Kenyans will have to dig deeper into their pockets after President William Ruto, on Monday, June 26, approved the increase of fuel's Value Added Tax (VAT) from 8 per cent to 16 per cent while singing the Finance Bill 2023 into law.
The extra 8 per cent of VAT on petroleum products will have a significant effect, especially on fuel price per litre, national revenue and cost of essential household products.
Following the Parliamentary approval of the increase, there is no doubt that there will be a significant increase in the cost of petrol, diesel and kerosene across the country.
The additional 8 per cent, which is equivalent to Ksh14.592, will be added to the existing cost of petrol in price ratio settings, provided other factors of supply and demand remain constant.
On fuel price, taking into account the other dynamics that Energy and Petroleum Regulatory Authority have to consider when setting new rates, petrol that currently retails at Ksh182.4 in Nairobi is likely to increase to Ksh196.992 by July 2023.
Diesel, on the other hand, which currently retails at Ksh167.28 will increase by 8 per cent (Ksh13.3824) to around Ksh180.6624 per litre at fuel stations in Nairobi.
Meanwhile, kerosene which retails at Ksh161.48 will increase by 8 per cent (Ksh12.9184) more to Ksh174.3984 at fuel stations in the capital city.
The eight per cent increase in VAT would disproportionately affect low-income households, who spend a larger proportion of their income on fuel.
Advantages to State
The VAT increase on petroleum products is, however, very vital in helping the government generate more revenue (estimated at Ksh50 billion) which the Head of State revealed will be channelled towards the rehabilitation of roads.
The President also looks to encourage people to use public transport instead of private vehicles, which would help to reduce traffic congestion and environmental pollution.
The increase is also expected to make Kenya's fuel prices more competitive with those in other countries, which could attract foreign investment.
At the level of regulations by EPRA, the impact of the increase in VAT will depend on a number of factors, including the size of the increase, the state of the economy, and the government's use of the additional revenue.
If the increase is small and the economy is strong, the negative effects are likely to be minimal. However, if the increase is large or the economy is weak, the negative effects could be significant.
It is important to note that the increase in VAT is only one of a number of factors that could affect the price of fuel in Kenya. Other factors, such as the global oil price and the exchange rate, could also have a significant impact.
Offering a silver lining, President William Ruto promised to remove 3.5 per cent road development levy, 2 per cent of the Import Declaration Fee (IDF), and 8 per cent VAT on gas to lower the cost of living
