Kenya faces tough decision on fuel taxes, IMF loan rule

Kenya must convince the IMF that slashing petroleum taxes will not affect its revenue basket for it to continue enjoying the Sh259.4 billion Covid-19 cushion loan.

According to tax experts, the move is likely to affect disbursements to Kenya which has so far received two tranches of Sh34 billion (in April) and Sh43.9 billion in May.

The National Treasury has been under pressure from the IMF to impose a 16 percent VAT on fuel products from the current eight percent to boost its revenues and address the debt problem.

In the Finance Bill assented to by President Uhuru Kenyatta on June 30, cooking gas (LPG) moved from being zero rated to taxable under the VAT, increasing the cost of the product by up to Sh700.

The IMF’s advisory on increasing fuel taxes came after the fund’s board approved the $2.34 billion (Sh259.4 billion) loan to help the country continue responding to the Covid-19 pandemic and address its debt vulnerabilities.

“The halving of VAT rates on LPG fuel is likely to be a negative when put forth by the authorities for IMF review. The periodic performance reviews by IMF ensure that the next instalment of the loan is disbursed,” financial analyst and tax expert Mihr Thakar said yesterday.

The reduction of taxes and levies on fuel, coupled by a reduction in electricity prices may however boost productivity and hence tax revenue in the mid-term, he notes.

Treasury is expected to convince IMF the existing programme will not be affected, mainly riding on the Kenya Revenue Authority's better-than-expected performance.

To address the high cost of fuel, MPs have recommended slashing what is considered burdening taxes in a move expected to bring down the cost of fuel by up to Sh10.

This is after a public uproar last month when prices hit a history high, amid rising global prices.

Between April and August, the government was forced to use the Petroleum Development Fund to cushion Kenyans against high fuel prices.

It however failed to spend the kitty last month which saw pump prices rise to a high of Sh134.72 for a litre of petrol in Nairobi, Sh115.60 (diesel) and Sh110.82 for a litre of kerosene.

There are nine different taxes and levies payable on fuel products making nearly half of the cost of retail prices. Kenyans are currently paying Sh58.81 per litre of petrol as taxes. The landed cost at Mombasa is Sh60.35.

Tax advisory firm KPMG had pushed for the exclusion of excise duty, fees and other charges in the computation of the taxable value of fuel products.

“The high fuel prices are unsustainable and threaten to jeopardise the economic recovery which is still facing the realities of a reduction in the disposable income of most Kenyans,” said KPMG in is budget paper..

This was however not considered in the Finance Bill.

The Homabay Woman Representative Gladys Wanga-led committee has now proposed to reduce the Petroleum Development Levy charged on Super Petrol and Diesel from Sh5.40 to Sh2.90, per litre.

It also proposes that VAT be reduced from eight per cent to four per cent.

Oil Marketing Company's margins will also be cut by Sh3 per litre, to Sh9 if the recommendations are considered, a move likely to bring a backlash from firms retailing petroleum products in the country.

Yesterday, the Supply Coordination Committee (SupplyCor), the umbrella body for oil marketing companies in Kenya, said it was looking into the proposal before making any decision.

“We just received the report so we are looking at it.  We will get back to you soon,” its leadership told the Star.

If adopted, a litre of petrol, diesel and kerosene will drop by at least Sh10.91, Sh10.18 and Sh7.1, but only if there is on spike in the global prices and the landed cost remains at an average Sh60 per litre.

Crude prices have been rising in recent weeks closing at $81 a barrel yesterday , from a low of $50 early this year.

The Energy and Petroleum Regulatory (EPRA) is expected to announce new prices today, where the government is expected to try and cushion consumers by retaining low prices and compensating OMCs.