Taxes, dealers' margins keep Kenyan pump prices up in EA

On Wednesday morning, after petrol stations had adjusted pump prices to reflect the shock increase by Energy and Petroleum Regulatory Authority (Epra) the night before, the retail cost of super petrol in Mombasa was at similar levels with that of Kigali.

 Super petrol at the port city of Mombasa was retailing at Sh203.69, which is similar to the retail cost of super petrol in Kigali where it has been retailing at Sh203 (2,303 Rwandan Francs) since April 1.

 Notable was that diesel in Mombasa was higher at Sh203.56 per litre compared to the Sh196 per litre in Kigali.

 The pump prices in Mombasa and Rwanda is despite Kigali being more than 1,600 kilometres by road from Mombasa, where Rwanda picks some of its petroleum products, transporting them through pipeline and road to Kigali and other parts of Rwanda.

 Oil firms selling fuel in Mombasa, however, have marginal transportation costs, moving the products by road over a few kilometres from depots.

 Super petrol

 Kenya has since reduced the cost of fuel following the eight per cent cut on Value Added Tax (VAT) for three months. Super petrol is retailing at Sh197.6 per litre in Nairobi. Diesel has also dropped to Sh196.63 per litre in the Kenyan capital, comparable to prices in Rwanda.

 While the cost of fuel in Kenya has since dropped to below what is on the streets of Kigali, it is still higher when compared to other countries in the East African region.

 In Tanzania’s port city of Dar es Salaam, super petrol is retailing at an equivalent of Sh192 while diesel is going for Sh189 while in Kampala a litre of petrol is Sh183 and that of diesel is Sh176.

 Kenya’s aggressive tax regime on petroleum products but also significantly higher oil marketers’ margins are seen as pushing the cost of products above its neighbours.

 Before cutting VAT on fuel to eight per cent, taxes and levies accounted for Sh82.09 per litre of petrol or 40 per cent of the retail price that was then at Sh206.97 in Nairobi.

 Following the review on VAT, the share of taxes has since dropped to 36.6 per cent at Sh72.38 of the Sh197.60 retail cost. This however is a short term measure that is set to expire within 90 days.

 Margins to oil marketers stood at Sh17.39 per litre of super petrol, having been on the rise in recent past.

 The money that the oil companies make rose last year, when Epra implemented the recommendations of a study that noted that the firms’ margins have been flat since 2018 despite market conditions having changed.

 Per litre

 Epra last year increased the retailer’s margins by Sh5 and plans to increase it further by Sh2 to bring the margins to Sh19.51 per litre of super petrol.

 In the region, oil marketing companies (OMC) make between Sh12 and 14 per litre of super petrol.

 “Looking at the myriad of levies on fuel in Kenya it is about 50 per cent of the pump price. If you look at our neighbours in Uganda, tax and levies comprise about 20 to 23 per cent of the pump price,” said Hadijah Nannyomo a tax partner at EY Kenya at a pre-budget briefing in Nairobi.

 “Zambia has put in place emergency fuel intervention and removed some of the taxes such as excise duty and VAT on fuel.”

 Caroli Omondi, Suba South MP pointed to the high taxes, noting that other than the temporary reprieve by halving VAT, the government should have also considered waiver of the Petroleum Development Levy (PDL) in the coming months. The levy, which motorists pay at Sh5.40 goes to the PDL Fund that is used to subsidise pump prices to reduce shock increases.

 “I think that the government is committing Sh6 billion out of the Sh17 billion in the stabilisation fund, I would urge that the government commits more.

 ‘‘Other than that, the Sh5.40 per litre that we pay for stabilisation should have been waived for that period in question,” said Omondi during debate on amending VAT to eight per cent. Makali Mulu, Kitui Central MP, said the government should explore what other taxes to reduce in the interim to further cushion Kenyans.

 ‘‘I have heard Kenyans debate about why oil is cheaper in Uganda, Tanzania and other neighbouring countries compared to Kenya.

 ‘‘ The reason is because of taxes and levies we have imposed on the products because we get them from the same source. We could also implore on the government to look further to other areas where we can reduce the taxes and levies so that we make oil cheaper for Kenyans.’’

 The Institute of Economic Affairs in a review of Kenya’s fuel pricing formula has called on reforming how taxes are applied on petroleum products.

 Fiona Okadia an economist at IEA said that currently VAT is calculated on top of all other taxes and levies applied to fuel, creating a ‘tax on tax’ effect that inflates prices unnecessarily.

 She argued that reforming this system to apply VAT only on the base cost of the fuel, while keeping other levies and stabilisation mechanisms in place, could moderate the price increases substantially. Alternatively, she said, the government could keep VAT as currently applied but suspend or even remove excise duties.

 Provide relief

 “While the government may be concerned about potential revenue losses, it does not need to eliminate fuel taxes entirely to provide relief. Targeted and thoughtful adjustments such as reforming VAT to avoid taxing taxes or temporarily reducing excise duties can meaningfully lower prices at the pump,” she said in a review on the pricing formula, adding that reviewing taxes apply on fuel might be counter productive when done the fuel price capping regime.

 “While reducing fuel taxes can cushion the immediate impact of rising prices, combining such measures with strict price controls often creates conflicting outcomes.

 A more balanced approach would involve lowering taxes while removing price caps, allowing prices to better reflect market conditions without placing excessive strain on consumers.”

 Okadia also queries last year’s increase in OMC margins, noting that this is use of regulatory tools to guarantee oil firms profits.

 She noted that when margins are adjusted through regulation rather than competition, it protected a few large players as opposed to encouraging competition.

 “Over time, such structures risk entrenching market power, especially in a sector where entry barriers like capital requirements, storage infrastructure, and regulatory licences are already high,” she said.

 “The quiet upward revision of operating margins affects every Kenyan who boards a matatu or buys goods transported by road. Because we know that profit is guaranteed by design, then transparency cannot be optional.”

 Taxation of fuel has over the years been a thorny issue and was in 2021 subject to heated debate in the country following a surge in prices driven by post-covid recovery.

 The concerns resulted in Parliament taking up the matter and holding an inquiry that was led by the National Assembly’s Committee on Finance and National Planning. In a report, the Committee observed that Kenya’s tax regime on petroleum products was the highest in the region and recommended review of different taxes.

 The Committee made proposals to reduce some of the taxes. These included halving VAT from eight to four per cent and reduction of the Petroleum Development Levy for super petrol and diesel to Sh2.9 per litre from Sh5.40.

 It also recommended reducing the margins for oil marketers by Sh3 to Sh9 per litre from Sh12.39. Margins have since gone up to Sh17.39 per litre.