State extends fuel VAT relief

The government has extended the eight per cent value added tax (VAT) rate on petroleum products by three months in what the Energy and Petroleum ministry said would continue to offer Kenyans a degree of relief following the sustained high cost of fuel.

In April, Parliament passed the VAT Amendment Act, reducing VAT on fuel to eight per cent from the standard rate of 16 per cent for three months, but also giving the Treasury Cabinet Secretary a leeway to extend the relief by another three months.

The three-month window was set to lapse yesterday but the Energy and Petroleum CS Opiyo Wandayi said the ministry, in consultation with Treasury, would extend this by 90 days, to October 14. This is even as he warned that renewed attacks in the Middle East that have led to reduction in traffic through the Strait of Hormuz could further see the cost of fuel go up in the coming months.

“As part of the government's commitment to cushioning households and businesses from international market volatility, and in consultation with the national treasury, we have extended the application period for eight per cent VAT on petroleum products for a further three months, until October 14, 2026,” said Wandayi at a press briefing in Nairobi on Tuesday.

He added that additional measures aimed at helping Kenyans cope with high cost of petroleum products would include a Sh945 million subsidy for the July to August pricing cycle.

The government has spent more than Sh23 billion to subsidise fuel prices since the start of the war in the Middle East. It spent Sh7 billion over the April to May cycle, another Sh6 billion over the May to June cycle and Sh10 billion in the June to July cycle.

The high spending on subsidies has nearly exhausted the Petroleum Development Levy Fund, which collects about Sh25 billion annually but whose use is not exclusive to subsidies.

The kitty is funded by motorists who pay Sh5.40 in each litre of diesel and super petrol. Other than stabilising fuel prices, the money is also deployed in other areas for petroleum development.

While the crisis in the Middle East had for some time gone through a phase that pointed to an end in the fighting between US-Israel and Iran, there have been renewed attacks and counter attacks, including on oil production facilities as well oil tankers passing through the Strait of Hormuz.

This has resulted in oil prices starting to edge up. Murban crude oil has, for instance, increased to Sh10,790 ($83 ) per barrel yesterday up from Sh8,840 ($68) per barrel on July 6, which was at par with the levels seen before the US and Israel attacked Iran in late February.

Wandayi noted that this has affected the cost of petroleum products and Kenyans will continue to feel the impact at the pump.

“With the restart of the Middle East crisis, international benchmarks have now begun to climb again. This renewed pressure will be reflected in the pricing cycles that will follow,” Wandayi said.

“In a market of this kind, world prices can move either way in the region, as you have seen. What you can state plainly as the government is that Kenya's oil supply has held firm throughout. Under our government-to-government (G to G) arrangements, cargoes have continued to be sourced from a wider set of loading regions beyond the Gulf."

The CS further noted that every scheduled cargo had arrived and had been uploaded on time, and oil has remained available at the pump throughout the country.

He further noted that the G to G deal that the country has with state owned Gulf oil producers has shielded Kenya from sudden price hikes in that while the crude oil prices have been volatile, other costs such as freight and insurance have remained stable for Kenya. This is in comparison to other countries that have had to grapple with high freight and insurance costs.

“While importers who depend on spot purchases and open tenders have watched their freight and insurance costs climb, again with each price disruption, Kenya has continued to pay the same fixed rate and premium,” said Wandayi.

“That fixed cost, held constant while benchmark prices swing, is what has kept our landed costs in check, and our deliveries on schedule, and it has allowed our suppliers to load from alternative regions without passing the cost of that facility on to the Kenyan motorists. The arrangement is doing exactly what it was created to do.”