Govt likely to review fuel tax, PWC

Tax experts see the government walking back on the proposed increase in fuel tax after consultations with stakeholders, a trend seen over the past few years when the tax faced huge opposition on the impact of higher petroleum prices on cost of living.

In a bid to increase the revenue collection, the Government has proposed in the Finance Bill, an increase in the rates of various tax heads such as Value Added Tax (“VAT”) on petroleum products, which has been increased from 8 percent to 16 percent.

Value added tax on fuel introduced over a decade ago has been a very contentious tax that has been frozen and when it was applied, the government was only able to impose half the intended 16 percent.

PwC says the fact that the government has been cautious in the past due to the adverse impact of fuel taxes on the economy, means authorities are likely to compromise when the bill comes to parliament for consultations.

“Some of the tax rate increases affect items that play a critical role in the economy e.g. petroleum products and the Government has in the past adopted a cautious approach when increasing the tax rate for such essential goods. This trend may continue after the appropriate stakeholder engagement,” PWC said.

Government is likely to compromise given indications in the draft National Tax Policy where Treasury is seeking to set the minimum value added tax rate at 12 per cent

Treasury said charging fuel at 8 per cent and other goods at 16 percent has created an undue advantage over other products, as it proposed that all goods should be taxed at 16 per cent and preferential rate should not be lower than 12 per cent.

VAT tax law was reviewed in 2013 to simplify the tax regime by eliminating lower rates and charging a standard 16 per cent rate or zero rating.

The 2013 law exempted petroleum products for a transition period of three years which was subsequently extended to 2018.

Implementation of the 16 per cent rate on petroleum at the end of the transition period led to widespread anger that prompted President Kenyatta to offer a 50 per cent cut on fuel vat as a compromise.

President Uhuru Kenyatta proposed the lower charge on fuel in 2018 as a compromise after an uproar over imposition of 16 per cent VAT on petroleum products.

Taxes are a huge component on what Kenyans pay at the pump with vat, import declarations fee, road maintenance, petroleum development, petroleum regulatory, railway development, anti-adulteration, and merchant shipping levies make up 40 per cent of the retail fuel prices.

Push to increase these taxes further is coming from the International Monetary Fund (IMF) who told government in April 2021 if it needed to meet fiscal objectives, it should capitalise on lower fuel prices by aligning fuel VAT to the standard rate.

Parliament also halved the vat on LPG this year from the current 16 percent to eight percent following the rise in the cost of cooking gas has piled pressure on families that are struggling to foot daily bills due to job losses and drastic cuts in earnings in the wake of the coronavirus pandemic.