The taxman is collecting Sh62.89 on every litre of petrol, a 39 percent jump in tax collections over the past two years that has made the Kenya Revenue Authority (KRA) a key beneficiary of the surge in pump prices.
The KRA collected Sh45.1 in taxes and levies in June 2020 from petrol, and Sh51.6 last year. The taxman is now collecting Sh62.89, underlining the impact of duties on driving petrol and diesel prices.
The surge in crude oil prices and the taxes have hit household budgets in an economic setting where the costs of basic items have surged, sending inflation to a 27-month high in May.
But it has enhanced the KRA collection, with taxes from fuel estimated at Sh22.9 billion in June or 15.7 percent of average Kenya's overall monthly duties of Sh145 billion.
This is more than three times the Sh7 billion monthly subsidy the State has offered to cushion consumers from the surge in the price of oil in international markets, with analysts putting pressure on the State to cut or freeze taxes in the quest for cheaper fuel.
Like other frontier economies, Kenya is reeling from a surge in crude oil prices since last year, which has forced it to start subsiding retail prices from April last year.
The subsidy scheme is proving unsustainable and the Treasury warns that it has started cutting back on the State support, which sets the stage for a further rally in local pump prices.
Without the subsidy, diesel prices would have increased by a further Sh48.19 a litre from the current Sh140 in what could have increased KRA's share by Sh17.
"A gradual adjustment in domestic fuel prices will be necessary to progressively eliminate the need for the fuel subsidy, possibly within the next Financial Year," Treasury Secretary Ukur Yatani said yesterday — just a day after the energy regulator announced monthly pump prices to July 14.
About 40 per cent of the retail price of petrol is consumed by taxes and levies such as excise, value-added tax (VAT), import declarations fee, road maintenance, petroleum development, petroleum regulatory, railway development, anti-adulteration, and merchant shipping levies.
For every litre of petrol retailing at Sh159.1, the government collects Sh62.89 and takes Sh51.60 for every litre of diesel selling at Sh140.
Treasury has previously resisted attempts by lawmakers to reduce the levies and taxes on fuel and cooking gas, underling the importance of the commodity on KRA tax collections.
The National Assembly Finance committee late last year directed a cut on the eight percent value-added tax (VAT) on petroleum products to four percent.
It also proposed a cut of the petroleum development levy (PDL) from Sh5.40 to Sh2.50 per litre, which was estimated to leave a Sh11 billion funding gap in a year.
The halving of VAT was expected to cut the taxman's collections by Sh22 billion.
The budget hole could have forced cuts in public spending to rein in the fiscal deficit as the country heads into a highly charged general election that is expected to slow down economic activity.
The proposed amendments, which were tabled in Parliament in October, were time-barred and never implemented.
Kenya's economy is highly dependent on diesel for transportation, power generation and agriculture and kerosene is used in the homes of many of the country's population.
Higher fuel prices are a key inflation driver, with the cost of living measure reaching a 27-month high at 7.1 percent in May from 6.5 percent the prior month.
Pump prices are set to spike in the coming months after Treasury announced plans to scrap the fuel subsidy scheme.
Mr Yatani said the continuation of the fuel subsidy kitty risks ruining Kenya's plans to reduce debt accumulation, adding that it will be removed in the fiscal year starting next month.
"The cost of fuel subsidy could eventually surpass its allocation in the national budget thus potentially escalating public debt to unsustainable levels and disrupting the government's plans to reduce the rate of debt accumulation," Mr Yatani said.
"However, fuel subsidies are inefficient and often lead to misallocation of resources and crowding out of public spending on productive sectors, resulting in unintended consequences such as disproportionately benefiting the well-off," he added.
It has so far spent tens of billion shillings subsidising fuel, which has helped stabilise prices at the pump and keep inflation within the government's preferred band.
The rally in pump prices caused cash flow problems at some smaller fuel retailers, leading to supply shortages, and the hardships have been compounded by delays in the payment of subsidies to the companies by the government.