Nairobi motorists will pay a record Sh130.15 per litre of petrol or about Sh17.9 more beginning next month when petroleum products start attracting 16 per cent value added tax (VAT).
Treasury principal secretary Kamau Thugge yesterday confirmed that petroleum products will start attracting the tax on September 1 in line with Kenya’s promise to the International Monetary Fund (IMF) two years ago.
At prevailing prices diesel, used to power commercial vehicles such as buses and tractors, will cost Sh16.5 more to stand at Sh119.77 a litre after adding the tax.
The new tax burden will also be felt among consumers of Kerosene, who are mostly low-income households that use it for lighting and powering cooking stoves. A litre of kerosene will cost Sh99.44, a Sh13.7 increase from current price of Sh85 per litre.
The increase in prices at the pump will not be limited to Nairobi but will be felt countrywide beginning September 1.
Earlier estimates showed that the 16 per cent tax charge on petroleum products could earn the Treasury – which has continued to suffer perennial budget holes – additional Sh71 billion a year.
VAT was first introduced on petrol, diesel, kerosene and jet fuel in the VAT Act of 2013, with a three-year grace period that would have seen it come into force in 2016 when it was once again deferred to September 2018.
The IMF has been pressing Kenya to do away with tax exemptions as part of a wider plan to grow revenues, reduce budget deficits and ultimately slow down the debt pile-up that has in recent months become a source of national concern.
Yesterday, Dr Thugge said “the grace period has expired”, meaning there will be no going back on the policy.
VAT is levied at the point of sale and is calculated as 16 per cent of all other costs in the product, including other taxes and levies, other than VAT.
That means the additional pain at the pump will be compounded by rising global oil prices that have been steadily rising in recent months.
Consumers in far-flung towns will pay even higher prices arising from added costs such as transport, the sum of which forms the principal amount on which VAT is levied.
Tax experts, however, warned that charging VAT on petroleum bears the potential of causing a general rise in prices of essential goods in all segments of the economy as it affects the cost of transport, which is ultimately passed on to the end users.
“The petroleum VAT is intended to boost government revenues to rebalance the public debt, while also providing essential funding for the Big Four socio-economic agenda,” said George Wachira, the director of Petroleum Focus Consultants, adding that the combined impact of higher import costs and VAT will be to increase producer and consumer prices.
Increased prices of sugar, petrol, electricity and health put pressure on households in the month of July, pushing the inflation rate to a four-month high of 4.35 per cent.
Dr Thugge, however, sought to downplay the looming impact of the new tax, insisting that producers will claim “Input VAT” that was previously not-recoverable, easing their costs base.
“The ability of the VAT-registered taxpayers to recover input VAT will therefore lower their cost base and as such they should be able to retain reasonable margins on petroleum pump prices,” said Dr Thugge.
The Treasury is also expecting the supply of liquefied petroleum gas (LPG), which has been zero-rated and spared the VAT, to help cushion consumers from higher energy costs.
“Other items that have direct impact on the livelihoods of ordinary mwananchi remain zero-rated,” Dr Thugge said, citing bread, milk and medicines.
Nikhil Hira, the Deloitte East Africa tax leader, however reckoned that the steep rise in fuel prices will raise the cost of transport, mechanised farming as well as manufacturing with the potential of cooling down activity in an already struggling economy.
“Treasury sits in a precarious fiscal space and could be banking on the extra collections to help narrow the fiscal deficit,” he said.
Consumer Federation of Kenya (Cofek) has hit out at the impending increase in fuel prices, arguing that they are likely to hurt the poor most.
Kenya in 2015 entered a binding agreement with the IMF to charge VAT on fuel and had Treasury officials write a letter of commitment a week before the fund approved a $688.3 million (Sh69 billion) standby loan.
“We are committed to abolish by August 2016 the VAT exemption on oil products,” Treasury secretary Henry Rotich said in the letter to the IMF but failed to follow through until this year.
The precautionary loan serves to cushion the economy from unforeseen shocks to its foreign exchange reserves.
Last week, the IMF completed reviewing the performance of its Sh150 billion forex insurance programme with Kenya, which expires in September.
The IMF did not mention the new status of the facility.