Kenya Revenue Authority

How you will be hit by VAT on petroleum products

The VAT Act 2013 that came into effect on September 1, 2013 introduced value added tax on petroleum products such as petrol, diesel, kerosene and natural gas.

However, noting the adverse effects of introducing VAT on petroleum products, the VAT Act 2013 exempted petroleum products for a period of three years from commencement of the Act.

This exemption further extended for an additional two years via the Finance Act 2016, effective September 1, 2016. This exemption status will come to an end this year, with the expectation that petroleum products will be considered vatable from September 1, 2018, either as zero-rated goods or standard rated goods.

Alternatively, the Government may seek to maintain the status quo by extending the exemption status of petroleum products.

Looking at the latter option first, the Government may seek to extend the exemption status of petroleum products. From face value, this may seem to be the most beneficial option available for all parties involved. However, this may not be the case when one considers the nitty-gritty of our VAT system.

As VAT is a consumer tax, it is expected that the burden of any vatable good is passed down from supplier to supplier and ultimately borne by the final consumer. To enable this, suppliers may recover VAT on taxable purchases as input VAT against VAT on taxable sales (output VAT).

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This system works best when dealing with vatable goods, either standard rated or zero-rated. However, in terms of exempt goods, suppliers are not entitled to recover input VAT as a tax credit against output VAT.

As such, suppliers have the option of either absorbing the non-recoverable VAT cost, or passing this down to the final consumer by incorporating the VAT expense into the cost of the product. Unsurprisingly, suppliers of exempt supplies often prefer incorporating the VAT expense in the cost of the product, rather than absorbing the non-recoverable VAT.

Should petroleum goods be considered standard rated goods, the impact on the cost of living is likely to be immediate. The costs of transportation both of goods and people, the cost of power generation, and running fuel powered machinery, inter alia, expected to rise by 16 per cent. This is primarily because the cost impact of standard rating petroleum products will be passed down to the final consumer.

While this cost increase will be borne by the entire population, it is expected that low income earners will be disproportionately affected, as the segment least able to cope with the increased cost of living. This does not bode well for the ordinary Mwananchi, currently stretched thin by high cost of living.

Conversely, zero-rating petroleum products from September 1, 2018 will be a welcome move. From a tax perspective, the zero-rating of petroleum goods allows suppliers to net off input VAT against output VAT, following which any excess output is due for onward remittance to the Kenya Revenue Authority.

By zero-rating petroleum products, the ultimate effect is that input VAT incurred by suppliers can be utilised as a tax credit against output VAT. This will ensure that the VAT burden is borne by the ultimate consumer.

While this is welcome by suppliers and consumers alike, this option will likely result in a situation where there will be no output VAT available for onward transmission to the KRA. But given the already high cost of living, both the ordinary Mwananchi and suppliers alike would expect the Government to shoulder the burden of zero-rating petroleum products.

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