Motorists and kerosene users are headed for more pain at the pump later this year as the Treasury moves to impose a new tax that will add up to Sh17 on every litre of fuel.
Treasury principal secretary Kamau Thugge yesterday said petroleum products will start attracting 16 per cent value added tax beginning September in line with a deal Kenya made with the International Monetary Fund (IMF) two years ago.
Petroleum has been exempt from VAT although it remains one of the most taxed commodities in Kenya.
Early estimates show that a 16 per cent tax charge on all petroleum products could earn the Treasury an additional Sh71 billion per year.
IMF has been pressing Kenya to do away with tax exemption as part of a wider plan to increase revenues, reduce budget deficits and ultimately slow down debt pile up that has in recent months become a source of national concern.
The VAT charge on petroleum is part of the tough conditions the IMF set for Kenya in exchange for a standby credit facility that the country can draw in the event of economic distress.
The current precautionary loan that Kenya got in 2016 expires this month and negotiations are on for a new one.
September marks the expiry of a two-year exemption of VAT on fuel products, setting consumers up for even higher fuel prices from the current 40-month high level.
Global oil prices
It will be a double whammy for motorists because global oil prices are on the rise, increasing cost for net importers such as Kenya.
Nikhil Hira, a tax partner at Deloitte, said consumers should expect a 16 per cent cost surge at the fuel pump should the tax take effect, citing the VAT Act.
VAT is levied at the point of sale and is calculated as 16 per cent on all other costs of the product, including other taxes and levies, other than VAT.
If charged on a litre of petrol at the current price of Sh107.92 in Nairobi, motorists would pay a record price of Sh125 per litre, or Sh17 more.
At prevailing prices, diesel would soar by Sh15 a litre to Sh111 in Nairobi with the new tax.
The tax pain will also catch up with consumers of kerosene whose price would rise by Sh12 a litre. Consumers in far-flung towns will pay even higher prices arising from added costs like transport, the sum of which forms the principal amount on which VAT is levied.
The additional charges, based on current prices and consumption levels, translate to a tax burden of Sh71 billion annually.
This excludes jet fuel, which will also start attracting VAT from September, meaning the Exchequer could be on course to minting more revenue from the tax.
Consumption of diesel, used to power commercial vehicles, stands at an average of 210 million litres per month or 2.5 billion litres a year, making it the most used fuel in the economy that will earn the government Sh37 billion a year from VAT alone. Petrol intake is 140 million litres a month or 1.6 billion a year while kerosene’s use is 50 million litres a month or 600 million a year.
The impending tax comes even as motorists already carry a heavy load of taxes to put their cars on the road.
The government takes Sh39.16 in taxes from every litre of petrol at the pump, translating to 36 per cent of pump price and takes Sh29.57 per litre of diesel, a tax burden that is set to rise.
The Treasury in September 2016 postponed introduction of VAT on fuel by two years through the Finance Act 2016.
Higher cost of transport, farming and manufacturing
VAT on petrol, diesel, kerosene and jet fuel was first introduced in the VAT Act in 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.
Mr Hira said that the upcoming sky-high fuel prices will raise cost of transport, mechanised farming and manufacturing and risk cooling down an already struggling economy.
“Treasury sits in a precarious fiscal space and could be banking on the extra collections to help narrow the current fiscal deficit,” he said.
In 2015, Kenya entered a binding agreement with the IMF to charge VAT on fuel with Treasury officials committing through a letter a week before the fund approved a $688.3 million (Sh69 billion) standby loan. The precautionary loan serves to cushion the economy from unforeseen shocks to its foreign exchange reserves.
“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 one-year emergency facility expired without having been tapped, and Kenya again applied for another one, this time a two-year $1.5 billion (Sh152 billion) facility which was approved in March 2016.
The facility, which was suspended last year in what IMF termed as Kenya’s non-compliance with fiscal deficit targets, expires this month.
Treasury has continued to suffer perennial budget holes, amid rising expenses and slowing tax revenues, triggering a spike in borrowing to bridge shortfalls.