The Treasury will take Sh57.57 out of every one litre of super petrol sold in Nairobi beginning this Saturday, marking the coming into effect of the new value added tax (VAT) that raises the cost per litre to Sh131.93.
The new tax, a condition imposed by the International Monetary Fund (IMF), increases to 44 per cent the proportion that the government takes in the cost of one litre of fuel.
The Kenya Private Sector Alliance (Kepsa), Motorists Association of Kenya, and Central Organisation of Trade Unions have all warned Kenyans to brace for steep increases in prices of goods once the new tax comes into effect.
They have also cautioned that VAT on fuel could deal a big blow to overall economic growth, with the possibility of even scuttling the Treasury’s chances of realising the additional Sh70 billion revenue projected to come from the new levy.
The government already imposes a raft of taxes on fuel, including road maintenance levy, petroleum development levy, petroleum regulatory levy and railway development levy.
A litre of diesel and kerosene will cost Sh119.18 and Sh98.54 respectively once the new tax is added.
With VAT being a proportion of the final price of a good or a service, any future fuel price increases will automatically lead to an escalation in local pump costs.
The total tax to be taken by the government on a litre of diesel will amount to Sh46.22 per litre while every litre of kerosene will attract Sh23.37 tax.
This is compared to Sh39.37, Sh29.78 and Sh11.78 currently being paid in taxes for each litre of petrol, diesel and paraffin respectively at the retail level.
Different VAT amounts
Petroleum prices, which are set every month by the Energy Regulatory Commission, vary across different towns in the country, which means the Treasury will be collecting different VAT amounts depending on the pump prices in respective towns.
While the government has cited mounting pressure to repay debts and finance infrastructure projects and devolved government units as justification for the tax increase, critics argue that it should explore options such as seeking alternative sources of funding, and cutting its expenditure and debt service costs instead of imposing VAT on petroleum products.
Besides the public wage bill, debt service is currently the largest cost in annual government expenditure.
Efforts to supplement funding through public private partnerships (PPPs) have largely flopped.
Opposition to new taxes has also been based on the argument that hundreds of billions of shillings are lost through corruption and wasteful expenditure every year.
Manufacturing is especially expected to take a hard hit, diminishing capacity for job creation in the economy.
“It is our view that zero per cent VAT would be the ideal rate for petroleum products for a country keen on enhancing financial inclusion and its manufacturing capacity,” said an analysis prepared by audit and advisory firm PricewaterhouseCoopers.
Stephen Mutoro, chairman of the Consumers Federation of Kenya (COFEK), said the Treasury had mismanaged the country’s finances by introducing projects of little value that could be easily removed from the budget instead of increasing consumers' tax burden.
“We need to look at the viability of projects that we have put in the annual budget. Do they add any value? Fuel is an enabler of economic growth and increasing taxes on it will only drive up inflation,” said Mr Mutoro.
When contacted, Treasury principal secretary David Thugge did not respond to our queries.
The Cofek boss wondered why the Treasury had failed to use the PPP model to finance projects and instead turned to tax measures to the detriment of ordinary Kenyans who were already economically hard pressed.
“Every year, we see that one third of the budget cannot be accounted for. Corruption is the order of the day. Why should we seek to spend more by putting more taxes on Kenyans? Why are we even seeking to incur more debt for projects? Who will pay this? Isn’t some of this money just going back where it came from, to the lender?” asked Mr Mutoro.
Cost of doing business
Kepsa said that the increase in the fuel prices would push up the cost of doing business in Kenya and constrain the sector’s role in job and wealth creation.
“The projected rise in pump prices will result in an increase in the cost of production and manufacturing of commodities by both small and big businesses, an increase in cost of transport and an increase in cost of household consumption of goods and services,” said Kepsa in a statement.
“The country will not be in a position to attain the anticipated two-digit GDP growth, generate jobs and create wealth as envisioned in our development blueprint.
“In our opinion, the increase in cost of doing business will not only impact the local investors but also render our economy uncompetitive and repel investors who would invest directly in our economy, including the Big Four opportunities.”
Operators of public service vehicles, including taxis, have vowed to increase fares once the new tax is implemented.
The tax is also expected to have some negative impact on the price of most goods and services that incorporate a transport element.