Ruto tough options: Reduce fuel taxes, slow development

President William Ruto’s administration faces a delicate balancing act as pressure mounts on the state to reduce fuel taxes amid worsening economic strain and growing public anger.

Soaring petroleum prices and the rising cost of living have seen public anger grow, especially after matatu owners pulled their vehicles off the roads, forcing many commuters to walk to work.

The countrywide strike that paralysed the country for nearly two days was called off on Tuesday with a rider that it will resume in a week if no deal is reached between the government and transport operators.

While the move has given Ruto some breathing space, pressure remains on the government to further slash fuel-related taxes.

On Tuesday, Kenya Association of Manufacturers Chief Executive Officer Tobias Alando said the only way out is to cut down the taxes.

“Fuel-related taxes and levies must be reviewed to ease economic pressure, protect local manufacturers’ competitiveness, lower commodity prices, stabilise supply chains, and support economic recovery,” he stated.

However, some economists warn that cutting down taxes will widen the budget deficit and force the government to suspend development projects.

Even with the current taxes, Kenya’s 2026/2027 national budget projects a fiscal deficit of Sh1.1 trillion

This now leaves the administration walking a tightrope as cutting fuel taxes could cripple key development programmes that heavily rely on revenues collected from the sector.

The government earns hundreds of billions of shillings every year from taxes and levies imposed on petrol, diesel and other petroleum products.

Treasury Cabinet Secretary John Mbadi told the Star the recent reduction of VAT has resulted into a Sh12 billion loss in revenue for the month of April.

“From April, we have reduced VAT on petrol and petroleum products from 16 to eight per cent, that is a loss of Sh12 billion per month,” Mbadi said.

“For the two months, April and May, is Sh24 billion.”

During the 2024/2025 financial year alone, Kenya Revenue Authority (KRA) collected over Sh338 billion in oil-related taxes and levies.

Among those under sharp public scrutiny is the Road Maintenance Levy – the largest component – which is charged at Sh25 per litre.

During the 2024/2025 financial year, the taxman collected Sh119.7 billion from RML after it was increased from Sh18 to Sh25.

The government uses the levy to finance the rehabilitation and expansion of road networks across the country.

Other fuel-related taxes include Value Added tax (VAT) at Sh17.81 (petrol) and Sh17.85 (diesel), it was halved to eight per cent from the initial 16 per cent.

The government also imposes excise duty at Sh21.95 (petrol) and Sh11.37 (diesel), the levy goes towards debt servicing and public services.

Also charged on petroleum products is the Anti-Adulterations Levy of Sh18 per litre, import declaration levy (Sh3.50), railway development levy (Sh2.10), petroleum regulatory levy (Sh0.75) and Merchant Shipping Levy (Sh0.3).

In total, the taxes and levies on petrol and petroleum products account for 52 per cent of the pump prices.

Foregoing the taxes, as being pushed by some quarters, will mean a huge revenue gap for the administration and may cripple key sectors.

The government also reduced the cost of diesel by Sh10 on Monday, a move Energy Cabinet Secretary Opiyo Wandayi said will cause another Sh2.7 billion loss.

“The reduction by Sh10 on diesel took some Sh2.7 billion,” Wandayi said.

The push to reduce the taxes and levies thus presents Ruto’s administration with tough options amid demanding national development priorities.

Economic analysts warn that any major reduction in fuel taxes could leave the state with a huge budget gap, forcing it to borrow more to sustain ongoing projects, a move likely to pile pressure on the country’s already ballooning public debt.

Economist and Kitui Central MP Makali Mulu has urged the government to reduce public expenditure and review fuel levies to shield Kenyans from the rising cost of living following the latest increase in fuel prices.

Mulu called on the government to reconsider some of the levies imposed on fuel, arguing that easing the tax burden would help stabilise the economy and cushion households from further hardship.

He further noted that some expenditure lines in the current budget can wait to allow the government to bridge revenue gaps without heavily relying on fuel taxes.

“We need to look at the budget from the expenditure side not revenue side, we need to see which areas can we push to next year,” Makali said.

“Reducing taxes and then borrowing more will be putting more pressure on the economy. We can reduce some of the levies, fuel is cheaper in Uganda and Tanzania than Kenya because we have more taxes and levies.”

According Mbadi, the state is observing the situation with a possibility of reducing VAT further and reviewing the expenditure.

“If we reduce VAT we will have to look at what we can cut in terms of government spending,” he said.

The government is currently rolling out several infrastructural and development activities across the country.

Kesses MP Julius Rutto cautioned that reducing fuel taxes may offer temporary relief to wananchi, but it could also slow down development and widen the fiscal deficit.

“We are on a lean and tight rope financially such that we will make fuel cheap and stop development,” Rutto said.

But Kitutu Masaba MP Clive Gisairo said many taxes on petroleum products is to blame for the hiked prices calling on the government to reconsider some of the taxes.

“Petroleum products are subjected to multiple levies, significantly increasing their cost,” Gisairo said.

“Prices can be managed by removing the VAT imposed on these products and scrapping the Sh7 Road Maintenance Levy Fund (RMLF), which was quietly sneaked into the pricing formula in 2024 and has since been securitised by the government.”

The crisis is already taking a heavy toll on the transport sector, with Matatu Owners Association estimating losses of up to Sh500 million on the first day of disruptions linked to the fuel standoff.

The associations' chairman Albert Karakacha in justifying the industrial action said operators across the country are struggling to cope with the sharp increase in fuel costs, which he described as unsustainable for both operators and ordinary Kenyans.

He said the sector has been forced into drastic measures after recent fuel price adjustments pushed diesel and petrol prices to record highs.

He claimed the government has failed to cushion transport operators despite repeated appeals for dialogue and intervention.

“We have already lost more than Sh500 million as a sector, and we are ready to continue bearing those losses until the government addresses the issue of high fuel prices,” Karakacha said during a media briefing on Monday.

The protests and partial transport paralysis witnessed in several towns followed the latest fuel price review by the Energy and Petroleum Regulatory Authority, which saw diesel prices rise to Sh242.

The increase has sparked outrage among matatu operators, boda boda riders, logistics companies, and private motorists who say operating costs have become unbearable.

INSTANT ANALYSIS

The protests and partial transport paralysis witnessed in several towns followed the latest fuel price review by the Energy and Petroleum Regulatory Authority (Epra), which saw diesel prices rise significantly.