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Why fuel is always a low-hanging fruit for the taxman amid uproar

At 12.2 per cent, the contribution of petroleum taxes to overall tax collection is significant for a single product.

"I think petroleum is an easy target because of the ease of collecting the tax. The moment you consume, the government collects that tax immediately," said Alex Kanyi, Partner in the Tax and Exchange Control at Cliffe Dekker Hofmeyr (CDH) Kenya.

"There is also the fact that it is needed and you cannot take away that need, it is easy for the government to tax that and collect it from the oil marketers."

While the government has refrained from hiking taxes over the last two years and dug into public coffers to subsidise fuel, the last decade has been marked by frequent hikes.

The hikes are usually marked by public uproar as has been the case with the doubling in VAT on fuel to 16 per cent. But resistance tends to die down with time as Kenyans learn to live with higher prices. With the implementation of the Finance Act, 2023, the government will have achieved what it has been trying to do for the last decade - raise VAT on fuel to 16 per cent.

Despite public opposition, this has been marked by incremental success over the years.

It was first introduced in 2013 through VAT Act (2013). Its implementation was, however, suspended for five years, with MPs noting that it would have had a monumental impact on the cost of living. But the government succeeded in 2018 when VAT was implemented at eight per cent on all petroleum products, which was a negotiated rate in place of the standard VAT rate of 16 per cent.

This year, this rate has gone to 16 per cent despite the conditions being worse than in 2018, considering the weakening shilling has seen Kenya spend more on importing petroleum products as well as recent economic shocks that have eroded Kenyans' spending power.

VAT on fuel is not the only tax that has been introduced in recent years.

In 2018, the government introduced an anti-adulteration levy on kerosene at Sh18 per litre of fuel.

This raised its cost of kerosene - largely used by low-income households for lighting and cooking - to be at par with that of diesel, a move aimed at dissuading unscrupulous traders from increasing diesel volumes with kerosene.

Excise duty on kerosene also moved from Sh7.21 to Sh11.37, in a move also aimed at reducing adulteration.

The Road Maintenance Levy has in the last decade doubled to Sh18 per litre of diesel and petrol from Sh9 per litre. It was initially adjusted in 2014 to Sh12 and then to Sh18 in 2016.

The State increased the Petroleum Development Levy ((PDL) in July 2020 from 40 cents per litre of petrol and diesel to Sh5.40.

At the time, the Petroleum Ministry explained that the PDL under new regulations had a price stabilisation component that would be tapped to ease fuel prices whenever they went above a certain threshold.

Cliffe Dekker Hofmeyr's Mr Kanyi noted that the latest hike would hit different industries in a major way.

The transport sector will be specifically hard hit as in addition to the VAT on fuel, the Finance Act has also increased Advance Tax.

"We have already seen PSVs (Public Service Vehicles) increasing our fares. There is a huge increase in advance tax that will affect the transport sector including the matatu businesses. This will be painful because we have to discuss it within the context of the increase in VAT on fuel," he said.

The Act has increased advance tax paid by public service and commercial vehicles. The advance tax for passenger vehicles will increase to either Sh100 per passenger per month or Sh5,000 per year, whichever is higher, from a rate of Sh60 per passenger or Sh2,400 per year.

Advance tax for cargo vehicles will double to Sh3,000 per tonne per year or Sh5,000 per year, whichever is higher, from the current rates of sh1,500 and Sh2,400 per year. Advance tax is paid by owners of commercial vehicles and includes passenger vehicles such as matatus, taxis and tour vans as well as cargo vehicles such as pick-ups, lorries, prime movers, trucks and trailers.

"When considering the impact of higher VAT on fuel, you have to also look at this from a manufacturing sector perspective because of factories that would ordinarily use diesel to power their generators because they do not have consistent power from Kenya Power, if you increase the cost of that diesel, it means that they are going to pass on the cost of power to the final consumer," said Mr Kanyi.

"This is also against the increase in rates of electricity over the recent few months. It will get more serious when you consider that a component in the price of electricity is actually the price of fuel. If the price of electricity goes up, it means that you will pay more for fewer power units going forward."

Higher taxes and the impact they have on pump prices are now a cause of concern that fuel consumption could further decline this year, bucking the trend last year where spikes in crude oil prices and a weak shilling pushed petroleum prices to record highs at the time and saw consumption dip.

High fuel prices last year resulted in a 1.1 per cent drop in the consumption of petroleum products, according to data from the Kenya National Bureau of Statistics (KNBS).

Diesel, the fuel used heavily by industries in their production processes and transportation of materials to plants and products to market, dropped by 3.7 per cent. The increase in the cost of fuel has been in quick succession, with Kenyans having had little time to absorb the increases that followed last year's withdrawal of subsidies across different products.

The weak shilling has seen Kenyans pay more for fuel. The latest hike, analysts say, could result in a further decline in consumption, which is a bad indicator for an economy.