From the 1st of September 2018 the cost of petroleum oils including Petrol, Diesel and Kerosene rose in Kenya by 16% after the addition of Value Added Tax (VAT) on the products. The VAT being applied on petroleum products will end the tax exemption that had previously applied in accordance with the VAT Act of 2013. The Treasury is implementing the VAT after a five-year delay that consisted of a three-year grace period and a two-year deferral of the tax. Petroleum is one of the highest taxed commodities in the country bearing a number of levies and taxes currently at Kshs.55.16 on super petrol, Kshs.43.87 on diesel and Kshs.25.93 on Kerosene.
The move to have VAT on petroleum products was mandated by the International Monetary Fund (IMF) as a method for Kenya to better deal with its public debt. The condition that was set by the IMF is part of an agreement for a standby credit facility that would allow emergency borrowing in the event of economic shocks. This move is expected to burden the taxpayer approximately 71 billion shillings according to the Treasury. The change of policy is expected to increase tax revenue, contain the level of debt and improve the balance of payments of Kenya.
The application of the VAT has taken the prices of petrol and diesel to another consecutive peak price in four years resulting in average figures of Kshs.128.70 per liter of super petrol and Kshs.116.20 per liter for diesel. The consumption of diesel tops the petroleum chart with 210 million liters used a month by Kenya whereas super petrol has a usage of 140 million liters a month. Kerosene follows with 50 million liters being consumed per month. This demonstrates that the VAT will cause price increases for all users of petroleum across uses and sectors, thereby driving up the cost of living and affecting Kenya’s competitiveness.
While the government has maintained that the citizens will incur a minimal charge, the Kenya National Chamber of Commerce & Industry is concerned on how the VAT will impact the cost of everyday goods. This concern is raised from the experience of prices rising following an increase in the cost of petrol or diesel. The occurrence where a rise in the cost of petrol leads to the inflation of prices in other goods results from the impact of the rise in production and/or transportation costs amongst other factors. While businesses can claim the tax as input tax, the chamber is also concerned with the pace with which the Kenya revenue authority has in the past refunded VAT with the delays ranging from months to years and the impact this has on businesses. In the meantime, KRA needs to make it mandatory that petrol stations issue valid tax invoice/ electronic tax register receipts that businesses can use to claim tax refunds.
Tax pundits from various firms have agreed that the poorest households will suffer the most from the VAT on petroleum as a result of the resulting costs as well as the direct increase in kerosene costs that affects their lighting and cooking needs. There are concerns from the manufacturing sector about the impact of the rising cost of oil coupled with the VAT on their production costs; this is amplified by their distance from Nairobi as costs rise with increased distance from the capital with super petrol price currently at Kshs.141 in towns like Mandera.
With the government promoting manufacturing through its Big 4 agenda this rise will be an impediment to any investor wishing to set foot in the country especially with the cost of electricity another major deterrent as the country continues to generate 10 percent of its power from thermal sources
Other than manufacturing, the effects of the same will affect all aspects of the Big 4 agenda with various products meant to make the vision a reality such as cement, agro-processing, logistics (including air travel), paints to mention but a few, likely to go up, increasing the costs of locally produced products and thus making it hard to make the mantra Build Kenya Buy Kenya tenable. In the case of air travel it is unforeseeable how Kenya Airways can remain competitive against airline competitors from oil rich nations and numerous subsidies extended to its rivals with increased costs on jet fuel and aviation spirits.
Further, it is expected that workers will demand for an increment in wages so as to cover increased expenses from higher costs of living. Businesses on the other hand have no way to increase their margins from the same to help cushion their employees.
As a chamber we laud parliamentarians for postponing the implementation of the 16% VAT tax on petroleum products by two years and would like to request the president to sign the bill to ease the burden of rising costs on consumers and to offshoot the effect of VAT on other basic products. The implications of the VAT are far reaching and could potentially influence the potential for economic growth for the next financial year.
The following are recommendations from the chamber that could support the debt management of the government and therefore remove the need for the VAT on petroleum oils:
1.Expand the Tax Base by adopting a presumptive tax and increasing taxes on goods with negative externalities.
2.Curb Losses to Corruption by handling the problem of impunity.
3.Improve Public Transport Network and Service Delivery through the development of a public transport network with efficient service delivery to encourage more people to use public transport and leave their cars at home.
4.Support Local Industries to Enhance Competitiveness by empowering the Ministry of Trade and Industry to better support the sector.
5.Conduct an Audit of Government Spending by heeding the directives of the Auditor General and make changes to spending based on independent reviews of government spending.
The chamber will continue to support the government where need be to come up with remedies to various national issues affecting business climate and we look forward to engaging the relevant government agencies on the same.
Kenya National Chamber of Commerce & Industry