Confusion, pain as hefty fuel tax kicks in, driving up cost of living

The Energy Regulatory Commission on Saturday made a belated move to announce the fuel price increase after daylong confusion and anxiety over whether the 16 per cent Value Added Tax on petroleum products would be enforced.

The move ignored a last-minute move by MPs to delay the enforcement of the law by two years.

This came amid strong public reactions to the steep price increase, with President Uhuru Kenyatta, who would have had to sign the amendments to the Finance Act, flew out to China for a summit without word on the issue that had been pushed by the International Monetary Fund.

There was an inevitable feeling of betrayal and outrage as Kenyans, who are already struggling with tough times, stared at price increases in transport and basic items.

PAY SH127 FOR PETROL

A statement signed by ERC Director General Pavel Oimeke on Saturday evening confirmed the pain at the pump where Nairobi motorists will now be required to pay Sh127 for a litre of petrol, Sh111.78 for diesel and Sh94.61 for Kerosene after the VAT was loaded into the pricing formula.

Those in far-flung areas like Mandera will pay as high as Sh141.61 for a litre of petrol while residents of Bondo, Meru, Bungoma and Isebania will take the hit at above Sh130 for the same quantity of petrol.

A thick haze of confusion had hung over the fuel market for the better part of the day after anxiety set in following the expiry of the legal period within which the VAT had been frozen and the fact that President Uhuru Kenyatta had not signed the amendment Parliament passed.

ERC, which is expected to give another revision on the prices on September 14, avoided mention of the MPs’ move to arrive at the decision, albeit one day late. Earlier, the Kenya Revenue Authority had indicated it would begin collecting the new tax from September 1.

VALUE ADDED TAX

“Pursuant to the Value Added Tax Act of 2013 and Clause 31 of the Finance Act 2016, the VAT on Super Petrol, Diesel, and Illuminating Kerosene comes into effect on 1st of September 2018,” read the statement which went ahead to specify fuel prices per region.

KRA’s statement rattled marketers who had not been charging VAT for the better part of Saturday after failing to get direction from the regulator.

“Kenya Revenue Authority informs the general public, oil marketers, resellers and retailers that VAT will be charged on all petroleum products at a rate of 16 per cent on all transactions with effect from 1st September 2018. The changes are contained in the Finance Act 2013, which extended the exemption for three years. Further the exemption was extended by two more years under the Finance Act 2016. Consequently, the VAT charge on petroleum products has now come into effect,” read the KRA statement as the taxman expected to collect Sh70 billion from the move.

FILE RETURNS

The KRA notice, having come ahead of ERC’s, now puts marketers in an awkward situation that will see the taxman demand the VAT they had collected since Saturday when they file returns.

Enraged marketers who spoke to Sunday Nation said the confusion may eventually push pump prices even higher should KRA come back to demand for the tax since ERC will be forced to load any expenses incurred in the late compliance to the tax collection.

“Of course, we are concerned that KRA will come back to us to demand for money we should have collected during this awkwardly mishandled period when we were basically left without regulatory guidance and policy guidelines. But as in that scenario, ERC will be forced to adjust pricing to make that recovery,” a managing director of an multinational petroleum product distributor told Sunday Nation in confidence, owing to the sensitivity of the matter.

“KRA does not regulate our prices, we work with what ERC gives us,” the source added.

MAXIMUM PRICES

Cost recovery is the main principle that ERC uses in marking maximum prices every month for petrol, diesel and kerosene, making the possibility that the current dilemma will boil down to even higher prices, a reality starting September 15 when the next monthly revisions will take effect.

Last year the energy regulator made a similar move after oil marketers applied to be compensated for an unexpected fuel price escalation in two tenders, a move that had significant impact on the price of fuel in September 2017.

ERC simply had to do a gazette notice to allow the compensation of Sh1.3 billion shillings, a process that may easily recur after the confusion that has set in since September 1.

Higher fuel costs will erode the purchasing power of motorists, push up operating costs for industrialists and transporters, who could then pass the additional costs on to consumers, triggering a wave of inflation in a country which entirely relies on imported petroleum products after it shut down the Mombasa-based refinery in September 2013.

EXCISE TAX

Levies and taxes, which account for close to half the prices of a litre of petrol and diesel, include excise tax, road maintenance levy, petroleum development levy, petroleum regulatory levy as well as railway development levy.

Tax experts said the authorities must have decided to let the law set in by default after they read the signal from Parliament following the vote on Wednesday to push it by one year.

Delloite East Africa Tax leader Fred Omondi said Treasury Cabinet Secretary Henry Rotich tabled the Finance Bill without any provision to have the VAT on fuel pushed by any period, making September 1 its effective date unless the amendment passed by MPs was signed by the President (which never happened).

Kenya consumes about 126 million litres of petrol per month, according to the energy regulator, a figure that has been on the increase as more people join the middle class and buy more vehicles over time.

It is perhaps this growth that the IMF saw and compelled Kenya to load the VAT on fuel so as to boost revenue and bridge its budget gaps amid the growing debt distress, which has so far crossed the Sh5 trillion mark.

TAX EXEMPTION

The Bretton Woods Institution has been pressing Kenya to do away with tax exemption as part of a wider plan to increase revenues, reduce budget deficits and ultimately slow down debt pile up that has in recent months become a source of national concern.

The VAT charge on petroleum is part of the tough conditions the IMF set for Kenya in exchange for a standby credit facility that the country can draw from in the event of economic distress.

Treasury may have found the fuel tax an easy option after the push to remove bank interest rates cap met tough headwinds in Parliament while it remains another key legislation IMF had asked Kenya to revise.

FORCE DOWN TAX ON CONSUMER

Consumers Federation of Kenya (Cofek) chairman Stephen Mutoro, however, read mischief in IMF's pressure to effect VAT on fuel, saying the haphazard manner with which it was being done raises suspicion on whether the revenues will be accounted for in the first place.

“How many other legislations have been pending implementation by even KRA so that they tell us this one is so urgent? This is highly suspect since I do not even understand why Mr Rotich takes this as a matter of life and death, even when Parliament which passed the VAT Act 2013 in the first place has voted to push it further,” said Mr Mutoro, who had earlier alleged a scheme to force down the tax on consumers despite the bid by Parliament to delay it.