Economy
How will the 16 per cent fuel tax hit families and motorists from July
Thursday, June 22, 2023
A fuel worker carries a fuel pump at a filling station along Kimathi Street. file image | NMG
Pump prices for petrol will rise by up to 12 shillings per liter from next week after MPs voted to double the value-added tax (VAT) rate on petroleum products to 16 from eight percent, in a decision that promises great harm to families.
Higher fuel costs, which are expected to take effect on July 1 as the Kenyan Kwanzaa administration targets an additional Sh50 billion in fuel taxes, will also cause more pain for motorists, distributors and manufacturers.
These additional costs will be passed on to consumers in the form of higher food prices, bus fares and electricity prices.
A liter of super petrol in Nairobi will rise to Sh193.77 after new taxes from the current Sh182.04 while diesel can retail at Sh177.94 from the current Sh167.28. Kerosene consumers should expect to buy a liter at Sh171.71 from the current price of Sh161.48.
On Wednesday, 184 deputies voted in favor of keeping the amendment as part of the 2023 Finance Bill after a contested debate in the National Assembly, while 88 deputies objected.
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The cost of living, as measured by the Consumer Price Index, is expected to rise, with inflation rising from eight percent in May after the introduction of the new rate of value-added tax on petroleum products.
Consumers have been grappling with runaway costs for the better part of the past 12 months, as inflation topped the 7.5 percent target in June last year and has remained above target since.
In May, the inflation rate rose to eight percent from 7.9 percent in April due to the higher cost of food.
The rise in inflation was largely due to the 10.2 percent increase in the prices of food and non-alcoholic beverages; Housing, water, electricity, gas and other fuels increased by 9.7 percent and transport costs by 10.1 percent between May 2022 and May 2023,” noted the Kenya National Bureau of Statistics (KNBS).
According to KNBS, food, energy and transportation costs account for more than half of household budgets at 57 percent. With the rise in fuel prices, it is expected that food prices will rise with the cost of production rising from the rise in diesel prices, which will affect mechanized agriculture, including the operating cost of tractors and harvesters.
At the same time, higher diesel costs will mean more expensive electricity since the cost of fuel is an additional cost on consumers’ monthly bills and covers additional costs or rebates as a result of fluctuations in oil prices and the amount of oil consumed by generating electricity.
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Bus prices will also rise on the same cost pressures as will the cost of mobilizing private and other commercial vehicles, which will raise transportation costs not only for individuals but also for companies and companies, especially those operating in the transport and logistics sector.
Disproportionately high inflation is expected to hit lower-income families who escape higher-income homes with a softer blow.
According to data from the Central Bank of Kenya (CBK), the inflation rate for low-income households in Nairobi was 9.04% in March compared to just 6.75% for high-income households.
The CBK classifies low-income households in the capital as those who spend Sh46,355 or less per month, which translates to 70.89 percent of all households in Nairobi.
Similarly, the inflation rate for households outside Nairobi was 9.5 per cent higher than the 8.43 per cent for the average household in the city. About a third, or 32.91 percent, of the average household’s income is spent on food, according to KNBS statistics.
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Meanwhile, the 10 top-spending commodities cover mobile airtime, inner-city and suburban prices, house rents, hotel and restaurant dining, beef, milk, beer and bread.
The higher fuel costs come despite proposals to cut the railway development tax rate and the import declaration fee, which is a surcharge for the costs of downstream petroleum, from 3.5 percent to 2.5 percent.
The motion is widely expected to pass in the National Assembly.
For the impact of the new prices, the Energy and Petroleum Regulatory Authority (EPRA) is expected to announce a fuel price hike on Friday next week, and may not wait for the next pump cap price review date of July 14.
While MPs aligned with the opposition challenged the changes due to their impact on the cost of living, those aligned with the ruling Kenya Kwanzaa Coalition supported the amendment arguing it would strengthen state coffers allowing expenditures including road construction to be disbursed to the national government. Government Departments Development Fund.
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