Petrol VAT to hit regional exports

The VAT on petroleum products risks hitting Kenyan exports to the region due to raised cost at a time the country’s strong currency is hurting the competitiveness of local goods.

Manufacturer’s face higher input price where they use diesel powered machinery to produce goods while transport costs to regional markets will also rise.

The government started levying the 16 per cent tax on petroleum products from September 1, instantly increasing the price of diesel by Sh12.34 to Sh115.08 per litre. A court, however, Thursday suspended the new tax.

The Kenya National Chambers of Commerce and Industry (KNCCI) has warned that local goods will become even more expensive, and that businesses may also struggle to get back input VAT on fuel from the Treasury which will only serve to raise the cost of doing business.

“The effects of the same will affect all aspects of the Big 4 agenda with various products meant to make the vision a reality such as cement, agro-processing, logistics (including air travel), paints to mention but a few, likely to go up, increasing the costs of locally produced products,” said KNCCI in a statement.

“While businesses can claim the tax as input tax, the chamber is also concerned with the pace at which the Kenya Revenue Authority has in the past refunded VAT, with the delays ranging from months to years and the impact this has on businesses.”

In the first six months of the year, the performance of exports to regional economies was mixed, growing significantly in Tanzania, marginally in Rwanda and falling in Uganda.

Exports to Uganda fell by Sh245.6 million to Sh25.7 billion in the six months to June compared to the same period last year, while Tanzania exports rose by Sh2.4 billion to Sh12.3 billion in the period.

Exports to Rwanda were up by just Sh21.6 million to Sh7.16 billion in the period, while exports to Egypt rose by Sh2.1 billion to Sh10.1 billion.

This growth is now threatened by the impeding rise in cost of producing goods, as well as the divergence in exchange rate performance against the dollar between these countries and Kenya.

The shilling has gained 2.6 per cent to the dollar this year, in contrast to the Uganda shilling which is 2.4 per cent down against the greenback. The Tanzania shilling is down 2.1 per cent, the Rwanda Franc 2.8 per cent and the Egyptian pound 0.7 per cent.

This means that it is costing importers of Kenyan goods in these countries a lot more to buy Kenyan goods—they need more of their local currency to buy dollars, and at the same time they suffer an exchange hit when converting the same dollars to buy goods in Kenya which are priced in shillings.