VAT waiver planned to cut power costs

The Government, alarmed by the economic impact of high electricity costs, plans to remove Value Added Tax from bulk fuel used for power generation.

The final touches to the tax proposal were being made on Monday by top civil servants in the ministries of Finance and Energy who will then have the plan rubber-stamped by acting Finance minister John Michuki and his Energy counterpart, Mr Kiraitu Murungi.

Some experts say the move could cut electricity costs by as much as 50 per cent.

Factory closures

The revelation came amid reports of job losses, reduced production and impending factory closures and follows orders directly from the President to the two ministries to review taxes on power generation.

The orders came after impassioned pleas of big and small power consumers who have been protesting over huge bills.

Said the President: “I am aware that the country is experiencing high cost of energy, especially of electricity. I am now directing the minister for Finance and of Energy to review the taxes and levies in order to reduce the costs of power.”

The Kenya Association of Manufacturers, hoteliers and domestic consumers have been campaigning against the high cost of electricity, which the power-generating firms have attributed to the rise in fuel costs.

The President’s directive comes a few weeks after an appeal he made to oil firms to cut fuel prices and, by extension, help reduce power-generating costs.

Power bills have rocketed since July mainly because of the high cost of fuel used by power-generating firms.

Removal of the VAT will significantly bring down the bulk fuel cost, with some experts putting the reduction by as much as 50 per cent.

The Executive Director of the Institute of Policy Analysis and Research (Ipar), Prof Inonda Mwanje, said the reduction would average 60 per cent if the Government acted on the fuel cost element which is well over 70 per cent of the actual consumption.

He said that the Government could subsidise the cost of heavy fuels used to generate power or support the power generators to import the fuel directly in a bid to reduce the cost and hence the pass through cost to the consumers.

Losing revenue

“There are so many taxes in the power bills which could be harmonised into one consolidated reduced bill ... This could be done without the government losing any revenue generation,” Prof Mwanje said.

The Ipar boss further said the Government could curb the situation by putting in place measures to ensure the heavy fuel used to produce power costs less like zero rating any duties charged on heavy fuels.

But KenGen CEO Eddy Njoroge said he could not approximate the possible percentage decline, however, noting that the two ministers have a variety of current duties with which they could juggle with for possible reduction.

“When we have analysed the parameters concerned, I can be in a position to tell,” added Mr Njoroge.

Electricity tariffs went up by over 20 per cent from July 1, this year as a result of the high cost of oil.

Consumers were shocked when they received bills, some having gone up three times their normal monthly payments.

President Kibaki who was addressing members of the National Economic and Social Council at Kenyatta International Conference Centre in Nairobi, said the high cost of energy had been mentioned by local and foreign investors as one of the reasons why they were shying away from starting projects.

The Head of State expressed confidence that his directive would be implemented to the letter saying: “I am sure we can be able to do it.”

Manufacturers Monday welcomed the President’s directive.

The chairman of the Kenya Association of Manufacturers, Mr Vimal Shah, said the high cost of energy was driving business people and ordinary consumers out of the market.

“The President’s directive is good and timely. We know the fuel and electricity power suppliers have justifiable costs but the thing is, we just can’t afford it,” he said.

Mr Shah, who is also chief executive officer of Bidco Oil Refineries added: “We will adopt a wait-and-see attitude until the two ministers act on it.”

He had earlier expressed same sentiments at the National Economic and Social Council meeting.

“The cost of doing business in Kenya is currently too high and we need to deal with the factors that push these costs up,” Mr Shah said.

The order to review taxes also comes ahead of today’s energy conference bringing together stakeholders from Kenya and experts from abroad to discuss the strategies for affordable prices by the year 2030.

Electricity consumers are charged five different taxes on their monthly bills. They pay 16 per cent VAT which is passed on to the Kenya Revenue Authority. Then they pay a five per cent levy to the Rural Electrification Authority.

Customers are also charged 3 cents on every unit consumed, which is given to Energy Regulatory Commission. A further 7 cents is charged to cater for any fluctuations in foreign exchange which might be incurred by the power sector such as loan repayments.

Fuel cost is the highest component of the bill, which is passed on to power generators and is based on international fuel prices within the month.

The President also ordered the KRA to refund VAT to manufacturers and businesses within six months as an incentive to attract more local and international investors.

When contacted after the presidential function, Mr Murungi declined to elaborate on how he and Mr Michuki would implement the directive, saying it was part of issues that would be discussed at the three-day National Energy Conference that the Head of State is opening Tuesday at KICC.

Tax waivers

“We will discuss the high cost of electricity and of petroleum products at the energy conference. I would not like to pre-empt it by discussing the details today,” he said.

Earlier, he said the Government was willing to institute any policy measures, including tax waivers and subsidies, to mitigate the effects of the current high cost of fuel and electricity on the economy.

Mr Murungi said the Government had received many policy proposals from various sectors such as manufacturers through, over the high cost of energy.

“We are feeling the heat,” he said.

The minister said representatives of various sectors of the economy are warning that businesses might move to other countries, and that there could be job loses and scaled down productions unless the Government offered them incentives.

However, Mr Murungi said the Government would act after the conference where delegates are expected to make recommendations on how the country can provide secure, quality and adequate energy at cost-effective but affordable price strategies.

The strategies will cover electricity, petroleum and renewable energy to provide economic growth stimulus for the realisation of Vision 2030 objectives.