Inside MPs plan to ease the pain at petrol pumps

This story has significance for readers across Kenya and beyond.

A parliamentary committee has proposed a reduction of the fuel pricing components subject to Value Added Tax (VAT) in a bid to help lower pump prices, especially whenever global costs of refined fuel skyrocket.

The Senate committee on energy says VAT should only be charged on landed costs to help reduce pump prices.

The landed cost is the total all-in expense of purchasing crude oil or refined fuel products and delivering them to a primary local storage depot or port. It is used as the baseline figure by regulators and oil companies to determine wholesale and retail pump prices.

Currently, VAT is charged on the total sum of the landed costs and margins and distribution costs for oil marketers. VAT is also charged alongside other eight distinct taxes per every litre of diesel, petrol and kerosene, triggering steep prices especially when global fuel prices rally.

“Strategic recommendations for Kenya: amending the VAT Act so that the eight percent is charged only on the landed costs, excluding State levies from the taxable base would help lower pump prices immediately while still protecting revenue flows to key infrastructure funds,” the committee says in the report tabled before the House last month.

Slapping VAT at the rate of eight percent on the total sum of the landed costs, margins and distribution costs for oil marketers and eight taxes has created a ‘tax on tax’ scenario in Kenya, with consumers bearing the brunt of the heavy levy.

For example, in the current pump prices, VAT on a litre of diesel and petrol accounts for Sh16.14 and Sh15.86 respectively. This could potentially drop if the State excludes the eight taxes from the VAT charge.

Pump prices surged to a historic high of Sh242.92 and Sh214.25 per litre of diesel and petrol respectively in May this year, as Kenya reeled from the global market shocks of the Middle East conflict that started in February.

Prices have since marginally eased to Sh217.86 and Sh214.03 per litre of diesel and petrol, respectively, in Nairobi currently, but could be lower if the State reduced the taxation rate.

Besides the eight percent VAT, Kenya also charges Sh25 as Roads Maintenance Levy on every litre of diesel and petrol and a Petroleum Development Levy (PDL) at the rate of Sh5.40 per litre of the two fuels.

Petrol and diesel also attract excise duty, Petroleum Regulatory Levy, Railway Development Levy, Merchant Shipping Levy, Import Declaration Fee, and anti-adulteration levy, which is charged on a litre of kerosene at the rate of Sh18.

But the committee’s recommendation, if adopted, could hit the Sh94 billion that the Treasury projects it will collect as VAT from fuel in the year ending June 2027.

The State has in the past been reluctant to lower taxation on fuel and instead opted to subsidise consumers to cushion them in the face of global price shocks.

The current eight percent VAT will lapse on October 14, potentially setting the stage for a return to the higher rate of 16 percent.

Kenya halved VAT on fuel from 16 percent on April 17 in response to the skyrocketing global fuel prices in the wake of the US-Israel war on Iran. The lower rate was to last for 90 days but was extended by three months to October 14.

In 2021, Parliament rejected a recommendation by its Finance Committee to halve VAT on fuel from the then eight percent and also lower PDL to Sh2.50 from Sh5.40.

Heavy taxation has for years been cited as a major driver of costly fuel in Kenya, with the country being home to one of the highest taxation regimes on refined fuel.

Reporting originally appeared via Business Daily. Read the full source for additional context.