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Higher VAT will reduce petroleum consumption and change lifestyles 


Higher VAT will reduce petroleum consumption and change lifestyles 

Friday June 30 2023

A fuel station. FILE PHOTO | NMG

VAT on petroleum fuels will increase from 8.0 percent to 16 percent effective July 1, while LPG will be without VAT or any levy.

As long as Kenya needed IMF support to balance its Budget, full VAT on petroleum products was always a condition, irrespective of which government was in office.

Indeed, it was a surprise that the IMF agreed to exempt LPG from taxes, a concession I bet was negotiated to counterbalance consumer pain on increased VAT on the other fuels.

Any new government around the world implements essential but unpopular reforms immediately after winning elections when still riding on victory euphoria.

To balance Nigeria’s budget, the new president Bola Tinubu scrapped petroleum subsidies immediately after being sworn in last month, a highly unpopular action politically avoided by previous governments for decades.

Gasoline pump prices will be upwards of Sh190 per litre next week, with periodic increases thereafter to reflect the depreciating Kenya shilling, which continues to compound petroleum dollar import costs.

However, it is a blessing that global petroleum prices are currently stable at the mid-$70s per barrel, a figure that can rise anytime depending on global economic recovery or supply-reducing geopolitical incidents.

The immediate impact of high fuel prices will be increased inflation figures when fuel costs are passed through to various economic sectors, especially transport, industries, and agriculture.

Consumption of petroleum will definitely decline as motorists cut down on discretionary travel to accommodate pressure on household budgets.

The use of taxi-hailing and public transport will increase as families cut down on the use of family cars. Roads in general will be less congested with some savings on travel time and fuel.

Those buying new cars will generally opt for lower-engine-capacity vehicles, while electric cars, buses and motorbikes will become a justified option.

The unintended consequences of increased VAT on fuels are potential reduction of projected tax revenues unless the Treasury had correctly factored in reduced revenues from lower petroleum consumption, and also from poorer business performance across the board.

For climate advocates, reduced petroleum demands, prompted by high fuel prices and fuel use efficiency, is a quick journey towards carbon reduction targets and a strong justification for the transition to cheaper renewable energy.

For the economy, reduced oil consumption will reduce pressure on dollar demands for oil imports.

Finally, the ever-creative Kenyans will no doubt search for and implement effective ways to sustainably co-exist with ever-increasing petroleum costs now and in future.

The writer is a petroleum consultant. [email protected]