State faces renewed push to lower lucrative petroleum taxes

There is a renewed push for the review of the country’s tax regime on petroleum products that could offer reprieve for Kenyans who are currently grappling with the high cost of fuel. High fuel prices, aside from pushing up the cost of transport, have also resulted in a rise in the cost of essential products.

Pump prices shot up in April this year as the impact of the war in the Middle East and the resulting sharp spike in the cost of oil started being felt locally.

While there has been a drop in the retail cost of diesel from the Sh240 per litre announced on April 14 to Sh217 per litre currently, following a series of measures that included halving value added tax (VAT) to eight per cent and higher subsidies, the cost remains elevated, with calls for the government to intervene, including relooking at the taxes on fuel.

The Senate Committee on Energy wants the government to rethink the computation of taxes, including moving away from applying VAT on other taxes in what is seen as taxing other taxes.

Separately, the Institute of Economic Affairs  (IEA) has suggested relooking at the tax structure, including consolidating all taxes and levies into one fuel tax that should also be capped at 30 per cent of the landed cost.

The Senate Committee, which has been undertaking an inquiry into alleged irregularities in the petroleum products supply chain, noted that taxes and levies remained the second-largest component of the pump price structure and have in the past been at par with the cost of the product.

Taxes and levies currently account for between 25.8 and 34.6 per cent of the retail price of fuel.

Over the August-September pricing cycle, taxes and levies per litre of petrol stood at Sh74.29 or 34.7 per cent of the retail price, while for diesel, the government gets Sh63.50 per litre (29.1 per cent of the retail price) and Sh49.90 per litre for kerosene (26 per cent).

Currently, the share of taxes and levies is lower following the reduction of VAT to eight per cent. Over the March-April cycle, when VAT was still at 16 per cent, the taxes and levies accounted for 45 per cent of the pump price per litre of petrol at Sh80.94 out of the Sh178.28 pump price at the time.

“This highlights that any meaningful intervention to manage fuel price volatility or affordability must focus on one dominant component, that is, taxation and levies which the government has control over,” said the committee in a report, but also noted the government’s over-reliance on petroleum taxes and how lowering them could affect the budget.

“However, the benefits of lower fuel prices would need to be weighed against the significant fiscal implications. For instance, assuming a six-month VAT exemption and removal of the Sh7 Road Maintenance Levy Fund (RMLF) levy would reduce government revenue by about Sh4l.2 billion in the financial year 2026/27. This revenue loss would either increase the fiscal deficit from Sh1.114 trillion to Sh1.155 trillion or require a reduction in development expenditure from Sh845.2 billion to Sh804.0 billion to maintain the current deficit level.”

The committee compared Kenya’s tax regime with that of other neighbouring countries where consumers have always enjoyed lower pump prices than in Kenya and concluded that “Kenya stands out with the highest taxes and levies”.

Tanzanians paid a tax rate of Sh46.50 per litre of super petrol while this stood at Sh41.21 in Uganda. Other than a lower tax burden, Uganda, for instance, also has significantly lower landed costs at Sh89 per litre of super petrol against Kenya’s Sh122, despite being landlocked and using Kenya’s fuel logistics systems.

The Senators proposed changes in how taxes are administered, including reviewing VAT on fuel so that the tax is not applied on other taxes and levies. Currently, VAT on fuel is applied on the combined total of the landed cost of fuel and other taxes, creating what the committee noted was a tax-on-tax situation. VAT on fuel is currently levied at eight per cent after it was reduced from 16 per cent in April for an initial three-month period to July and later extended to October in a move that was aimed at cushioning Kenyans from high costs following the Iran war.

The report recommends “amending the VAT Act so that the eight per cent is charged only on the landed and distribution costs, excluding State levies from the taxable base, would help lower pump prices immediately while still protecting revenue flows to key infrastructure funds”.

“Kenya should consider reducing its reliance on percentage-based taxes such as VAT within the energy sector and instead place greater emphasis on specific excise duties. Unlike percentage-based taxes, specific taxes remain fixed in monetary terms, meaning they do not rise automatically when global crude prices increase,” said the committee in the report.

“This helps to cushion consumers by preventing the tax burden from escalating during periods of high international fuel prices, thereby offering a more stable and predictable pricing structure.”

The senators also noted that the application of the Petroleum Development Levy (PDL) should be governed by rules that make its use predictable, including having a threshold in pump prices beyond which the government can tap into the kitty to cushion motorists from high pump prices.

PDL is funded by motorists who pay Sh5.40 per litre of super petrol and diesel and is used to subsidise fuel prices, which should ideally prevent sharp spikes in pump prices over a single pricing cycle.

“While the Petroleum Development Levy is currently being effectively used to subsidise diesel and reduce prices, its application is still subject to case-by-case decision-making,” said the committee.

“To improve predictability in the market, its use should be guided by clear, rules-based mechanisms. Introducing defined causes such as automatically releasing subsidies when the global Murban crude index rises above a set moving average would give manufacturers and oil marketing companies greater certainty, support better planning and help stabilise inflation.”

The government heavily relies on petroleum for taxes, which generated about Sh278.6 billion between July 2025 and April 2026, according to submissions by the Kenya Revenue Authority (KRA) to the Committee during the inquiry. VAT and excise duty contributed Sh140.8 billion and fuel levies Sh137.9 billion over the same period.

KRA told senators that slashing VAT to eight per cent resulted in a revenue loss of Sh9 billion in April.

In an analysis, IEA noted that the government’s heavy reliance on taxes and levies on petroleum fuels has created significant economic distortions. It proposes consolidating the numerous taxes into a single tax as well as capping it at 30 per cent of the landed cost.

“Consolidate all existing taxes and levies into a single Petroleum Energy Duty. Having determined this, parliament should set a statutory ceiling that the total tax burden shall not exceed 30 per cent of the landed cost (CIF price Mombasa),” said IEA in May this year.

“Because petroleum is an easy tax to handle, the government hesitates to reduce the litany of taxes and levies even as public finances remain fragile. A fundamental reform of energy tax policy is imperative—both the number of taxes and their rates must be moderated substantially to restore market efficiency and fiscal credibility

The think tank proposed doing away with the Energy and Petroleum Regulatory Authority's  (Epra) pricing formula and instead letting market forces dictate retail prices.

IEA noted that the formula and other administrative controls, including the fuel subsidy has created an unrealistic public expectation about price stability.

“The current global oil price shock has triggered sharp increases in the retail prices of diesel, kerosene, and premium fuels in Kenya,” said IEA.

“Epra continues to implement a price management policy that attempts to stabilise local pump prices through administrative controls. However, this policy is not fit for purpose.”

“It creates a misleading impression that the government can shield consumers from global crude oil price volatility, whereas in reality, Kenya has no control over international oil markets.”

There have been numerous other instances where there is a push to lower taxes on fuel that have, however, not yielded much. In 2021, for instance, MPs had recommended chopping some of the taxes and levies in a bid to give Kenyans relief.

This was after the cost of petroleum products began to go up as global economies recovered from Covid-19 and, in turn, increased demand for oil saw prices surge and, with it, the local pump prices.

At the time, the National Assembly’s Committee on Finance and National Planning, after a public inquiry into what could be done to cushion Kenyans from the high cost of fuel, made recommendations to review certain taxes.

The committee, in its report, criticised the government for its high appetite for taxing petroleum products to the detriment of the economy. The committee drafted a Bill, proposing to lower different taxes.

Among the proposals in the  Petroleum Products (Taxes and Levies) (Amendment) Bill, 2021 were reducing VAT to four per cent, which was at the time at eight per cent, reducing the PDL to Sh2.9 per litre of super petrol and diesel from Sh5.40, while at the same time, reducing the margins for oil marketers to Sh9 from Sh12 per litre.

The recommendations, however, never made it anywhere, and the public inquiry was later criticised as an exercise to calm down Kenyans at the time.

 If anything, different taxes and levies have gone up, including the doubling of VAT to 16 per cent in 2023, the increase in margins for oil firms to Sh19 per litre from Sh12 and the higher Road Maintenance Levy that increased to Sh25 per litre of super petrol and diesel in 2024.