Tax on petroleum products applies brakes on consumption

Tuesday November 13 2018

Grant Thorton Kenya director Samuel Mwaura said

Grant Thorton Kenya director Samuel Mwaura said while it may be early to conclude on the impacts of the VAT on petroleum products, the drop in consumption was expected and would take time to normalise. FILE PHOTO | NMG 

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Motorists scaled-down their fuelling budget in response to the new tax the government introduced on all petroleum products in September cutting sales by close to 30 per cent, the latest statistics indicate. Data from the Energy Regulatory Commission shows that petrol and diesel sales dropped to a six-month low in September after an eight per cent Value Added Tax was loaded on the commodities, a move that threatens the government’s plan to reap billions of shillings from the petroleum products to fund its budget. Motorists purchased 105 million litres less of the two products with diesel, which is used to power trucks, buses, vans, tractors and factories, experiencing a bigger negative of 58 million litres in September.

Petrol, which is largely used in private cars, recorded a 46 million litres-drop in sales after the VAT kicked in. Analysts say the decline in use of motor fuels has a longer ripple effect in the economy since consumption has a direct impact on productivity.

Audit and tax advisory services firm Grant Thorton Kenya director Samuel Mwaura said while it may be early to conclude on the impacts of the VAT on petroleum products, the drop in consumption was expected and would take time to normalise.

“People may have had to cut down spending on fuel and only use cars when very necessary but this may change with the coming festivities. Should the downward trend continue then it means the tax will only have achieved one thing; burden Kenyans and slow down the economy, which is counterproductive to the overall goal of realising more revenues,” Mr Mwaura said.

Less consumption of fuel apart from denying the government its targeted Sh35 billion from the VAT, has a general slowdown on various other sectors of the economy, creating a stronger revenue shock in the long run.

Some of the direct impacts on revenue collection include the corporate taxes from oil marketers who registered less sales and dampened profits.

With more middle class homes getting cars, consumption of motor fuel has been on an upward trend for the last seven years with only a slight drop in diesel sales recorded in the first six months of 2017 after a steady rise since 2011. Nairobi-based economists Robert Shaw said apart from the rise in international crude prices the tax on fuel was expected to have a larger effect in the economic value chain.

“Generally the economy has not picked up as it was anticipated to, and such increases in fuel prices work to create a further hand break effect. Everyone is obviously keen on what prices of fuel which is basically the power that runs the economic engines,” Mr Shaw said.

Petrol, Diesel and Kerosene carry a heavy load of levies and taxes raising hundreds of billions for the government in revenues. Over Sh60 billion was raised from the consumption of these three products in the first six months of 2016 alone according to the official data for example.

The levies include, road maintenance (Sh18 per litre on both diesel and petrol), petroleum development levy (Sh0.40 per litre on all the three), petroleum regulatory levy (Sh0.05 per litre on kerosene and Sh0.12 per litre on petrol and diesel) as well as railway development levy Sh0.50, Sh0.52 and Sh0.51 on every litre of petrol, diesel and Kerosene respectively. With another 16 per cent VAT added on a litre of all the products, the burden is heavier.

High fuel costs affect transport which is the third weightiest factor after food and Housing, water and electricity in measuring inflation according to the Kenya national Bureau of Statistics which put October inflation at 5.53 per cent, slightly lower than September’s 5.7 per cent.

The war on fuel adulteration has also suffered a setback after consumers bought less of the kerosene blamed as the main ingredient of the unscrupulous traders.