Cornered: Ruto caught between a rock and hard place over fuel VAT rollback

 President William  Ruto cut value added tax (VAT) on fuel by three per cent .[PCS]

The government’s decision to cut value-added tax (VAT)  on fuel by three per cent is expected to have a negative ripple effect on the country’s revenues for both the current and the forthcoming financial year.

The reduction of VAT from 16 to 13 per cent as announced by the Energy and Petroleum Regulatory Authority (EPRA) on Tuesday will not only cut  Kenya Revenue Authority's (KRA) collections for this quarter but also eat into the exchequer’s 2026/27 projections.

However, President William Ruto on Wednesday at a public rally announced his government had slashed value-added tax on fuel to eight per cent for three months amid public pressure and discontent to alleviate pressure on fuel prices.

The surprise reduction, announced by the President during his ongoing Kisii development tour was deeper than the 13 per cent rate the energy regulator had announced just a day earlier. There has not been any official government communication on this further reduction by the President.

While this move by the government is being viewed as a relief amid a global fuel crisis due to the ongoing US-Iran war, it is a premonition of tougher times ahead, owing to how cash-strapped the President William Ruto administration is.

With a government that is unable to tame its spending appetite, experts warn that the fuel crisis complicates budget numbers, especially as the country nears a charged political season culminating in the 2027 general elections.

Just a week ago, President Ruto signed a supplementary budget of Sh393 billion that increased the country’s 2025-26 expenditure to Sh4.7 trillion from an original budget of Sh4.3 trillion.

Boaz Musina, Tax Manager at tax consultancy firm EY, says the changes in fuel pricing will have a direct impact on government collections.

“There is going to be an immediate deficit in this quarter,” he said during a pre-budget briefing on Wednesday.

He said the government will have to find a way to recover from this deficit in the next budget cycle.

“There is going to be an increase in austerity measures; for example cutting down on travelling and hospitality, which form most of the expenses that are usually adjusted in the supplementary budget,” he said.

In the 2026-27 financial year, the government has a target of Sh3.5 trillion in total revenue compared to the Sh3.3 trillion projection for the current period.

EY Tax Associate Director Robert Maina said with the current fuel situation, this target is likely not to be achieved.

“It is also notable that every other year, we overstate our revenue expectations. More likely than not is that we will not achieve the Sh3.3 trillion,” he said.

“For example, imagine the fuel crisis prolongs, and the VAT has been reduced to 13 per cent, that might be a hit on tax collections.”

In the EPRA’s April-May price cycle, the regulator increased super petrol prices by a maximum of Sh28.69 and diesel by Sh40.30 per litre.

This has pushed the prices to above Sh200 a litre from Sh178 for petrol and Sh166 for diesel even as the government says a Sh6.2 billion subsidy has been applied.

Analysts said yesterday the move by the government, while welcome for ordinary Kenyans, will further depress revenues for a cash-strapped administration already struggling to meet tax targets. 

However, EY Partner, Indirect Tax Hadijah Nannyomo said the cut on VAT is negligible for consumers as it reduces the cost per litre by just Sh5 only for the government to load Sh40 on the consumer. 

“If you are reducing VAT and excise duty remains the same, you are not doing anything,” she said, referencing other levies on fuel such as Road Maintenance Levy Fund that have not been altered.

She says in other jurisdictions, such as Zambia, the government removed excise duty and VAT.

“What Kenya, a more developed country, has done is to save us Sh5 and add another Sh40,” she said.

These costs are predicted to have a ripple effect on consumers with manufacturers expected to pass on the fuel index to the customers.

“We are going to see a general increase in the cost of producing what we consume,” said Aditi Nayar, Strategy and Transactions Partner, EY.

With the Kenya Revenue Authority (KRA) already having missed its nine-month tax target by Sh84 billion as of March, analysts say the VAT cut will further widen the fiscal hole currently facing government, making it harder for Ruto to deliver on promises ranging from affordable housing to universal healthcare.

“The new VAT will imply KRA shall not meet its revenue target while it shall cushion consumers from high prices,” said Samwel Nyandemo, an economics lecturer at the University of Nairobi. 

“The realistic option is to reintroduce subsidies for cushioning purposes. Otherwise such an increase in (fuel prices) is going to cause inflation to shoot up, thus misery for citizens.”

Nairobi-based tax expert Nikhil Hira drew a direct line between the tax reduction and the government’s deteriorating revenue position.

“Part of me thinks the cut was just seen as a way to make the price hike a bit less,” Hira told The Standard.

“VAT is paid by the end consumer. I believe they are also considering subsidies but this is probably not sustainable in the long run.”

Hira said increased fuel prices are going to be a big burden, so the tax cut may offer some relief.

"Of course, this is going to have an impact on revenue collections for the next three months. I believe we are already behind target...has been throughout the financial year.

"The thing is, the Iran issue doesn’t look as though it’s going to end anytime soon so oil prices may rise more. Are we going to be able to give these types of relief in the long term?”

Deepak Kumar of Autonomi Capital said the tax cut represents the government’s least-bad option, but warned that further fiscal headroom simply does not exist.

“This is the most manageable way for the government to support Wananchi, but additional support will be tricky given the GoK has very little fiscal flexibility,” Kumar said.

“The true fallout of the current conflict will be later this year and we’ll have to see what can be done then. Generally, these cuts are the fastest way to softly subsidise rising fuel costs.

"Given our employment markets and supply chains, GoK has no choice but to make transport more affordable, and this is the only path. Direct cash subsidies to cushion the blow are fraught with mismanagement and diversion risks.”

The Ruto government, facing a ballooning fiscal deficit and limited room to borrow after sustained public resistance to new taxes, can ill afford further revenue failures, analysts say.

With just 18 months until general elections, pressure on the President to stabilise public finances and deliver on campaign promises has never been greater.

“Partly, I think the VAT cut was just seen as a way to make the price hike a bit less,” Hira said, underscoring the government’s defensive posture.

The question now, analysts said, is whether three months of relief will be enough, or whether Kenya’s fiscal cupboard will be bare when the next price shock arrives.