How taxes on petroleum sustain high pump prices

Kenyans are paying more for fuel compared to their counterparts in other East African countries. 

Last week, a section of MPs allied to the Kenya Kwanza coalition are reported to have pleaded with President William Ruto to allow the reduction of petroleum taxes so as to bring down the cost of fuel.

High fuel prices, the MPs said at a parliamentary group meeting at State House, were making their constituents hostile towards them and generally making the Kenya Kwanza administration unpopular.

For many Kenyans, the pleas would appear hypocritical, knowing too well that MPs hold the power to increase or lower tax rates. 

Just five months ago, they exercised these powers when they oversaw the latest hike in petroleum taxes when they passed the Finance Bill 2023 that doubled value added tax (VAT) on fuel. 

They have over the years overseen new taxes on fuel, with the last decade having been particularly bad, with consumers slapped with all manner of levies and taxes. These ranged from the Sh18 per litre anti-adulteration levy on kerosene, the doubling of the road maintenance levy, the introduction of VAT at eight per cent and later 16 per cent and the hiking of the petroleum development levy to Sh5.40 per litre of diesel and super petrol from 40 cents.

All these tax measures have sailed through parliament with the approval of MPs.

Because of these tax measures, Kenyans are paying more for fuel compared to their counterparts in other East African countries. A litre of super petrol is selling at Sh217.36 in Nairobi, diesel at Sh205.47 and kerosene at Sh205.06. 

This is significantly higher when compared to pump prices in Tanzania’s city of Dodoma, where a litre of super petrol is going at Sh201.51 - Sh15 cheaper than it is in Nairobi.

Kenyans were shocked when Tanzania cut its fuel prices at the beginning of this month, which the government explained was due to lower crude oil prices.

Diesel is retailing at Sh207.55 while kerosene is going for Sh210.52 a litre, higher than Nairobi where prices are subsidised but would have otherwise retailed at higher rates.

Dodoma is about 450 kilometres from the port city of Dar es Salaam, almost the same distance between Nairobi and Mombasa.

While a city like Kampala is further from the port of import, more than 1,100 kilometres from Mombasa, one can still find fuel retailing at lower prices compared to Nairobi.

It is also despite Kenya’s expansive fuel transport and storage infrastructure, which Uganda relies on to import petroleum products. The document by Energy and Petroleum Regulatory Authority (Epra) shows that at certain petrol stations in Kampala, one can buy a litre of petrol at Sh211 and diesel at Sh183, again significantly lower than in Nairobi.

This is especially true among petrol stations run by independent oil marketers – which are oil firms that are not associated with the oil majors.

The analysis by Epra shows that Kenya has the highest taxation rates on petroleum products, which makes it possible to find petrol stations in Uganda selling fuel at lower costs than Kenya. A litre of petrol in Kenya attracts a total of Sh80.37 in taxes and levies. 

In comparison, Ugandans pay Sh58.33 in taxes per litre of super petrol that they consume while the total taxes that Tanzania imposes on a litre of petrol is Sh56.61. Rwanda has the lowest tax on super petrol at Sh42.30 per litre.

Parliament came close to cutting taxes on fuel when in 2021 the Committee on Finance and National Planning presented a report to the National Assembly that proposed reductions on different taxes and levies.

This was after the committee conducted an inquiry into the high cost of fuel and at the time noted that taxes were a key contributor.

The committee in its report slammed the government for its appetite for taxing petroleum products to the detriment of the economy. It further drafted a bill that lowered different taxes.

Among the proposals in the Petroleum Products (Taxes and Levies) (Amendment) Bill, 2021, included reducing VAT to four per cent, reducing petroleum development levy to Sh2.9 per litre of super petrol and diesel while at the same time reducing the margins for oil marketers by Sh3 to Sh9 per litre.

The high fuel taxes have this time failed to help Kenya Revenue Authority (KRA) net higher taxes.

KRA said fuel revenues for the period between July and September this year had a performance rate of 84.8 per cent. This resulted in a deficit of Sh12.9 billion compared to the set target, the revenue agency said.

The taxman, while appearing in Parliament last month, said there was an 8.6 per cent decline in collections during the quarter compared to the July to September period last year.

“Oil revenue recorded a performance rate of 84.8 per cent in July-September 2023 for a deficit of Sh12.9 billion against target, and a decline of 8.6 per cent over July-September 2022 collections,” said KRA.

“The tax category’s performance was affected by a decline in overall oil volumes by 12.4 per cent, attributed to a drop in fuel consumption in January-June 2023 driven by high pump prices that depressed demand,” said KRA.  

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