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February 20, 2019

The origin of VAT on petroleum products

Treasury Cs Henry Rotich. /FILE
Treasury Cs Henry Rotich. /FILE

In a letter dated June 15, 2013, Treasury CS Henry Rotich and the then CBK governor Njuguna Ndung’u promised IMF managing director Christine Lagarde that the country was planning to increase the VAT bracket to allow for higher mobilisation of revenue which will reduce the fiscal imbalance.

The two were talking about Valued Added Tax (VAT) Act of 2013 which had among other things proposed VAT application on petroleum products. However, Parliament suspended its operationalisation by three years.

On August 31, 2016, MPs made an amendment to Clause 31 of Finance Act 2016, extending the tax exemption by two more years to September 1, 2018.

Last Wednesday, MPs further suspended the implementation of the tax by two more years, but Treasury which is keen to keep its promise of raising tax revenue to IMF, and fund President Kenyatta’s Big Four Agenda went ahead to effect it.

Read: Hard times ahead as Rotich effects 16% VAT on fuel

Treasury and KRA argued that the tax came into effect since the President had not signed into law any other legislation cancelling it.

On Saturday, the Energy Regulatory Authority announced new fuel prices in line with Clause 31 of the Finance Act 2016, raising fuel prices by up to Sh14 per litre.

The surge in fuel prices has consequently raised transportation costs, forcing business operators to pass costs to consumers.

The pressure is now on President Uhuru Kenyatta to assent to the amendment to the Finance Bill 2018 that will extend VAT exemption on petroleum products by two more years.

Even so, Uhuru who returns to the country today after attending the China-Africa Cooperation (FOCAC) Summit in Beijing will have to strike a delicate balance to resolve the matter.

While he is likely to bow to public pressure and sign into law the Finance Bill 2018 as hinted by his confidants including Deputy President William Ruto and former Prime Minister Raila Odinga, IMF will be watching.

Read: Kenya insists it will implement reforms to extend IMF deal

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