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Kenya: 16 Percent VAT On Petroleum Products Need Not Result in Price Hikes

January 19, 2016

There has been an ongoing debate in Kenya on the value added tax (VAT) status of petroleum products come September 2016. This is because the VAT Act 2013 provides for exemption from VAT on specified petroleum products for a transitional period of three years.

Given that the VAT Act came into force in September 2013, the three-year period lapses in August 2016. This implies that unless changes are made to the VAT Act in this year’s budget cycle, VAT at the standard 16 per cent will be applicable on the supply of these petroleum products effective September 2016.

The products that will be affected by this change are those under the East African Community Common External Tariff (EAC-CET) codes 2709 to 2711, which range from petroleum oils to natural gas in a gaseous state.

The change will therefore see the popular petroleum products such as petrol, diesel, kerosene and aviation gas attract VAT. Under the current VAT law, of the popular petroleum products, only liquefied petroleum gas (LPG) popularly used as cooking gas is taxable.

Prior to the introduction of the VAT Act, 2013, the above products fell under exempt and zero-rated categories with the bulk of them being exempt from VAT under the Second Schedule to the repealed VAT Act, Cap 476 while the remainder were zero-rated under the Fifth Schedule to the same Act.

This meant that the suppliers of these products had to deal with the VAT considerations that come with making mixed taxable and exempt supplies including partial or non-recovery of the VAT incurred by such suppliers. While the mixed supplies offered an opportunity to claim back some of the input VAT incurred by the suppliers, it also provided an increased administrative burden, especially in isolating the recoverable versus non-recoverable VAT.

Cost incurred

Under the current VAT Act, most of the VAT associated with petroleum products is not claimable due to the restrictions relating to VAT exempt supplies. For instance, VAT expenses incurred by distributors of petroleum products to bring the exempt supplies to sale cannot be recovered.

As is often the case, the distributors and other stakeholders in the supply chain are then compelled to adjust their prices upwards to cater for the irrecoverable VAT cost incurred on the exempt items.

With the impending change of VAT status of the petroleum products, the obvious result will be the petroleum products attracting VAT at the standard rate of 16 per cent. Whether the ultimate impact of the VAT is desirable for the broader government policy is subject for a different debate.


However, there is a school of thought that has cautioned that the introduction of VAT on petroleum products will result in an increase in the cost of living given that petroleum products form a vital input for most of our industrial processes as well as day-to-day lives.

While mathematically the introduction of VAT should result in a 16 per cent increase in the selling price of the petroleum products, technically there may be no basis for such price hikes.

This is because while these products will henceforth attract VAT at 16 per cent, the input VAT that was previously non-recoverable will now be recoverable. The ability of suppliers to recover input VAT should therefore lower their cost base as VAT passes through the supply chain to be borne by the end consumer on the final product purchase – unfortunately no reprieve for the end consumer.

Hypothetically, suppliers will therefore be able to retain their margins without the need to increase their selling prices.

As an alternative to imposing VAT at the standard rate, the government could choose to extend the VAT exemption currently in force. This could mean retaining the status quo and hence all VAT accounting practices would remain as they are.

The second option would be to impose VAT at the zero rate. If this happens, it should ideally lead to a reduction in the prices of the affected products since the sellers will be at a position to recover all the VAT costs incurred in bringing the products to the market with a corresponding obligation to collect zero per cent VAT on their sales.

Unfortunately, zero rating of products does not necessarily lead to a commensurate decrease in prices. Additionally, zero rating is also likely to be frowned upon by the National Treasury as it would re-introduce problematic VAT refund claims in the petroleum sector.

As we head towards the end of the three-year period within which provisional VAT exemption was granted to petroleum products, what is certain is that if nothing is done, the products will attract VAT at 16 per cent starting September 2016.

This will most likely lead to an increase in the prices of these products – what is not certain is the government’s will to provide for a different classification of these products, to be either zero rated or VAT exempt. For now, it’s wait and see.