Remove punitive taxes to reduce high fuel prices

Treasury PS Chris Kiptoo struck the right chord during the vetting exercise. The State, he said, would review the multiple petroleum levies and taxes - the biggest cause of the skyrocketing local fuel prices.

Countries, Kenya included, buy petroleum at the same prices at the international market. They then decide to impose different taxes. The difference in taxation is the main reason fuel prices vary between countries. Other reasons could include the costs of handling, quality and refinery costs, product transportation, and distribution costs "but these only for a small share of the variation," says the International Energy Association

In comparison, the key European economies of the UK, Germany, Italy, the Netherlands, and France have the highest cost of fuel among the major world economies, says UHY, the international accountancy network. They levy taxes of at least 60 per cent on petrol, more than other major developed economies such as the US, Canada, and Australia. In the UK, fuel is taxed twice; it attracts fuel duty, and 20 per cent VAT.

Indonesia, Brazil, the US, Canada, Mexico, and China pay the least amount of tax on their fuel. In terms of the differences in percentages - the US is at 25 per cent, Japan 45 per cent, UK 62 per cent, Germany 65 per cent, India 260 per cent. The world's largest economies, the US and China, have extremely low fuel taxes. For more perspective, the US levies 13 per cent on petrol and 12 per cent on diesel, whereas China levies no taxes at all on these fuels.

The UAE levies no tax on petrol or diesel at point of consumption, though it levies corporation tax on foreign oil companies operating in the country, at an average of 55 per cent, considered higher than most countries' corporation tax rates.

Kenya, it appears, went on a spree - 40 per cent of the retail price of petrol is consumed by taxes and levies such as excise, VAT, import declarations fee, road maintenance, petroleum development, petroleum regulatory, railway development, anti-adulteration, and merchant shipping levies.

Unless these windfall levies and taxes are reviewed, consumers will be pressed harder. These taxes form a key plank of the country's pricing formula.

The pricing formula that guides the Energy and Petroleum Regulatory Authority (EPRA) should be amended. For a while, EPRA was in the spotlight with accusations that it single-handedly raised fuel prices. These attacks deflected attention from the real cause of the local price spikes. The impact of these taxes was understated, and consumers knew little, if any, of the profound impact they had on them.

There is a need to strike a balance to ensure that fuel and tax costs are not prohibitive, especially to the retail and distribution sectors, as the consumers get to shoulder the burden passed over to them. We need to offset the inflationary impact of high fuel prices. Amending the requisite laws and removing the punitive fuel taxes would be a good start.

Mr Mudibo is the Senior Account Director and Client Services Lead at Apex Porter Novelli. [e-mail]