Treasury eyes higher excise duty on fuel in IMF deal

The Treasury has disclosed that excise duty on fuel will be revised by April next year in a move that mirrors one of Kenya’s commitments under an International Monetary Fund (IMF) financing deal.

The draft Medium-Term Revenue Strategy (MTRS) for the period between June 2024 and June 2017 shows the excise duty on petroleum products will be reviewed to “address the negative externalities, or negative effects, of consuming these fuels”.

Read: Excise duty beats target despite fuel taxes freeze

As part of reform measures under the financing deal between the Washington-based institution and Kenya, the Treasury committed to implement carbon pricing that would possibly include a new carbon tax or increase excise duty on fuels and the establishment of a carbon credit market.

Increased excise duty, popularly known as the sin tax, and the carbon tax are aimed at discouraging the consumption of fossil fuels which scientists say emit harmful greenhouse gases.

Steeper excise duty on petroleum products—diesel, super petrol and kerosene—is likely to add to the pain of motorists who are still reeling from the doubling of the value-added tax (VAT) to 16 percent.

Additionally, in the period between 2024 and 2027, the government will roll out a carbon tax, in which it will set a price that emitters must pay for each tonne of greenhouse gas emissions.

This, Treasury said, is expected to be tabled in Parliament by April next year, possibly in the next Finance Bill.

“The authorities’ recent efforts to phase out subsidies and increase taxes on fossil fuels is helping Kenya achieve its mitigation goals,” said the IMF in its fifth review under the Extended Fund Facility and Extended Credit Facility Arrangements.

“Going forward, possible options include the introduction of a carbon tax or increasing the excise tax on fossil fuels to better capture the externalities associated with fossil fuel consumption in line with the recommendations from the IMF climate policy diagnostic mission.”

A 1,000 litres of regular petrol, for example, attracts an excise duty of Sh21,522.6. The same quantity of diesel attracts an excise duty of Sh11,370.99 and Sh11,370.98 for Kerosene.

Carbon taxes are implemented mostly by OECD countries, with the non-OECD nations featured on the list being Argentina, South Africa and Ukraine.

OECD, a club of mostly rich countries, noted that while Kenya does not levy an explicit carbon tax, its fuel excise taxes, which it describes as an implicit form of carbon pricing, covered 18.9 percent of carbon dioxide emissions in 2021.

Like many other recommendations it has proposed, the IMF expects the carbon pricing, which should first go through Parliament, to face a backlash.

“They would help Kenya meet its mitigation goals while raising additional fiscal revenues, which could in turn be used to compensate vulnerable groups and offset the costs of higher energy prices,” the IMF said.

“A successful rollout of this reform will need to be accompanied by a well-planned communication strategy to clearly explain how revenue from higher carbon pricing reforms will be spent including steps of the reform.”

Kenya has already secured a fresh 20-month $551.4 million (Sh80.4 billion) through the IMF’s Resilience and Sustainability Facility (RSF).

Read: Court saves motorists from fresh fuel tax increase

Among the reform measures committed by the government is the Cabinet’s adoption of a national framework for climate services to enable dissemination of a digital early warning system, especially targeting the most vulnerable counties in the arid and semi-arid lands.

The review date for this reform measure is October 7, 2023.

“Our team will come in to do the first review and discuss with the authorities the reforms progress and if satisfactory, the authorities can access the first batch of financing,” IMF’s Deputy Managing Director, Bo Li, told the Business Daily on the sidelines of the recent Africa Climate Summit held in Nairobi.

Consumption of coal, another fossil fuel commonly used locally by cement and steel manufacturers, might also be subjected to a higher excise duty should the strategy, in its draft form, be implemented.

→ (email protected)