Treasury set to reintroduce higher diesel, paraffin taxes
The Treasury plans to withdraw special tax cuts on kerosene, diesel and wheat to close widening revenue gaps, a move that will leave consumers worse off as the threat from a general price surge persists.
The removal of tax cuts on diesel would particularly increase the cost of producing and distributing goods. Charging paraffin at market prices would leave poor households with higher bills since they rely on the fuel for cooking and lighting.
“We plan to phase out these measures by the end of the fiscal year and instead scale up targeted interventions, including expanding our existing food safety net programmes covering all vulnerable groups in both urban and rural areas,” said Finance minister Uhuru Kenyatta and Central Bank of Kenya governor Njuguna Ndung’u in a letter of intent to the International Monetary Fund (IMF).
The letter dated November 13, 2011, was made public on Wednesday. The cuts would make kerosene at least Sh7 more expensive per litre while the end of the one-year window to import duty-free wheat could increase the price of flour and other end products, including animal feeds.
Last year, the government removed excise duty on kerosene and reduced tax on diesel by 20 per cent to protect consumers from high prices.
It also waived duty on maize for six months and on wheat imports for a year to boost stocks locally after drought reduced harvests. The window for untaxed maize imports ended last month.
Diesel is the main fuel for machinery in the agricultural sector, which contributes almost a quarter of the Gross Domestic Product (GDP). Diesel, which accounts for about 40 per cent of the fuel products sold in Kenya, is also key in public and cargo transport businesses. Tax analysts said the government’s rethink pointed to growing pressure to raise money.
“There is a deficit in revenue that the government must find ways of bridging if it is to survive the demands of funding huge projects like implementing the Constitution,” said Ashif Kassam of RSM Ashvir Associates.
Statistics by the Treasury showed that the country missed its domestic borrowing and revenue collection targets in the first quarter of the 2011/12 (July-June) fiscal year.
Net domestic borrowing in July to September stood at Sh12.3 billion against a target of Sh49.8 billion for the quarter. Total revenue collection was off its projection by Sh30.2 billion to stand at Sh149.1 billion.
The Kenya Revenue Authority (KRA) had last year raised the red flag over the special tax measures, saying the Treasury should revise its revenue targets to reflect the lower collection base.
Consumer watchdogs fear higher taxes will trigger a fresh wave of discontent in the run-up to the elections with discontent already growing over inability by low-income households to make ends meet.
“The government has lost touch with the people and should work towards reversing the decision to retain normal duty on kerosene and diesel,” said Stephen Mutoro of the Consumers Federation of Kenya (Cofek).
Nigeria is currently in the throes of a strike after it lifted subsidies on fuel (see story on Page 3). Uganda also abolished electricity subsidies paid to power generators yesterday, raising power bills by 42 per cent at a time when there are already protests over high interest rates.
“The threatof inflation is still high and the plans by the government will only worsen a bad situation,” said Sammy Onyango of tax consultancy firm, Deloitte. The Energy Regulatory Commission (ERC) has said that excise duty on kerosene and diesel is traditionally set at Sh7.21 and Sh10.31 per litre respectively. The special tax measures effected by the government saw excise duty on kerosene slashed to zero while that on diesel was cut by 20 per cent to Sh8.24 per litre.
“If the higher taxes on diesel and kerosene are reinstated then they have to be passed on to the consumer,” Rashid Omar, a medium-size oil dealer said.
Barely a fortnight ago, the Central Organisation of Trade Union (Cotu) and the Matatu Welfare Association called for a national strike by public commuter vehicles to protest rises in the cost of petrol. The strike, however, flopped though most motorists shared the concerns over expensive fuel.
