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Economy

Two-year relief for motorists as Treasury suspends VAT on fuel

An attendant fuels a car at a Total petrol station in Nyeri town. PHOTO/FILE
An attendant fuels a car at a Total petrol station in Nyeri town. PHOTO/FILE 

Motorists have been handed a two-year relief with the deferment of value added tax (VAT) on petroleum products, which pushes forward fuel price increases to September 2018 at the earliest.

The Finance Act 2016 assented to a week ago extended the exemption of the 16 per cent tax offering relief to motorists who had feared the new levy would once again push petrol prices above Sh100 per litre.

Treasury Secretary Henry Rotich had in his June 8 budget speech indicated that the tax would be deferred for one year but this has now been extended to two years.

“The exemption shall be extended by a further two years from 1st September, 2016,” the Act says.

VAT on fuel products including petrol, diesel and jet fuel was introduced in the VAT Act in 2013, with a three-year grace period that would have seen it come into force early this month.

The Treasury however raised the road maintenance levy charged on each litre of petrol and diesel by Sh6 to Sh18.

Fuel is one of the most heavily taxed items with about 42 per cent of what is paid for a litre of petrol going to the State in terms of taxes.

Consumer Federation of Kenya Secretary-General Stephen Mutoro said the deferment was good news for consumers but added VAT on fuel needs to be scrapped entirely.

“Any measure to remove or delay (the tax) will have a positive multiplier effect by making fuel affordable for motorists and pulling down inflation,” he said.

“We have always asked the president to lower the cost of living and fuel, which attracts the highest taxes in the country, should be a good starting point. High fuel prices affect transport, trade and manufacturing.”

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 would be heavily hit by a 16 per cent price increase at the pump.

The price of fuel is a key determinant of the cost of goods in the market and carries an 8.61 per cent weight in the basket of goods used to determine the country’s inflation.

Other items that will eventually be captured by VAT when it comes into force are white spirit, mainly used as a paint thinner, and premium gas oil used for high speed engines.

Motorists have over the last one-and-a-half years enjoyed lower prices driven by low global crude oil prices. A litre of petrol currently retails at Sh91.39 while diesel costs Sh82.46 in Nairobi.

Introduction of VAT on fuel would have seen the prices rise by 16 per cent denying motorists dividends of the low crude oil prices.

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