Time right to review Kenya’s crippling fuel taxation regime

Now, high oil prices greatly concern consuming countries like Kenya. An upswing in crude oil prices sets off fears of costly living.

The differences in prices across countries are due to the various taxes and subsidies for fuel. Locally, prices at the pump are now at their highest in two years, partly influenced by the Israel-Iran war that sparked rise in global petroleum costs.

Kenya, just like the rest of the world, has access to the same petroleum prices of international markets.

For Kenya, the prevailing petroleum supply route is imports from the Arabian Gulf (AG), with freight according to the cargo size with Platts as the most widely used global reference for petroleum markets and prices.

The AG quotations for LPG, gasoline or petrol, Jet fuel and gasoil or diesel are considered to correctly reflect imports sourcing for Kenya due to their geographical proximity, hence used as the price benchmark reference for import formula price build-up.

Countries then decide to impose different taxes. The difference in taxation is the main reason why fuel prices vary between countries.

Some countries charge so much tax that nearly 40 percent of the price you pay at the pump goes straight to the State.

The International Energy Association adds that other reasons could include the costs of handling, quality related and refinery costs, product transportation, and distribution costs “but these only for a small share of the variation.”

The world’s largest economies, the US and China, have low fuel taxes, compared to many developed nations that often levy a higher percentage of the retail price.

The United Arab Emirates has a general corporate tax rate of nine percent for most businesses, considered low, and a special corporation tax that goes up to 55 percent for foreign oil companies involved in natural resource extraction.

This high rate is designed to capture a significant portion of the profits from the country's main natural resources. In Africa, Libya, has the second lowest petrol price in the world, second to Venezuela. Algeria is also high up the global scale.

Back home, Kenya, has nearly 10 different taxes and levies woven into the fuel price formula including the railway development levy, merchant shipping levy, petroleum regulatory levy, petroleum development levy, road maintenance levy, excise duty, import declaration fee and value added tax.

The most significant one is the Roads Maintenance Levy (RML), which adds a hefty Sh25 to every litre of petrol and diesel. This levy was hiked by Sh7 in April 2021, supposedly to stabilise fuel prices and shield consumers from costly fuel. Suffice it to say its effect has often felt like an additional burden.

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These taxes and levies are strong components of the pricing formula that guides the Energy and Petroleum Regulatory Authority in its calculation of the applicable monthly prices.

Computation considers; the landed cost (Free on Board/price in the international market), storage & distribution costs, allowed margins and taxes & levies. Pump prices comprise the weighted average cost of cargo imported and discharged at the Port of Mombasa between the 10th day of the preceding month and the 9th day of the current pricing month.

Three years ago, then Treasury PS nominee Chris Kiptoo struck the right chord during his vetting when he alluded to State review of the multiple petroleum levies and taxes.

It was a promise that sadly has remained an unfulfilled commitment, a poignant reminder of good intentions lost in the labyrinth of policy and competing priorities.

The Petroleum Development fund is meant to stabilise retail fuel prices to cushion consumers, fund infrastructure upgrades and undertake research in line with the Petroleum Development Act. But this has not always been the case, especially with cash from the fund reportedly diverted to pay other items.

In 2021, for instance, some Sh18 billion was used to pay the Chinese firm operating the standard gauge railway.

In June 2024, the State had to tap other funds to cushion consumers. Some Sh58 billion from the Railway Development Fund was used to subsidise pump prices; a game of fiscal musical chairs, with the consumer often left without a seat.

The high pump prices are not merely abstract numbers; they represent a growing burden - higher transport costs, increased prices for basic goods, and a diminished purchasing power for already struggling families.

Policymakers at the Legislature and Executive levels need to strike a delicate but essential balance, to ensure that fuel and tax costs are not so prohibitive that they cripple our retail and distribution sectors, and more importantly, the livelihoods and aspirations of ordinary Kenyans.

Mr Mudibo is a former multiple award winning NTV Business Journalists and Anchor