State's decade-long quest to impose 16pc VAT on petroleum products

The highest of these taxes on fuel is excise duty, which was traditionally regarded as 'sin tax' and charged on luxury or harmful goods, at Sh21.95 per litre.

"In our view, it is not an opportune time to increase VAT on fuel because the country is grappling with a lot of challenges, the cost of living is quite high, hovering at about nine per cent in the recent past," said Deloitte East Africa tax manager Fred Kimotho in a discussion yesterday on the Finance Bill 2023.

"Our recommendation would be that this proposal be shelved and not increase the VAT rate at this point in time."

He said to prop up the economy, the government should consider a downward revision of taxes and levies on fuel to enable companies and individuals access fuel, which is critical to the economy.

"There are about nine other levies and taxes on fuel and maybe it is time to review these levies and maybe drop some of them in totality or review the rates downwards," said Mr Kimotho.

Tax on fuel

Taxes on fuel have for years been a contentious matter and in 2021, MPs had recommended chopping some of them to give relief to Kenyans as the cost of petroleum products began to go up.

At the time, global economies were recovering from the impact of Covid-19 and in turn increased demand for oil that led to a price surge, and with it the local pump prices.

The National Assembly's Committee on Finance and National Planning, after a public inquiry into what could be done to cushion Kenyans from the high cost of fuel, made recommendations to review certain taxes.

The recommendations, however, were not heeded and it appears the public inquiry may have been an exercise to calm down consumers.

The House committee in its report recommended halving VAT to four per cent, reducing the petroleum development levy to Sh2.90 a litre from Sh5.40 and reducing the margins that oil marketing companies make by Sh3 per litre to Sh9 from Sh12.

For 10 years, the government has been trying to impose VAT on petroleum products. This has been met by opposition to the extent that to date, the State has only been able to get motorists to pay half of the normal VAT rate at eight per cent.

The National Treasury is in another bid to claim the other eight per cent.

In the Finance Bill 2023, Treasury has proposed review of the VAT Act (2013), deleting the clause that put VAT on fuels such as petrol, diesel and kerosene at eight per cent, which would see the usual rate of 16 per cent apply on petroleum products, except cooking gas.

Tax experts warn that this could impact the economy significantly.

"The proposal to delete the reduced VAT rate implies VAT at 16 per cent will apply on petroleum products, which we expect to have a significant adverse effect on the cost of living taking into consideration Kenya's dependency on fossil fuel and the already high global oil prices," said business advisory firm PwC in an analysis of the Finance Bill 2023.

A rate of 16 per cent on petroleum products was introduced in 2013 when the VAT Act was being enacted.

Parliament, however, put a transitional clause to defer implementation by three years to save the economy from a sudden surge in the cost of fuel.

And in 2016, when the new rate was supposed to kick in, the MPs extended the transitional clause by another two years.

It was only in 2018 that eight per cent VAT on fuel came into place. It was, however, after a fight between the Executive and Parliament.

At the time, as is the case today, the government noted that it needed to increase revenue but MPs said this would make the cost of living unbearably high for Kenyans.

The MPs had shot down Treasury's proposal in the Finance Bill, 2018 to VAT fuel at 16 per cent, instead deferring it's implementation for another two years and forwarded to the President the Bill for assent.

But then President Uhuru Kenyatta was not ready to let go, with the pressing need to increase tax revenues and fuel providing a low hanging fruit to increase revenues by as much as Sh35 billion over the 2019-20 financial year by simply imposing VAT on it.

He took a lower rate and proposed the eight per cent VAT on fuel. This was in a memorandum detailing why he did not assent to the Finance Bill 2018 and instead referred it back to Parliament.

In debating the memorandum, there were major disagreements - even chaos - in Parliament that saw some of the MPs walk out in protest.

The walkout, though, handed the State a win as it denied the National Assembly the requisite two-thirds majority required to override the President's recommendations on the Bill.

Tax consultants

Tax consultants KPMG said in their analysis of the Finance Bill, 2023 that the proposed tax increase will raise prices on a wide range f products and services.

"This proposal is likely to impact the prices of transport and production of goods increasing the inflationary pressure in the economy," it said.

Households could, however, see some relief as the Treasury proposed scrapping of eight per cent VAT on cooking gas.

The VAT on Liquefied Petroleum Gas (LPG) was introduced in the Finance Act, 2021 at the standard rate and reduced to eight per cent in 2022.

Together with other factors, it has had the impact of increasing the cost of cooking gas. This is to the extent that its consumption has reduced, leading analysts to conclude that Kenyans who had adopted the cleaner cooking fuel are falling back to other unhealthy fuels such as charcoal and wood fuel.

"This is a welcome amendment as LPG is used as a source of energy in many households in Kenya. Additionally, LPG being a cleaner source of energy is health and environmentally friendly," said PwC

The effect of both high oil prices and a weak Shilling drove pump prices to record highs, hitting Sh180 per litre of petrol in September last year. The result was reduced consumption of petroleum products. According to recently published data by the Kenya National Bureau of Statistics (KNBS), Kenyans cut back on consumption of most fuel including cooking gas in the course of 2022 due to high costs.

"Total domestic demand for petroleum products declined by 1.1 per cent to 5.1 million tonnes in 2022. Domestic demand for light diesel oil dropped by 3.7 per cent in the review period," said KNBS in the Economic Survey 2023.

"During the same period domestic demand for aviation spirit and illuminating kerosene dropped by 35.7 per cent and 20 per cent, respectively."

Demand for LPG declined by 10.1 per cent to 338,800 tonnes in 2022.

The high crude oil prices and weak shilling also saw the amount of money that Kenya spent in importing petroleum products nearly double last year.

The survey showed that the country's petroleum import bill rose 80.4 per cent to Sh628.4 billion in 2022 from Sh348.3 billion in 2021.

Petroleum is the largest import item and accounted for 25 per cent of the country's import bill at Sh2.49 trillion in 2022.

"This was on account of high global petroleum prices as well as weakening of the Kenyan Shilling against the US dollar," said the KNBS report.

Other factors that were at play, the survey noted, was the geo-political tensions linked to the Russia-Ukraine conflict.

"(These) led to the first half of 2022 registering the highest inflation-adjusted crude oil prices since 2014. Further, low global oil inventories contributed to the 2022 crude oil price rise in the first half of the review period."

Crude oil prices rose from $85 (Sh11,560) a barrel in January last year to peak at $117.72 (Sh16,000) in June. They however started going down and settled at $79.61 (Sh10,826) in December. On average, a barrel of crude oil was selling at $99.9 (Sh13,586) in 2022.

The decline in crude oil prices was however not felt in the local market as the shilling continued weakening.