How 16pc fuel tax will hit households, motorists from July

A fuel attendant holding a fuel pump at the filling station along Kimathi Street. FILE PHOTO | NMG

Petrol pump prices will increase by upto Sh12 for every litre from next week after Members of Parliament voted to double the Value Added Tax (VAT) rate on petroleum products to 16 from eight percent, in a decision that promises to hit households hard.

The higher fuel costs, which are expected to be effective July 1 as the Kenya Kwanza administration targets an extra Sh50 billion from fuel taxes, will also cause more pain to motorists, distributors and manufacturers.

These extra costs will be passed to consumers in the form of higher food prices, bus fares and electricity prices.

A litre of super petrol in Nairobi will rise to Sh193.77 after the new taxes from the current Sh182.04 while diesel could retail at Sh177.94 from the current Sh167.28. Kerosene consumers should expect to buy a litre at Sh171.71 from the current Sh161.48.

Wednesday, 184 MPs voted to keep the amendment as part of the Finance Bill 2023 after a contested debate in the National Assembly while 88 MPs objected.

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The cost of living, as measured by the consumer price index, is expected to edge further up with the rate of inflation rising from eight percent in May after the new rate of VAT on petroleum products kicks in.

Consumers have been grappling with runaway costs for the better part of the last 12 months, with inflation having breached the targeted upper limit of 7.5 percent in June last year and remained above the target since.

In May, the rate of inflation rose to eight percent from 7.9 percent in April on costlier food.

“The increase in inflation was largely due to an increase in prices of commodities under food and non-alcoholic beverages by 10.2 percent; housing, water, electricity, gas other fuels at 9.7 percent and transport costs at 10.1 percent between May 2022 and May 2023,” the Kenya National Bureau of Statistics (KNBS) observed.

According to KNBS, food, energy and transport costs account for more than half of household budgets at 57 percent. With higher fuel prices, food prices are expected to rise as the cost of production soars from rising diesel prices, which will impact mechanised farming, including the running cost of tractors and harvesters.

At the same time, higher diesel costs will mean costlier electricity given the fuel cost charge is a surcharge on consumers’ monthly bills and covers added costs or rebates as a result of fluctuations in petroleum prices and the quantity of oil consumed by electricity generation.

Read: May inflation climbs to 8pc on rising food, energy costs

Bus fares will also rise on the same cost pressures as will the cost of filling up private and other commercial vehicles, which will lift transport costs for not just individuals but also businesses and firms especially those in the transport and logistics sector.

Higher inflation is expected to disproportionately weigh on lower-income households with upper-income homes escaping with a softer blow.

According to data from the Central Bank of Kenya (CBK), the inflation rate for lower-income households in Nairobi stood at 9.04 percent in March compared to just 6.75 percent for upper-income homes.

The CBK classifies lower-income households in the capital as those spending Sh46,355 or less in a month, which translates to 70.89 percent of all households in Nairobi.

Equally, the inflation rate for households outside Nairobi stood at a higher 9.5 percent in contrast to 8.43 percent for the average household in the city. About one-third or 32.91 percent of the average household income is spent on food, according to KNBS statistics.

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The top 10 expenditure commodities meanwhile cover mobile phone airtime, fares within towns and their environs, house rents, dining in hotels and restaurants, beef, milk, beer and bread.

The higher fuel costs are despite proposals to lower the rate of the railway development levy and the import declaration fee which are surcharges to landed petroleum costs from 3.5 percent to 2.5 percent.

The proposal is widely expected to pass in the National Assembly.

To effect the new prices, the Energy and Petroleum Regulatory Authority (Epra) will be expected to announce the higher fuel prices on Friday next week and may not wait for the next maximum pump price review date on July 14.

While MPs allied to the opposition challenged the changes on the account of its impact on the cost of living, those allied to the ruling Kenya Kwanza coalition supported the amendment arguing it would firm up the State coffers allowing expenditures including road construction and disbursement to the National Government Constituency Development Fund.

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