State won’t reduce tax on oil products

Taxes levied on petroleum products will not be reduced, Finance permanent secretary Joseph Kinyua has said.

Mr Kinyua told Sunday Nation that the impact of the tax on these products is negligible, as taxation is fixed in shillings per litre and not on a percentage of oil products moved.

“The tax on a litre of petrol is Sh29.35, kerosene Sh7.66 and diesel Sh19.75. Designing a price formula agreeable to government and marketers could make fuel affordable for consumers,” he said.

Last month, President Kibaki directed the ministries of Finance and Energy to explore the possibility of reducing taxes on petrol, diesel and kerosene.

The apparently skewed taxation formula was introduced in 1981 to encourage use of diesel as the economy driver, and kerosene as poor man’s fuel. Before then, taxes on petroleum products were levied uniformly.

According to Energy minister Kiraitu Murungi, the government will in January next year introduce price control for petroleum products after the expiry of 40 days notice issued by Energy Regulatory Commission.

“ERC has published proposed rules for control of retail pump prices of petrol, diesel and kerosene and given stakeholders 40 days to submit written views,” he said.

It is feared that price control will create shortages and make investors pull out of the country because of the risk of incurring losses. Marketers can also refuse to import petroleum products if they disagree with the government.

“We are studying the proposed pricing formula. We do not know what the final decision will be, hence cannot speculate on the impact it will have on the market,” said Shell’s external affairs manager, Ngaari Mwaura.

The proposed pricing formula has been copied from South Africa. Kenya imports crude oil and refined fuel from the Middle East through the open tender system administered by Ministry of Energy.

Petroleum Institute of East Africa general manager George Wachira said the industry is studying the pricing formula and will respond to the ERC before 40 days lapse.

He said the South Africa pricing model is reviewed monthly in tandem with fluctuations in the international market of oil and the pump price is based on a Basic Fuel Price.

It is calculated on what it cost an importer to get petroleum products from an international refinery and transport the fuel to South Africa. The government and local refiners have no control over the formula, as it is worked out by a third party, based on international prices.

Mr Wachira said the oil industry is examining ERC’s formula in relation to  supply and refining economics, distribution systems, marketing economics (retail and wholesale), financial (profit and loss) and legal framework.

The escalation of the cost of oil products from the beginning of this year caused by speculation and geopolitics, among other factors, has prompted calls for government intervention through reverting to price control or reviewing the taxation structure.