How fuel tax has stretched meagre household budgets

Woman selling groceries.

Before the recent wave of tax increases as the National Treasury grapples with how to deal with the ever-growing budget deficit, life was hard enough for a majority of Kenyans.

But with the 16 per cent Value Added Tax on all petroleum products at the beginning of the month, life became harder for the average Kenyan, especially those based in urban areas.

Annette Karani, who works for an insurance company in the city centre, embodies the daily struggle of getting by in the wake of the new punitive tax regime.

Annette earns a basic salary of Sh49, 990 per month stays alone in a one-bedroom flat at Donholm estate where she pays a monthly rent of Sh15,000.

According to Kenya National Bureau of Statistics (KNBS), she belongs to a group of 719,444 formally employed Kenyan middle-class comprising those who earn between Sh30,000 and Sh49, 999 per month.

Every weekday, she wakes up at 6am to prepare for work before heading to the city.

“The first thing I do when I wake up is take a warm shower. I then light my gas and prepare white coffee,” she explained. “I take my tea while ironing my clothes before I leave”.

Anette uses Sh50 daily for a 500ml packet of milk not to mention the cost of sugar that currently goes at Sh155 a kilo. There is also cooking gas that costs Sh2,200 for a 13kg cylinder.

Annette said she then boards a matatu to town which sets her back by Sh70. At 1pm, she breaks for lunch. “I have an hour’s lunch break where I go to a restaurant and spends approximately Sh300. Sometimes, I spend more depending on what I eat,” she explained.

On lunch alone, Annette spends Sh6,000 every month. The 13kg gas cylinder, Annette said, lasts 60 days, thereby costing her about Sh37 daily. She also uses Sh1,000 on electricity per month and Sh2,800 on transport.

In a day, therefore, Annette uses Sh37 on gas, Sh33 on electricity, Sh140 on bus fare, Sh50 on milk, Sh300 on lunch, adding up to Sh560 in a five-day working week.

President Uhuru Kenyatta may have proposed cutting the VAT on fuel by half to eight per cent following a hue and cry from Kenyans of all walks of life, but the move, while offering some relief to an already overburdened taxpayer, is nothing short of a half-hearted measure for average Kenyans like Annette.

“Fellow Kenyans, I have spent the last few days listening to a wide cross-section of views. It is clear that you are all troubled by the effect of the rise in the prices of petroleum products, and its impact on the cost of living,” President Kenyatta said on Friday.

“I have heard and understood your concerns, which is why I have proposed, as part of my memorandum, to cut VAT on petroleum products by 50 per cent -- from 16 per cent to eight per cent.”

For Annette though, the struggle continues. If the VAT on fuel is retained at eight per cent, and manufacturers are forced to pass on the additional production cost to consumers, Annette will be forced to use Sh45 more every day. In one week, she’ll spend Sh225 more and Sh6,250 more in a month.

The rise in fuel costs is projected to increase the cost of production of many basic commodities.

The tax increase will directly escalate the cost of gas, electricity, fares, food, among other essentials.

Annette, along with other middle and lower class citizens in Nairobi, will have to dig deeper into their pockets to survive. These changes, however, will affect the upper class more as recorded by KNBS.

According to the State statistician, a middle class person living in Nairobi spends the bulk of their income on food and non-alcoholic drinks while the upper class spends more on transport.

Upper-class Nairobians spend Sh28 for every Sh100 earned on transport. While the middle class spends a negligible amount of their salaries on their private cars, the upper class use Sh13 in every Sh100 earned.

“The upper class use Sh49 for every thousand on petrol while the middle class earners use Sh10 less. They also use Sh19 of every Sh1,000 on diesel where the middle class spend an insignificant amount,” reads the statistics.

This difference could, however, be argued to be compensated on the amount spent by the middle class on passenger transport.

“The middle class use Sh43 of every thousand on matatus while the upper class only use seven shillings on the same,” says KNBS.

Absorb costs

For every Sh100, the middle class spend Sh22 for on food and non-alcoholic beverages while the upper class spend two shillings less.

“The middle class spend most of their income on beef (Sh23 for every Sh1000) and milk (Sh22). The upper class use two shillings for every thousand on beef and six shillings of a thousand on milk,” reads the 2018 KNBS report.

The report also says that while both use Sh22 of every Sh1,000 on electricity, the middle class spend nine shillings more on gas.

Both the lower and the middle class who spend the most on food and non-alcoholic drinks will spend even more after the Cereal Millers Association (CMA) sent a notification of price increase for maize and wheat flour due to the recent surge in the cost of production.

“The recent changes in the value-added tax status for processed wheat and maize flour and more recently the addition of VAT to petroleum products, have left our members with little room to absorb these additional costs without jeopardising the quality and the sustainability of operations,” said CMA chairperson Mohamed Islam.

Following the introduction of VAT on fuel, transportation costs have increased two-fold from the grain handling facilities to the millers and from the millers to the respective retailers and millers have to absorb these costs.  

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