Kenyans to brace for tougher times as Ruto bids to increase tax on fuel

An attendant at a Nyeri petrol station prepares to fill up a car in August 2020.

An attendant at a Nyeri petrol station prepares to fill up a car in August 2020.


Photo credit: File | Nation Media Group

What you need to know:

  • On Sunday, matatu owners warned commuters that fare hikes will be inevitable if the proposed higher taxes are imposed.

President William Ruto’s quest to reinstate an unpopular fuel tax his predecessor was forced to shelve revives the politics that stalks petroleum pricing and exposes doublespeak by leaders on the matter of immense public interest.

Starting July 1, Kenyans have been warned to brace for higher living costs should a proposal in the Finance Bill 2023 to subject petroleum products to 16 percent Value Added Tax (VAT), up from the current eight percent, be implemented.

National Assembly Majority Leader Kimani Ichung’wah and Budget Committee Chairman Ndindi Nyoro will be tasked to champion the Bill in the House, essentially whipping ruling coalition members to pass the unpopular law they vehemently opposed in 2021.

Audit firm KPMG, in its review of the Bill, warns the proposal “is likely to impact the prices of transport and production of goods, increasing the inflationary pressure on the economy.”

On Sunday May 7, matatu owners warned commuters fare hikes will be inevitable if the higher taxes are imposed on fuel.

“We know very well that for products to reach consumers they have to be transported, so every product's prices will go up," said Matatu Owners Association Chairman Simon Kimutai.

President Ruto’s Kenya Kwanza administration, which in March entered into a deal with the United Arab Emirates to import fuel on credit for up to one year to ease pressure on dollar demand, has triggered a storm with the push to increase VAT on fuel to 16 per cent, following in the footsteps of former President Uhuru Kenyatta who unsuccessfully attempted it in September 2018.

At the time, a transitional clause, which VAT-exempted petroleum products for two years, had expired. The House had voted to defer the 16 per cent VAT by another two years but President Kenyatta disagreed and went ahead to slash it by half to eight per cent, saying, the government needed additional revenue to finance rising demands.

The Kenyatta administration faced a strike by some oil dealers, backlash from commuters and a lawsuit after imposition of the 16 per cent VAT on all petroleum products triggered a hike in transport and fuel prices.

So stormy was the House session that several MPs walked out of the National Assembly, prompting then chairperson of the Committee on the Whole House Soipan Tuya to order a recount to establish quorum. Upon the House reverting to plenary, then Speaker Justin Muturi had a hard time cooling tempers after MPs faulted the voting system. The Speaker suspended the sitting for 15 minutes to allow parliamentary staff to assess the problem.

The proposals contained in Mr Kenyatta’s memorandum on the Bill were adopted after it emerged that there were only 215 MPs present in the House. Parliament requires at least two-thirds majority, or 233 of the 349 MPs, to veto a memorandum.

At the time, then ruling Jubilee Party MPs Kimani Ichung’wah (Kikuyu) and Ndindi Nyoro (Kiharu) said the 16 per cent VAT had been envisaged upon the country embarking on commercial oil production.

“Mine would be to ask the National Treasury to reconsider that provision or defer its implementation to allow ... commercial production of oil. When the base prices come down, we can charge VAT on petroleum fuel,” Mr Ichung’wah said.

Mr Nyoro added: “We cannot afford to burden the people by imposing VAT on oil products.”

But, after the falling out between President Kenyatta and his deputy, Dr Ruto, in 2021, and when the matter resurfaced in the House, the pro-Ruto camp was boldly vocal against the additional taxes on fuel. That was on September 21, 2021, during deliberations on the Finance Act,2018 to address increases in prices of petroleum products.

“We must begin by asking ourselves as a House whether it is not time to amend Article 115(4) of the Constitution that gives the President the powers to legislate through the back door. We must begin to ask ourselves whether it is time to amend that [law] so that ... on matters that touch on the people that we represent, the President cannot [impose his will],” said Mr Ichung’wah.

Then Garissa Township MP Aden Duale said the House had rejected the increase in price and imposition of VAT on petroleum products, “but the President used his powers under Article 115.”

Mr Duale blamed the International Monetary Fund (IMF) for railroading the government to charge the VAT and then going ahead to give the implication of various taxes on the runaway pump prices.

“On the matter of fuel, for every litre of petrol you buy, Sh78 goes to taxation. I want to tell the House that Excise Duty is Sh15 per litre; Kshs18 goes to the Road Maintenance Levy Fund; Sh7 goes to the Petroleum Development Fund and Sh2 goes to the Petroleum Levy Fund. VAT is Sh12 for every litre of petrol and Sh8 for every litre of diesel. Cumulatively, out of the Sh145 you pay for a litre of petrol, Sh78 goes to taxation,” Mr Duale said.

He went on: “This House must rise to the occasion. We must bring a Bill. The President cannot use Article 115 to harass Kenyans. The whole thing is about IMF, who said we must charge VAT. We must reduce the Sh78 taxation on a litre of petrol and other levies.”

Mr Duale is now the Defence Cabinet Secretary who sat in the Cabinet chaired by President Ruto that approved the Finance Bill 2023. Just as was the case then, the Ruto administration is also battling the high cost of living.

Prices of basic commodities are expected to continue to rise if the government increases fuel prices as a result of newly introduced taxes at a time fuel subsidies have been withdrawn.

The increment of fuel taxes goes against President Ruto’s election pledges that included removing taxes on fuel to lower its cost and reduce the cost of basic commodities. President Ruto had, in his inauguration speech, announced the end of the subsidy programme, saying, it would cost the country Sh230 billion by the end of this financial year. He cited a study indicating the subsidy had failed to achieve the intended purpose of lowering the cost of living. The move resulted in sharp increase in the price of petrol by 13 per cent.

Economists agreed that subsidies are unsustainable for Kenya.

But the Finance Bill, 2023 will also come with a relief to households using cooking gas after the government proposed exemption of eight per cent VAT on Liquefied Petroleum Gas (LPG).

A 16 per cent VAT on LPG had been introduced through the Finance Act, 2020 but the implementation was pushed back to July 2021 amid concerns over high living costs.

Subsequently, through the Finance Act 2022, the VAT was implemented on LPG, but the rate was reduced to eight percent.

The scraping of gas taxes not nly comes as a relief to Kenyans who use gas, but will also boost efforts to adopt green energy to positively impact the climate.

This is part of President Ruto’s administration effort to lower prices of cooking gas across the country. President Ruto has promised to reduce a six-kilo gas cylinder to either Sh300 or Sh500 by June 2023.