed to in exchange for the Sh63 billion credit line it got from the IMF last week.

If the Treasury pushes the proposal through Parliament, most likely in its June budget, the cost of petroleum will rise 16 per cent, wiping out a significant portion of the relief motorists have been getting at the pump with the fall in crude oil prices.

Kenya agreed to charge VAT on fuel in a letter of intent sent to the international lender ahead of last week’s approval of the precautionary loan.

“We are committed to abolish by August 2016 the VAT exemption on oil products,” said Treasury secretary Henry Rotich in the letter to the IMF.

Petroleum products have in the past been exempt from VAT whose introduction is expected to impact the rest of the economy with the resulting rise in manufacturing and transport costs.

The Treasury expects to collect Sh13.5 billion from the new tax, equivalent to 0.3 per cent of Kenya’s GDP.

Additional tax on petroleum products is expected to hit motorists hardest, coming at a time when the Department of Roads has announced plans to charge tolls on major highways besides the fuel levy that is part of the pump price.

READ: New date for toll stations on major roads released

Toll charges will initially affect road users on the Mombasa-Nairobi Highway (A109), the Nairobi-Nakuru Highway (A104) and Thika Road (A2) among other major roads.

Analysts said introducing additional tax on petroleum amounts to overloading of the product with levies that will have an impact on economic growth.

“I think there is enough tax levied on fuel. Fortunately, the tax will be introduced in August 2016 and will not upset what is expected to be a seriously meaningful stimulus to the economy in the form of lower fuel prices,” said Aly Khan-Satchu, an independent analyst.

The tax will also affect the price of kerosene, the predominant mode of lighting and cooking in most low-income households.

This is the first time that Kenya has addressed the tax which was introduced through the Income Tax Act 2012 but was suspended for a three-year period ending next year.

“One should imagine that the policy is grounded on the expectation that oil prices will remain at current levels, which is hard to tell,” said Nikhil Hira, a tax partner at Deloitte consultants, adding that the current growth level is not sufficient to absorb such a shock.

Petroleum prices have dropped to a five-year low in Kenya following a steep slide in international crude prices, causing huge traffic jams as more motorists resort to using personal cars for their daily commute.

READ: Relief for motorists as fuel prices drop to four-year low

If charged on a litre of fuel at the current price of Sh92.80 per litre, a Nairobi motorist would pay Sh107 per litre of petrol, just Sh5 shy of the average 2014 price of Sh112.

X.N. Iraki, an economics lecturer at University of Nairobi, said fuel prices are inelastic, meaning there might be no significant decrease in demand due to a price increase, allowing the Treasury to collect more revenue from the tax.

“Taxing the products may be counterbalanced by the falling oil prices, which could cushion the poor. We could also argue that since the consumers are not benefiting from falling oil prices, the government can share the benefits with manufacturers and distributors through taxation,” said Dr Iraki.

The Treasury is under pressure to fund a ballooning national budget driven by huge infrastructural projects and implementation of a new Constitution that created new cost units.

The introduction of new levies should also help Kenya to comply with the East African Monetary Union’s (EAMU) indicative tax revenue target of 25 per cent of GDP.

The list of new tax measures on the cards includes cancellation of the waiver of interest payments on overdue tax obligations. Under the law if one does not pay their tax liabilities on time they are charged a penalty fee and an interest of two per cent per month compounded on the outstanding fee.

Companies will, however, apply for a waiver of the penalty and interest outstanding whenever they voluntarily submit the tax with a good reason for the delay.

“In practice the Treasury has been waiving 50 per cent of the penalties and may be some more,” said Mr Hira.

If Parliament passes the proposed law, the penalties and interest will be fully collected whether or not the delay was from a calculation error.

Mr Rotich also told the IMF that he plans to introduce new excise duty on other products in his June budget but tax experts warned that such a move could be counterproductive.

“We have to be careful with excise — if you put too much duty people might stop buying the product so you get less corporate tax and excise,” said Mr Hira, citing an example of the Keg beer whose sales dropped on introduction of the duty.

The Treasury has recently imposed excise duty on a wide range of products and services such as mobile phone airtime and financial services fees.

Besides, Kenya has reintroduced capital gains tax after a three-decade break.

The tax is charged at the rate of five per cent of the difference between the selling price and the acquisition price less any transactional costs.

Assets that qualify for the gains tax include real estate, listed and non-listed shares and government securities. The implementation of capital gains tax on listed equities has, however, hit a snag with brokers refusing to take up accounting and collecting role.