After the implementation of Value Added Tax (VAT) on petroleum products, the question on everyone’s lips is this: how will it affect the prices of electricity?
This is understandable given that we have a fuel cost adjustment in our power bills.
Depending on the amount of electricity purchased from diesel and gas generators and on the prevailing price of the fuel, Kenya Power works out the additional cost to be posted in consumers’ bills. In August 2018, for example, this was Sh2.50 per kilowatt hour (kWh).
However, a closer inspection of the bill reveals that the fuel cost adjustment is included when the VAT is calculated in the bill. The question then is: since Kenya Power is already collecting VAT on the fuel cost, should consumers get additional tax now that the government has started charging VAT on fuel?
Responding to queries raised by the Senate Committee on Energy, the Principal Secretary for Energy said that consumers should not expect any increment because the wind generated electricity from Lake Turkana Wind Power in Marsabit will connect to the national grid this month.
According to the PS, the reduction in diesel and gas generated electricity will be more than the increment arising from the new VAT on petroleum. In my view, this explanation is not correct.
The VAT on fuel should not affect electricity bills at all since consumers have already been paying this tax — even before the new law came into effect. The August 2018 fuel cost adjustment of Sh2.50 per kWh attracted 40cts VAT and so consumers paid Sh2.90 per kWh in the final bill.
Now, the way VAT works is that collecting agents like Kenya Power are required to subtract any VAT that they were charged by their suppliers from that collected from their customers.
This is important because it removes the chances of double taxation where consumers might be charged VAT on VAT.
The fuel cost adjustment is a “pass-through” cost, meaning that Kenya Power collects the money and hands it over directly to the companies that operate the diesel/gas powered generators. So, with the new VAT on fuel, these electricity generating companies will bill Kenya Power Sh2.50+VAT = Sh2.90. Kenya Power will also bill consumers Sh2.90+VAT = Sh2.90. This is exactly the same as before!
The only difference will be that Kenya Power will not forward the 40cts VAT amount to KRA. This will now go to the electricity generating companies; who will in turn, pass it on to the fuel suppliers. Finally, the fuel supplier will hand over the 40cts to KRA. In short: there will be no difference to the electricity consumer. The VAT amount remains constant at 40cts.
But it is true that the injection of wind generated electricity should reduce the fuel cost adjustment. This reduction has nothing to do with VAT. The question is whether this will have significant effect on the final bill. Probably not. Fuel cost adjustment is currently just above 10 per cent of the bill.
www.figures.co.ke; Twitter: @MungaiKihanya