Ideas & Debate

Fuel VAT shock ought to instil budget discipline

VAT rate
The same way we have shown that the familiar VAT rate of 16 per cent can be varied, the VAT rates can be similarly varied among petroleum products. FILE PHOTO | NMG 

The petroleum value added tax (VAT) episode has been a shock therapy that may end up changing our attitudes and practices on how we manage public finances.

The subject has since the beginning of September become a major public debate with analysis and views on nearly every aspect of public finances, budgeting and socio-economic impacts. I am sure by now the general public has a better appreciation of the national budgetary process, which is good for public participation.

Although the International Monetary Fund(IMF) was the unfortunate punching bag by most of us, the lender had a strong and essential message on budget balancing and public expenditure discipline, and this should be heeded.

The IMF push for petroleum VAT at a time when the economy cannot possibly absorb its full impacts has triggered the authorities to come up with proposals for a revised compromise budget which is purposely not hedged on IMF standby support.

The IMF pressure will have served its key purpose if Kenya sustainably follows through with the spirit and practice of critically prioritising budgets to fit the means. And this is the way it should always be.


I hope the parliamentarians will understand why this should be the case and pass the revised budget proposals accordingly.

But what was definitely impressive was how President Uhuru Kenyatta allowed enough time for a full and open public debate on petroleum VAT.

Then, he used the VAT test case to deliver an effective message of shared responsibility (and pain) for the government, consumers, politicians, and counties to balance the budget.

In his proposed budget revisions, the President has reinforced his message on corruption by specifically allocating more cash to increase capacity for agencies responsible for fighting and adjudication of economic crimes.

This is a strong pointer that the fight against graft will indeed be sufficiently resourced to sustain momentum. Corruption and wastage have significantly contributed to unsustainable budgetary deficits.

The VAT episode should also serve as an opportunity to launch a campaign to instill financial management disciple and accountability to conserve taxpayer’s resources and keep taxation low.

The proposed procedures for public investments reviews and management are a strong starting point that should be given every support.

As a guiding principle, public investments should be prioritized and reasonably demonstrate socio-economic value addition to the country.

On the subject of public finance and investments we should also focus on state corporations. The state corporations reforms which were proposed (but aborted) in 2013/14 should now be implemented to bring the organisations under sharper scrutiny to prevent them from continuing to incubate corruption.

The commercial parastatals which do not meet the strict definition of “strategic national assets” should be privatised to compete on efficiency and profitability. Those that qualify for retention should target remittance of ample dividends to the treasury, with bail-out cheques disallowed.

Revisiting the petroleum VAT, it was a wise and timely move to reduce the VAT quantum from 16 per cent for this will allow the economy to absorb the ongoing increasing global oil prices which may surpass the US$ 80 per barrel level.

Further, the same way we have shown that the familiar VAT rate of 16 per cent can be varied, the VAT rates can be similarly varied among petroleum products.

Petroleum fuels affect the economy differently, and this is why diesel should be directionally protected from high taxes. Diesel is a critical economic input (agriculture, manufacturing, distribution, transportation) with wider inflationary impacts.

By doing a material balance on the total eight per cent VAT revenue proceeds, diesel can be made to carry a lower rate than eight while compensating with a higher rate for petrol.

Use of petrol is deemed to be mainly discretionary, especially as we move towards investments in mass public transportation which will consume diesel. The same taxation principle has been used to differentiate diesel and petrol excise duty.

Finally, it is important that the lessons learned from the IMF and VAT impasse guide us towards prudent financial management to pre-empt ever having to need IMF standby facilities. This is important for our national reputation and standing in global financial markets.