Why regulator wants kerosene consumers to pay more

The government’s decision to impose additional taxes on basic commodities has hit most Kenyans hard.

Even as consumers are forced to dig deeper to meet the increased cost of living, it is emerging that the situation could have been more dire for low income earners had the National Treasury not resisted the pressure to increase taxes on kerosene.

The Energy Regulatory Commission (ERC) has been pushing the National Treasury to increase taxes on kerosene.

The regulator says this would compel consumers to abandon the cheap but dirty fuel for cooking gas.

More than 50 per cent of Kenyans use kerosene to light or cook as it is cheaper compared to other forms of energy such as electricity and liquefied petroleum gas (LPG), commonly referred to as cooking gas.

“We have been advocating for an increase in the surcharge of kerosene to be at par with diesel.

Ultimately, the best goal is to shift usage from a dirty fuel to a cleaner fuel,” said ERC director general Joseph Nga’ng’a in an interview with Smart Company.

USAGE PATTERNS

“We have been trying as much as possible to see if we can be able to have taxes increased on kerosene so that we can have any benefits accruing from there invested in LPG access.

It is a deliberate policy to change usage patterns," Ng'ang'a said.

ERC also thinks that if kerosene is taxed, it will discourage fuel adulteration, a practice where unscrupulous fuel sellers mix kerosene with diesel, in order to take advantage of the low prices of the product to earn a windfall from unsuspecting motorists.

EXCISE DUTY ACT

The Excise Duty Act, which came into effect on December 1, increased the amount of tax on diesel by Sh2.06 per litre to Sh10.30 per litre.

This means that had ERC had its way, low-earning consumers would be paying at least Sh10 more for a litre of kerosene.

Kerosene does not attract any excise duty but Sh0.45 is levied per litre which comprises of the petroleum regulation levy and petroleum development levy.

Excise duty on kerosene was scrapped in 2011 by President Mwai Kibaki's government to cushion Kenyans against high cost of living.

During that year, the overall rate of inflation had risen to a record high of 19.7 per cent while the value of the shilling had deteriorated to Sh107 against the dollar.

The Petroleum Institute of East Africa (PIEA) says more than 80 per cent of kerosene consumed in the country is used to adulterate diesel and petrol hence the need to raise its taxes to curb the vice.

(READ: Fuel prices shoot up on weak Kenyan shilling)

According to data from ERC, about 1.2 billion litres of dual-purpose kerosene (DPK) are consumed in the country every year.

DPK consists of 400 million litres of illuminating kerosene which is used in homes and 800 million jet-type kerosene used to power aircraft.

ERC did not disclose the figure it had proposed to be taxed on kerosene.

Analysts say taxing kerosene would widen the gap between the rich and the poor.

“Taxing kerosene is not a pro-poor policy as it will worsen their situation.

The end result is higher cost for basic products which leads to more hardships and higher poverty levels,” said economic analyst Robert Shaw.

At the moment, alternative forms of energy remain far from the reach of most poor people.

LPG CONSUMPTION

Industry data shows that the country’s consumption of LPG is at just 2 kilogrammes per capita compared to Africa’s average of 3 kilogrammes.

This situation has been attributed to the high cost of the LPG equipment, unreliable supply and limited distribution resulting from lack of enough storage capacity for the product.

It costs about Sh600 to refill a three-kilogramme cylinder while six and 13 kilogrammes costs as much as Sh1,200 and Sh2,500 respectively.

The prices of cooking gas are also not currently regulated by ERC, leaving oil marketing companies to determine them to the detriment of consumers.

Government data shows that LPG currently accounts for just 11 per cent of the country’s energy mix with an annual consumption of 80,000 tonnes.

Under the economic blueprint Vision 2030, the government is targeting to raise the annual consumption of the product to 200,000 tonnes.

“To achieve the intended benefit of taxing kerosene, the government must ensure that other forms of energy are made affordable to consumers.

Currently, LPG is in a different category of cost compared to the price of kerosene,” said Mr Shaw.

According to the Leading Economic Indicators report for October by the Kenya National Bureau of Statistics, the price of cooking gas went up for two consecutive months to October when a 13 kilogramme cylinder retailed for Sh2,400.

It sold at the highest price of Sh2,954 this year in January.

ELECTRICITY CONNECTION
A litre of kerosene currently costs Sh54.81 in Nairobi.

In its fuel price review for November, ERC slashed the price of kerosene by Sh1.23 per litre, alongside reductions in the prices of diesel and petrol.

Data from Kenya Power shows that only 47 per cent of the country’s population are connected to electricity.

Low usage of electricity has been attributed to the initial cost of connecting customers which is currently as high as Sh75,000 for a single phase meter connection which is what is used in homes.

Through the Last Mile Connectivity project funded by African Development Bank (AfDB) and the World Bank, among other bilateral lenders, the government is aiming to reduce the initial power connection fees to Sh15,000 per household.

KRA DEFICIT

The amendment of the excise duty law is among drastic measures that the government has taken lately to bridge a revenue deficit which resulted from inability by the Kenya Revenue Authority (KRA) to collect the targeted amount during the first quarter of the current financial year.

KRA missed its revenue collection target during the first quarter by Sh28 billion.

It blamed the shortfall on the reduction in corporate taxes following a period characterised by low earnings among large companies, partly resulting from high financing costs emanating from stiff interest rates.

The taxman also reported a decline in payroll taxes of up to Sh10 billion as companies reduced the size of their workforce and the impact of the government’s decision to freeze employment.

According to Nikhil Hira, a tax partner at Deloitte, the government can deal with the shortfall in revenue collection by widening its tax bracket to include the informal sector so that it shifts focus from taxation of basic commodities.

“To prevent poverty levels from getting bigger, the government can widen its tax net to include the informal sector and enhance enforcement of the law on evaders to ensure maximum compliance,” he said.

POVERTY LEVELS

According to the World Bank, the poverty level in Kenya stands at 45.9 per cent of the national population, representing people living below $1.25 a day.

A report released by the Bretton Woods institution in April indicated that Sub-Saharan Africa is witnessing growing poverty levels despite the region’s fast-paced economic development in the recent years.

It estimates that a billion people were lifted out of extreme poverty between 1990 and 2015, but mainly in East Asia, Latin America and South Asia where the number of people living in extreme poverty has been on the decline during the period.