Treasury quest for VAT billions hits a snag on fuel consumption plunge

The government is unlikely to net the billions of shillings it expected from the value-added tax (VAT) slapped on fuel products, the latest data shows.

Falling sales volumes after prices of petrol, diesel and kerosene shot up from September 2018 when the eight per cent tax was introduced, and unpredictable international prices worked against the plan that was expected to raise some Sh35 billion in revenue annually.

Data from the Kenya Revenue Authority shows that VAT on petroleum products has collected a paltry Sh9.1 billion in the seven months to March 2019, a wide miss just five months before it clocks a year.

With an average of Sh1.2 billion monthly collections since its inception, the taxman will have to collect at least Sh5.2 billion every month to hit the revenue target starting this month, an impossibility which pundits say may cause Treasury to increase the tax or tap it elsewhere in the next financial year.

Tax experts contend the strategy, which the International Monetary Fund pushed to help the government boost its loan repayment ability amid a ballooning debt bill, was poorly hatched, setting it up for failure.

Audit and tax advisory services firm Grant Thorton Kenya Director Samuel Mwaura said apart from failing to factor in the fuel market dynamics, poor economic performance pushed motorists to scale down on consumption, further dwindling the chances of better collections.

“I am not so sure what parameters they had relied on to project such a collection target but it was expected that when prices go up then consumption would fall. It is also hard to predict fuel pricing with the changing geopolitics given that we are a net importer of the product.

“Such ambitious targets will obviously push the government to seek alternatives to bridge the gap which may mean higher taxes, of course,” Mr Mwaura said.

Lowest level in 3 years

Last year, fuel consumption dropped to its lowest level in three years on increased taxes, setting the government for further lowered corporate tax collection from oil marketers whose earnings went down as well.

Data from the Petroleum Institute of East Africa (PIEA) — the professional body for the oil and gas industry in the region — and the Energy and Petroleum Regulatory Authority (formerly ERC) show that fuel consumption dipped by six per cent to 5.92 billion litres in the year ended December 2018.

The trend continued in the first two months of the year where consumption of all petroleum products, except kerosene, recorded an increase.

Kerosene was hardest hit by the revisions, which brought it at par with diesel prices and sometimes higher after an Sh18 adulteration tax per litre was introduced in September.

Mr Mwaura also believes the Treasury projections may have been based on wholesome taxation of the retail prices for the products without considering that most of the price component for each litre of petrol, diesel and kerosene was already taxed.

A later revision left only the untaxed element of the price subjected to the VAT, lowering yields.

The VAT, which had been on the cards since 2013, was strongly pushed by the IMF 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.

Even with the debt pile still stacking up, chances of more collection will be dimmed by the increasing pump prices as international crude prices continue to hover above $70 per barrel.

This month, the regulator increased prices of super petrol, diesel and kerosene in Nairobi by Sh5.25, Sh5.52 and Sh2.76 per litre, respectively, as motorists eagerly await the next revision in less than three weeks.