Of VAT and fuel; Inside William Ruto's gamble to keep pump prices low

President William Ruto’s embattled government has introduced legislation to extend the temporary relief on petroleum products by another three months.

The Tax Laws (Amendment) Bill, 2026 proposes to extend the eight per cent Value Added Tax (VAT) rate for fuel by another 90 days.

The government slashed VAT on super petrol, diesel and kerosene in April, a move aimed at cushioning Kenyans from a sharp spike in the cost of fuel following the crisis in the Middle East.

The relief was for an initial 90 days, to June, but this was extended by another 90 days to October 14.

The extension and further relief is seen as a move by the Kenya Kwanza administration to placate Kenyans as inflation ticked up in September and public pressure mounts just under a year before the General Election.

The Tax Laws (Amendment) Bill, 2026, published in a special issue of the Kenya Gazette Supplement on September 28 and received by the National Assembly on October 8, proposes a 90-day reduction in VAT on petrol, kerosene, and diesel to eight per cent days before the expiry of the July legal notice offering relief for three months.

The bill, sponsored by Majority Leader Kimani Ichung’wah, says “the rate of tax for the following items shall be eight per cent of the taxable value”.

It further says the reduced rate would be in effect “for a period of 90 days from the date of coming into effect of this Act,” with a provision allowing the Cabinet Secretary to extend it “for a further 90 days” by notice in the Gazette. “The object of this bill is to amend the Value Added Tax Act to provide the rate of Value Added Tax on petroleum products at eight per cent. This is a tax measure intended to continue to cushion citizens from the rising global prices of fuel,” says the bill’s memorandum.

Petrol, known in the bill as Motor Spirit (gasoline) premium, is the lightest of the three and is used in most private cars, motorcycles, and small generators.

Petrol is the fuel of choice for the majority of private motorists and boda boda operators, making its pump price one of the most politically sensitive numbers in the country.

A rise in petrol prices is felt almost immediately by commuters and small businesses.

Diesel, referred to in the bill as Gas Oil (automotive, light, amber for high-speed engines), is heavier than petrol and is used in compression-ignition engines.

It powers most trucks, buses, matatus, tractors, construction equipment, and heavy machinery. Because diesel moves goods across the country and drives public transport, its price feeds directly into the cost of food, building materials, and manufactured goods. Economists often describe diesel as the “engine of the economy” for this reason.

Kerosene, listed in the bill as Illuminating Kerosene, is the heaviest and least volatile of the three. It is used for cooking, lighting, and heating in millions of Kenyan households that are not connected to the electricity grid or cannot afford cooking gas.

Kerosene price is a direct determinant of whether low-income families can afford to cook a meal or light their homes at night. A reduction in kerosene VAT therefore has an outsized social impact.

If the bill is passed and signed into law, the immediate effect would be a reduction in the retail pump prices of petrol, diesel, and kerosene.

The Energy and Petroleum Regulatory Authority (Epra) calculates pump prices monthly using a formula that includes the landed cost of the fuel, taxes, levies, and margins for importers, transporters, and dealers.

VAT is applied to the taxable value, so cutting the rate from 16 per cent to eight per cent would reduce the tax component by half.

For example, if the taxable value of a litre of petrol before VAT is Sh100, the current VAT at 16 per cent adds Sh16, bringing the price to Sh116 before other levies and margins.

Under the proposed eight per cent rate, the VAT would be Sh8, reducing the price to Sh108, a saving of Sh8 per litre.

For a motorist buying 40 litres, that is a saving of Sh320 per fill-up. For a matatu operator buying 100 litres a day, the saving would be Sh800 daily, which could be passed on to passengers through lower fares. The effect would ripple through the economy. Lower diesel prices would reduce the cost of transporting goods, which could slow the rise in food prices.

Lower kerosene prices would ease the burden on poor households. Lower petrol prices would reduce the cost of commuting and could moderate wage demand.

However, the relief would be temporary. The bill provides that the reduced rate “shall be in effect for a period of ninety days from the date of coming into effect of this Act,” with a possible extension of “a further ninety days” at the discretion of the Cabinet Secretary.

After that, unless Parliament acts again, the rate would revert to 16 per cent and pump prices would rise again.

The law would also reduce government revenue. VAT on petroleum products is a major source of income for the Kenya Revenue Authority.

Halving the rate for 90 days would leave a hole in the budget that would have to be filled through borrowing or spending cuts, potentially undermining the government’s fiscal consolidation efforts under its International Monetary Fund (IMF) programme.

The bill also amends the Excise Duty Act to change the tax base for imported ceramic tiles from weight to size.

The current rate is “five per cent of the excisable value or Sh50 per kilogram, whichever is higher.” The proposed rate is “five per cent of the excisable value or Sh300 per square meter, whichever is higher.”

This change is intended to correct an anomaly that allowed importers to undervalue tiles by declaring low weights, and it would raise the effective tax burden on heavier, larger tiles.

The bill will be debated in the National Assembly in the coming days. Because it is a money bill, it must be introduced in the National Assembly and cannot be amended by the Senate in ways that affect revenue.

It will go through committee review and public participation, though the government is expected to fast-track it given the political calendar.

If passed and signed into law, the reduced VAT rate would take effect upon publication, meaning pump prices that are set to be announced on October 14 will continue reflecting the eight per cent VAT rate. The government will be hoping that voters feel the difference at the pump and remember it at the ballot box.

Pressure has been piling on President Ruto to rein in the cost of living just under a year to the next general election, expected in August 2027.

Ruto, who is seeking re-election, had promised to boost incomes and resolve the “cost of living nightmare” during his first term.

That promise has collided with the reality of global energy price volatility, a heavy debt burden, and the fiscal constraints imposed by Kenya’s IMF programme.

The opposition, increasingly united under a broad coalition, has seized on the issue. Opposition leaders have staged rallies accusing the government of overtaxing citizens while failing to deliver relief.

The proposed VAT cut is likely to be framed by the government as proof that it is listening, and by the opposition as too little, too late.

A lawmaker from the ruling coalition, speaking on condition of anonymity, told Standard the timing was deliberate: “We cannot go into an election year with fuel prices where they are. This is about giving people breathing room.”

Governments across the world are seeking extraordinary measures to shield their citizens against high energy costs amid global disruption.

In Europe, several countries have extended energy price caps and windfall taxes on oil companies. In Asia, India cut excise duty on petrol and diesel in 2021 and has since resisted further increases.

In Africa, Nigeria removed fuel subsidies in 2023, triggering a sharp rise in pump prices and widespread hardship, a cautionary tale for policymakers in Nairobi.

The International Energy Agency has warned that global oil markets remain tight, with geopolitical tensions in the Middle East and supply disruptions keeping Brent crude volatile.