Uhuru fuel tax cut digs Sh54.9bn revenue hole

Fueling a car.

Pump attendant fueling a vehicle at Shell Petroleum Station on Kenyatta Avenue in Nairobi on Wednesday, April 14, 2021.

Photo credit: File

What you need to know:

  • Mr Kenyatta was in 2018 forced to halve VAT on fuel to eight per cent after the introduction of the full 16 per cent tax prompted protests from motorists and business lobbies.
  • The impact of the decision on the state’s coffers has now become clear with fresh data by the National Treasury showing that losses hit Sh28 billion last year alone, an increase of Sh11.2 billion from the previous year.
  • This marks a 67 per cent increase from the Sh16.78 billion revenue lost in 2020 and a further Sh9.09 billion in 2019.

The Treasury has booked a revenue loss of Sh53.87 billion in three years following an order by retired President Uhuru Kenyatta to halve value-added tax (VAT) on fuel products to appease a restless people stung by the rising cost of living.

Mr Kenyatta was in 2018 forced to halve VAT on fuel to eight per cent after the introduction of the full 16 per cent tax prompted protests from motorists and business lobbies.

The impact of the decision on the state’s coffers has now become clear with fresh data by the National Treasury showing that losses hit Sh28 billion last year alone, an increase of Sh11.2 billion from the previous year.

This marks a 67 per cent increase from the Sh16.78 billion revenue lost in 2020 and a further Sh9.09 billion in 2019.

“Tax expenditure on VAT on imported fuel increased by Sh11.2 billion,” the Treasury said in the latest disclosure.

Kenya introduced a 16 per cent VAT on fuel in 2013 through the Value Added Tax Act, 2013 as part of efforts by the then-new Jubilee administration to increase revenue collection to fund its growth agenda.

Execution of the tax was, however, deferred by three years until 2016 to give consumers room to adjust amid a high cost of living, before another two-year extension was granted through the Finance Act, 2016. 

The Finance Act of 2018 finally effected the tax but cut it by half to eight per cent to prevent a sudden and steep jump in fuel cost. A bid by MPs to further cut the VAT to four per cent last year came a cropper.

Through its proposed IMF-backed National Tax Policy, Treasury seeks to charge VAT on goods such as fuel and cooking gas at a minimum of 12 per cent.

The draft policy proposes that all goods be taxed at 16 per cent with the preferential rate not lower than 12 per cent.

It wants tax laws reviewed once every five years to make the taxation regime predictable and the country an attractive investment destination.

In the financial year to June 2021, Kenya collected Sh22.4 billion from the VAT on fuel marking a third successive annual increase in the collections due to increased fuel consumption.

A record high

In 2020, Kenya collected Sh15.9 billion from the tax on the commodity and Sh14.4 billion in 2019. 

While the tax cut has hurt the exchequer’s revenue collection, it has alleviated a further increase in the cost of fuel at a time the prices of the commodity have hit a record high.

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