Fuel prices dip marginally as VAT hike in budget looms large

If the proposal to increase VAT to 16 per cent from eight per cent sails through in Parliament, it is expected to increase super petrol pump price to Sh195 per litre in Nairobi and well over Sh200 in far-flung towns such as Mandera, Elwak and Moyale where the fuel is currently retailing at more than Sh190.

Diesel will increase to about Sh180 per litre in Nairobi. "The average landed cost of imported super petrol decreased by one per cent in April... diesel increased by 0.84 per cent... while kerosene decreased by 0.83 per cent," said Epra in a statement Wednesday.

Data that Epra used to compute the monthly pricing guide showed that the price of crude oil had continued to decline, but the impact this would have had on local pump prices was eroded by the shilling that continued to weaken against the US dollar.

The shilling exchanged with the dollar at an average of Sh141.39 in May, weaker than Sh138.96 in April. This is even as crude oil prices fell to $79.55 (Sh10,977) on average in May from $83.36 (Sh11,500) in April.

Prices are set to go up significantly next month as new VAT rates come into effect should lawmakers pass the Finance Bill, 2023 in its current form.

The Kenya Private Sector Alliance (Kepsa) told the National Assembly's Finance and Planning Committee that the hike in VAT on fuel would result in an immediate increase in pump prices by Sh12 per litre of petrol and diesel. "The increase of eight per cent will lead to a corresponding increase in the cost of fuel by Sh12.56 and Sh12.76 per litre for diesel and super petrol, respectively. Further, oil marketing companies will need additional capital to sustain their margins," said Kepsa in its submissions to the committee, adding that a higher tax rate would also dent earnings for industry players, who would need more cash to buy the same amount of stock.

"In 2019, oil marketing companies (OMCs) enjoyed margins of 0.1 per cent with an investment of Sh1 million, in July 2023, if the proposal passes, OMC margins will drop to 0.05 per cent with an investment of Sh2 million. The additional cash flow financing will reduce the OMC margins and profitability and hence a reduction in corporate taxes paid to the government."

Despite the public outcry on the impact that higher fuel prices will have on the economy, the committee retained the proposals that Treasury had made. This is despite making some concessions and reducing other taxes that Treasury had proposed in the Finance Bill.

The committee had noted that the aim was to standard VAT rates that are either imposed at 16 per cent or zero rated, adding that the eight per cent rate that was unique to petroleum products had complicated the administration of the tax on oil companies by the Kenya Revenue Authority (KRA).

"The committee noted that the existing VAT rates were not standard and thus intended to harmonise the rate to 16 per cent, including for petroleum products," said the Finance Committee in its report on the Finance Bill.