VAT On Petrol Starting September Could Significantly Inflate Fuel Prices

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Source: Kwetu Research Section 2018

Petroleum products will attract 16 per cent value added tax from September 1 going by Kenya’s promise to the International Monetary Fund (IMF) in 2015. At the time, Kenya committed to a binding agreement with the IMF to charge VAT on fuel before a fund amounting to $688.3 million (KES 69 billion) standby loan could be approved.

Next month could see a litre of petrol retailing at KES 130.15 in Nairobi; this is an additional of KES 17. Diesel on the other hand will cost KES 16.5 more to stand at KES 119.77 while a litre of kerosene will cost KES 99.44, a KES 13.7 increase from current price of KES 85 per litre.

VAT Act of 2013 effectively sought to remove tax exemptions on petrol, diesel, kerosene and jet fuel. The three year grace period would have seen it implemented in 2016 but it was once again deferred to September 2018. With massive pressure coming from the IMF, Kenya considerably contemplated doing away with tax exemptions as part of a wider scheme to grow revenues, reduce budget deficits and ultimately slow down the debt pile-up.

Normally, the VAT levied at the point of sale is calculated as 16 per cent of all other costs in the product, including other taxes and levies, other than VAT.  The additional costs at the pump will only serve to compound the global oil prices that have been steadily rising in recent months. Also distant towns will pay even higher prices arising from added costs such as transport, the sum of which forms the principal amount on which VAT is levied.

Tax experts have come out guns blazing indicating charging VAT on petroleum bears the potential of causing a general rise in prices of essential goods in all segments of the economy as it affects the cost of transport, which is ultimately passed on to the end users. Notably, increased prices of sugar, petrol, electricity and health burdened households in July, pushing the inflation rate to a four-month high of 4.35 per cent.

According to Nikhil Hira, the Deloitte East Africa tax leader, the steep rise in fuel prices will raise the cost of transport, mechanised farming as well as manufacturing with the potential of cooling down activity in an already struggling economy.

“Treasury sits in a precarious fiscal space and could be banking on the extra collections to help narrow the fiscal deficit.”






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