Ideas & Debate

Lender’s push for 16pc VAT on fuel irrational


A 16 per cent loading on retail pump prices which are already above Sh100 per litre (and still rising) will trigger harmful inflationary impacts across the entire economy. FILE PHOTO | NMG

There are indications that the Treasury could indeed be implementing the 16 per cent VAT on petroleum products, an action that was deferred two years ago. The VAT was a key financial condition prescribed by the IMF for Kenya to improve domestic revenues and tame the mounting public debt.

Another condition is understood to be the scraping of the interest rates capping law. That the Treasury would accept to implement the petroleum VAT at a time when global oil prices are on the rise points to a serious debt predicament.

A 16 per cent loading on retail pump prices which are already above Sh100 per litre (and still rising) will trigger harmful inflationary impacts across the entire economy.

I have previously argued in this column that if the government must raise more revenues from petroleum, it should use the excise duty option not the VAT tool.

Unlike the fixed across-the-board VAT percentage, excise duty can be flexibly varied from product to product, and in amounts spread out over time depending on how the economy and global oil prices are faring.

Because of its flexibility, excise duty has often been used as a fiscal instrument to drive various socio-economic policies. The government has historically differentiated taxes among various petroleum products because of their varying socio-economic impacts. Diesel, which is a prime economic driver, is usually taxed lower than petrol which is considered to be mostly discretional in use.

Kerosene is taken as a fuel for poor households and is taxed lower. This policy rationale of price differentiation cannot be effectively applied when a uniform 16 per cent VAT is enforced.

Further, applying 16 per cent VAT on final pump prices has a compounding effect on all the other taxes charged on petroleum products. The current petrol price of Sh112.2 already carries Sh41.5 in taxes and levies which will now be additionally taxed at 16 per cent.

Taxing other taxes is anomalous and does not sound right from a fiscal view point.

Assuming that VAT will be invoiced at the depot and dispensed by a third party service station, the administration of VAT refunds on inputs could prove messy.

From experience refunds are usually delayed especially when the Treasury has cash flow problems. This would in practice tempt businesses to pass on the full VAT in consumer prices, thus defeating the essence of value added taxation.

The ongoing IMF financial review is reminiscent of the 1980/90s when the Breton Woods institution descended on Kenya with a demand for major structural changes to our economic governance. Kenya had serious budgetary and balance of payments problems; serious human rights issues; and mega corruption. President Daniel Moi’s government had run out of negotiating options and mileage, and the IMF prevailed. I hope this is not where we have reached in respect of the IMF.

The national debt problems we are currently facing are for different reasons. First, we have put lots of cash into infrastructure development which has its payback in the future not today. These developments I strongly believe are justified and useful to current and future generations.

Secondly, we are financing an expensive and unsustainable governance structure mandated by the new Constitution.

At some time in the future this framework must be corrected. Thirdly, a runaway corruption has been fast draining public coffers. Our President’s ongoing no-nonsense approach to crush corruption may result in effective deterrence.

Back to petroleum taxation. If indeed the VAT has to be applied, the government should seriously consider implementing it in smaller spread-out instalments that are less disruptive to the economy. It need not be 16 per cent immediately.

In respect of global oil prices it is still a market influenced by President Donald Trump with the ongoing Iranian economic sanctions and trade wars rattling the oil markets. These market uncertainties are driving petroleum price speculation with the prices currently in the lower half of US$70s.

Fluctuating global oil prices are a large enough economic problem for us. We should not be compounding the problem with a homemade VAT challenge. On their part, the IMF should respect the government’s policy prerogative to exempt selected items from VAT.