Petrol tax vote punches Sh71bn hole in budget

Rejection of the Treasury’s proposal offers big relief to consumers

Parliament Wednesday dealt a decisive blow to the Treasury’s bid to impose higher taxes on fuel. FILE PHOTO | NMG 

IN SUMMARY

  • Rejection of the Treasury’s proposal offers big relief to consumers
  • The IMF-imposed tax would have seen the cost of a litre of petrol surge to a record Sh131.93 beginning Saturday.
  • The move now leaves the Treasury in a fix as its struggles to raise revenues

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Parliament Wednesday dealt a decisive blow to the Treasury’s bid to impose higher taxes on fuel after unanimously voting to delay for a further two years the implementation of 16 per cent value added tax (VAT).

The IMF-imposed tax would have seen the cost of a litre of petrol surge to a record Sh131.93 beginning Saturday.

While the vote offers a huge relief to consumers, it leaves the government Sh71 billion short of its revenue estimate, which could force Treasury secretary Henry Rotich to either trim his spending estimates or take up more debt.

Industry and consumer lobby groups had warned that the tax would set off steep price increases and stall overall economic growth.

National Assembly Minority Whip Junet Mohammed moved the proposal to defer implementation of the contentious VAT until September 2020, with plans to further defer the tax until 2022 in an amendment set for debate today.

In voting against the tax, the MPs said introduction of VAT on petroleum products will “touch off a button” for a rally in the cost of commodities and transportation, hitting ordinary Kenyans hard.

“This House has been accused of not being sensitive to the needs of the people. It is time we side with them and I plead that we postpone this tax to 2020,” said Mr Mohammed while moving the amendment.

Homa Bay Woman Representative Gladys Wanga said the heavy burden Kenyans are facing currently cannot allow MPs to impose additional taxes that stand to hurt poor families most.

“The most critical thing is that IMF is forcing us into this matter. We cannot rob the poor to fund our budget. Even as we postpone this tax for a further two years, this House must decide to either do away (with it) or not,” Minority Leader John Mbadi said.

READ: Treasury to take Sh57.57 for every litre of petrol sold

READ: WACHIRA: Lender’s push for 16pc VAT on fuel irrational

READ: Accountants fault Treasury’s tax plan

Commodity prices

Mr Mbadi said commodity prices were likely to rise by more than 10 per cent if the tax on petroleum products was imposed and that transportation costs would increase by more than 20 per cent, stiffling creation of new jobs in the economy.

“We know that matatu fares will rise, pushing up the cost of living for ordinary Kenyans,” said Kiminini MP Chris Wamalwa.

The move now leaves the Treasury in a fix as its struggles to raise revenues to plug gaping deficits in the national budget.

Earlier estimates showed that the 16 per cent tax charge on petroleum products could have earned the Treasury — which has continued to suffer perennial budget holes — additional Sh71 billion a year. Mr Rotich did not respond to Parliament’s vote when reached for comment.

Fuel prices. GRAPHIC | STANSLAUS MANTHI | NMG 

Manufacturers and consumer lobbies, who had earlier opposed the tax, welcomed the vote. They said Parliament had prevailed in protecting and safeguarding the interests of Kenyan consumers.

“We are excited. It’s a sigh of relief for consumers and Parliament has asserted the sovereignty of the people of Kenya over the IMF,” said Stephen Mutoro, secretary-general of the Consumers Federation of Kenya (Cofek).

Carole Karikuki, the chief executive officer of Kenya Private Sector Alliance (Kepsa), termed Parliament's decision good news.

“There are different ways to raise money. We need to increase investment in production,” said Ms Kariuki.

Matatu Welfare Association chairman Dickson Mbugua commended MPs for the decision.

“That’s a good move. MPs have proven they are pro-poor people and they are carrying out their obligations. We are happy and we commend the MPs,” said Mr Mbugua.

The VAT on fuel would have increased to 44 per cent the proportion that the government takes in the cost of one litre of fuel.

Raise taxes

Focus now shifts to the Treasury, which is expected to come under pressure to raise additional taxes. It is also expected that Treasury’s relations with the IMF, which had prescribed the higher taxes on fuel as part of economic reform programme, will be fractured.

Kenya in 2013 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.

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 Treasury was eyeing Sh57.57 out of every one litre of super petrol sold in Nairobi had the VAT come into effect.

At prevailing prices diesel, used to power commercial vehicles such as buses and tractors, would have cost Sh16.5 more to stand at Sh119.77 a litre after adding the tax.

emutai@ke.nationmedia.com, bnjoroge@ke.nationmedia.com

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