LETERS: Why VAT on fuel should be suspended

A 16 per cent levy on retail pump price which is already above Sh 100 per litre will trigger harmful inflationary impact across the entire economy.

A petrol station attendant fuels a car. FILE PHOTO | NMG 

BY PAUL THEURI

IN SUMMARY

  • A 16 per cent levy on retail pump price which is already above Sh 100 per litre will trigger harmful inflationary impact across the entire economy.

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Introducing value added tax (VAT) on fuel was a key financial condition prescribed by the International Monetary Fund( IMF), so as to improve domestic revenue and tame the mounting public debt which is now at 57 per cent of GDP. High debt level is an impediment to growth since most of the revenue collected is going to pay both domestic and foreign debts.

A 16 per cent levy on retail pump price which is already above Sh 100 per litre will trigger harmful inflationary impact across the entire economy. The prices of petrol, diesel and kerosene are already high and adding more taxes on this will make the cost of living more difficult

Methinks, if the Government must raise more revenue from petroleum it should use the excise duty option not the VAT option. Excise duty unlike VAT can be flexible varied from products and the amount be spread over a period of time other than imposing it once.

The premise was that by 2018, Kenya would be a commercial oil producer after discovery in Turkana but this hasn’t been the case, with that, even imposing VAT from local production and refinery won't have punitive damages as prices would have been lower.

Another reason why VAT on fuel should be suspended is that the government has historically price differentiated various petroleum products because of their economic impact. Petrol is taxed higher than Diesel and kerosene the reason being, Kerosene is regarded as for the poor and for the Government to caution them from adverse effects and high cost of living.

This price differentiation rationale can't be effectively applied when all products are taxed uniformly. Applying 16 percent VAT on final pump price has a compounding effects on all the taxes charged on petroleum products. This will be a classic case of imposing taxes on taxes which is wrong.

It's true we need revenue to fund our Budget and pay our debts but taxing fuel which has a negative multiplier effects won't solve the problem, let the Government widen the tax bracket and also fight misuse and mismanagement to spur economic growth.

The current debt problem Kenya is facing is not a reminiscent of the 1980/90s when IMF imposed conditions on Kenya. We have spent a lot of cash into infrastructural development which has its pay back in the future not today. If we use what we collect prudently and bring in more taxpayers, I think we will Plunge the deficit without necessarily taxing Kenyans highly.

The Government is working on reviving Manufacturing, value added exports and Job creation among other agenda that Government is working tirelessly to see its work and succeed, fuel being one of the components to make this happen, price increase will make cost of production higher this will discourage FDI and also make ‘Made in Kenya less competitive thus undermining growth and development.

Fluctuating global oil prices are a large enough economic problems for the country. Let's not compound the problems with a homemade VAT challenges whose effect will be negative.

Paul Theuri, economist.

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