Economy

Fuel use falls 25pc after September tax increase

fuel

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

Motorists cut fuel consumption by a quarter in the first month when Kenya introduced the eight percent Value Added Tax (VAT) on petroleum products, hitting government revenue.

Data from the Energy Regulatory Commission show that petrol and diesel sales dropped to 255,450 tonnes in September, from 338,460 tonnes in August, representing a 24.5 percent drop.

The drop looks set to hurt petroleum taxes if the consumption drop is sustained for months in what could defeat the reasons behind the tax rise.

The implementation of the new VAT on fuel is a key to government plans to shrink its fiscal deficit while funding essential programmes.

Diesel, which is used to power trucks, buses, vans, tractors and factories, experienced a drop of 23.4 percent to 162,520 tonnes while petrol fell 26.3 percent to 92,880 tonnes.

Audit and tax advisory services firm Grant Thorton Kenya director Samuel Mwaura said the drop was expected, but argued it’s early to conclude the impacts of the VAT on petroleum products.

“People may have had to cut down spending on fuel and only use cars when very necessary but this may change with the coming festivities,” Mr Mwaura said.

“Should the downward trend continue then it means the tax will only have achieved one thing; burden Kenyans and slow down the economy-which is counterproductive to the overall goal of realising more revenues,” he added.

Less consumption of fuel could derail the government's target of raising Sh35 billion from the VAT amid fears the tax rise could hurt other sectors of the economy.

It could also hit corporate taxes from oil marketers on lower sales and dampened profits.

Fuel prices jumped when the initial 16 percent value-added tax on all petroleum products entered into force on Sept. 1.

It later dropped when government lowered the tax to eight percent after it faced a fuel dealers’ strike, anger among commuters and a lawsuit.

A litre of diesel averaged Sh108 in September from Sh102 in August while petrol moved from Sh113 to Sh116, according to Kenya National Bureau of Statistics.

Transport operators raised their charges following the new tax.

The tax was originally included in a law passed in 2013, but was postponed several times, amid protests about its impact.