The government has extended the eight percent Value Added Tax (VAT) on fuel by three months to October 14, in an effort to avert a sharp increase in pump prices in the coming months in the wake of the resumption of the US-Iran war.
The eight percent VAT rate was due to lapse on Tuesday (July 14) but has been extended amid rising global prices of fuel, whose effect is expected to hit Kenyans from the August 14 monthly cycle.
VAT on fuel was lowered to 13 percent from 16 percent on April 15 as the government mirrored other economies in reducing taxes on fuel in a bid to cushion consumers following the start of the US-Iran war in February this year.
A resumption in the US-Iran war last week has already triggered a rally in global prices of refined products, with the government warning that consumers are likely to feel the impact from August.
Consumers are currently smarting from record-high prices of fuel, which have in turn triggered runaway inflation and sparked public outrage over costly goods and services.
A litre of diesel is retailing at Sh222.86 in Nairobi while that of petrol is at Sh214.03 in the current prices lapsing today. The prices had hit a record high of Sh242.92 and Sh214.25 for diesel and petrol, respectively, in June.
“In order to cushion households and businesses from international market volatility and in consultation with the National Treasury, we have extended the application period of eight percent VAT on petroleum products for a further three months to October,” Mr Wandayi said on Tuesday.
Steep diesel prices will spark fresh inflationary pressure in what could further fuel public outrage over costly living. Inflation --a measure of the cost of living-- is currently at 6.4 percent, reflecting the impact of the costly diesel last month.
Diesel is the main fuel in the Kenyan economy, and it's used to power farm machinery, industries and public transporters, highlighting why its price is a key factor in determining the inflation rate.
Global fuel prices are on the rise in the wake of the resumption of the US-Iran war, with the government warning that consumers will feel the impact in the coming months.
“With the restart of the Middle East crisis, international benchmarks have now begun to climb again, and this renewed pressure will be reflected in the pricing cycles that follow,” Mr Wandayi added.
Extension of the lower VAT rate will also ease pressure on the Petroleum Development Fund (PDL) kitty, which is used to subsidise fuel prices. The kitty is nearly depleted, leaving the government with limited options in efforts to keep a lid on pump prices.
VAT is the second biggest tax on fuel, and the reduction to eight percent has been crucial in helping prevent pump prices from rising by even higher margins.
The highest tax is the Roads Maintenance Levy of Sh25 per litre of petrol and diesel, the Petroleum Development Levy of Sh5.40 per litre of diesel and petrol and Sh0.40 for every litre of kerosene.
Other taxes are excise duty, petroleum regulatory levy, railway development levy, anti-adulteration levy of Sh18 per litre of kerosene, merchant shipping levy and the import declaration fee.
The government has used upwards of Sh20 billion to subsidise pump prices since April this year in the wake of the skyrocketing global prices of fuel due to the US-Israel war on Iran. The steep subsidy has nearly depleted the kitty, which is funded by a levy of Sh5.40 for every litre of diesel and petrol and Sh0.40 per litre of kerosene.
For example, a subsidy of Sh945 million will be applied in the new prices to be set later today as the government grapples with a near depletion of the kitty, which came under pressure from April.
“The government can only apply what is available," Mr Wandayi said on Tuesday while responding to a question on the subsidy to be applied in the monthly cycle to August 14.
