Record high fuel cost as new VAT plan stays

An attendant fuels a car at a petrol station along Koinange Street, Nairobi. [Elvis Ogina, Standard]

The government is pushing on with its largely unpopular plan to increase tax on fuel, despite huge resistance and warning that it could deal a major blow to an economy suffering multiple shocks.

If the value-added tax (VAT) on petroleum products is increased to 16 per cent from current 8 per cent, industry players said, will result in an increase of over Sh12 per litre of diesel and super petrol. It could see super petrol hovering at around Sh200 a litre.

This even as Kenyans are set to see a marginal decline in fuel prices after the Energy and Petroleum Regulatory Authority (EPRA) on Wednesday lowered the price of Super Petrol by 66 cents to retail at Sh182.04 in Nairobi, and that of Diesel by Sh1.12 to stand at Sh167.28 from Sh168.40. Kerosene prices increased by 35 cents. The price of fuel continues to be impacted by the weakening of the shilling against the dollar with shilling depreciating by 1.75% from Sh138.96 per dollar in April to Sh141.39 per dollar in May.

The National Assembly's Committee on Finance and Planning said it had weighed the good and the bad of doubling VAT on the economy and decided that the positives outweighed the negatives and backed the National Treasury's proposal to increase the taxes.

It argued that there was need to standardise VAT, which is either levied at 16 per cent or zero-rated. The eight per cent rate, the committee said, had complicated matters for both the Kenya Revenue Authority and oil marketing companies.

"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. The committee also agreed that the effect of the differential VAT on fuel led to petroleum distributors being in a constant credit position, thus leading to high expenditure for the government. The committee rejected the proposal (opposing the introduction of 16 per cent VAT on fuel)," said the Finance Committee in its report on the Finance Bill, in which it also noted that the proposal was among the most unpopular in the Finance Bill.

"The proposal to increase VAT on petroleum products from eight per cent to 16 per cent was also not supported by most stakeholders because it has potential to further increase the cost of living for mwananchi."

During public participation, the Federation of Public Transport Sector noted if effected, the higher tax could make running public service vehicles costly.

The federation pleaded with the committee to "retain the initial rate of eight per cent of VAT on fuel because an increase will push PSV operators out of business with the Kenya shilling continuing to depreciate, it means that the fuel prices will continue to increase. Furthermore, the operators will be forced to pass the burden to passengers by adjusting fares upwards."

The Kenya Private Sector Alliance said the hike in VAT on fuel would result in an immediate increase in pump prices, estimating that a litre of petrol and diesel would shoot by Sh12.

Currently, a litre of super petrol retails at Sh182.7 in Nairobi, an additional Sh12 would push it to Sh195. It will be well over Sh200 per litre in far-flung towns like Lokitaung and Kibish where a litre is already going for Sh190.

Diesel, a fuel largely used by industries such as transport and manufacturing, dropped by 0.87 per cent. The country consumed 2.27 million metric tonnes of diesel in 2022, which is slightly lower than the 2.29 million tonnes consumed in 2021.

"At 16 per cent, the higher VAT on fuel is coming at a time when fuel is most expensive. We have had a situation where our exchange rate has affected fuel cost, we have seen a gradual increase in fuel costs," Marshel Nyangor economist at financial services firm Zimele said.

"Putting an additional eight per cent to bring it to 16 per cent will mean that fuel will not be affordable to many people. The other bigger impact is that it has a knock-on effect on all other areas."

"So many companies use diesel in their production. This is even in the production of electricity, where a proportion of it still relies on diesel... all transport areas will be affected...any increase in the price of fuel affects the economy in so many ways."

Increase in the cost of fuel has been in quick succession, with Kenyans having had little time to absorb the increases that followed withdrawal of subsidies across different products.

The result is that over the last year, the local pump prices have defied the trend in international crude oil, which has dropped from a high of $122 (Sh16,900 at current exchange rates) per barrel in July last year to $73 (Sh10,000) at the moment.

Locally retail prices have moved up to the current record high of Sh182.7 per litre of super petrol in Nairobi. This is in comparison to Sh159 per litre in Nairobi in July last year.