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September 24, 2018

Viability of VAT on petroleum products

A fuel attendant fuels a car. /FILE
A fuel attendant fuels a car. /FILE

The VAT Act 2013, introduced VAT on petroleum products such as petrol, diesel, kerosene and natural gas. However, noting the adverse effects of introducing VAT on petroleum products, most notably being an immediate increase in the cost of living, the VAT Act 2013 exempted petroleum products from VAT for a period of three years. This exemption was further extended for an additional two years via the Finance Act 2016, effective 01 September 2016. This exemption status comes to an end this year, with the expectation being that petroleum products will be considered vatable goods from 01 September 2018 onwards, either as zero-rated goods or standard rated goods, with the VAT rate being 0% or 16% respectively. Alternatively, the Government of Kenya (GoK) may seek to maintain the status quo by extending the exemption status of petroleum products.

Should petroleum goods be considered standard rated goods, the impact on the cost of living is likely to be immediate, with the costs of transportation – both of goods and people – the cost of power generation, and the costs of running fuel powered machinery, inter alia, expected to rise by 16%. This is primarily because the cost impact of standard rating petroleum products will be passed down to the final consumer, resulting in a price rise on, inter alia, transportation and energy costs.

While this cost increase will be borne by the entire population, it is expected that low income earners will be disproportionately affected, as the segment least able to cope with the increased cost of living. This does not bode well for the ordinary Mwananchi who is currently stretched thin by the already high cost of living. Transportation of goods to market, for instance, will be negatively affected, with the cost of fuel expected to rise by 16%. This will in turn result in higher commodity prices as both formal and informal vendors seek to pass down the cost increase to the final consumer.

However, on the flip side, while VAT on petroleum products would likely increase the average cost of living, this will also result in increased tax revenues, which can then be utilised to fund GoK’s Big4 Agenda. As petroleum products are utilised in almost every aspect of the economy, the vatability of the same, as standard rated goods, will considerably widen the tax net, with an additional 71 Billion expected to be pumped into the economy annually. Given GoK’s ambitious developmental targets, the additional revenue is indeed welcome.

The challenge remains, however, in maintaining a balance between increasingly taxing the population within the existing tax net and widening the tax net in order to achieve desired tax revenue collections. In order to achieve this balance, it is advised that measures targeted at widening the tax net be given priority.

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