Change how petroleum is taxed and quit the price subsidies habit – Business Daily
Pump attendant fueling a vehicle at Total Petroleum Station on Kimathi Street in Nairobi on Wednesday, April 14, 2021. PHOTO | DENNIS ONSONGO | NMG
Kenya needs a realistic tax policy that views petroleum not as a captive and convenient source of tax revenues, but as an energy resource that drives numerous economic sectors to increase production and taxable incomes which yield more tax revenues to fund national development.
Overtaxed expensive energy slows down economic growth while fuelling inflation — a case of starving the goose that lays the golden egg for the exchequer. This is an economic mindset that should guide levels of petroleum taxes that are affordable by the economy.
When the government significantly increased petroleum taxes and levies about two years ago, global oil prices were in the low $50-60 price range. Consumer prices were similarly low and fairly affordable by the economy.
The government genuinely saw low global oil prices as an opportunity to increase tax revenues through higher petroleum taxes and levies. However, there was a caveat that when global prices rebounded, some of the tax cash collected would be reimbursed to the economy by way of price subsidies, which were indeed implemented last year when prices climbed towards $100 and above.
The recent announcement by the government that fuel subsidies will soon be withdrawn should have been accompanied by a corresponding announcement of petroleum tax reduction, starting with the Sh5.00 per litre (Petroleum Development Levy) that was specifically justified to fund the fuel subsidies.
Withdrawal of fuel subsidies when global prices are above $100 will significantly stress the economy at a time when all election manifestos have promised economic stimulation and jobs. It will be even more strenuous as the weakening shilling continues to increase pump prices further.
The new government will need to engage the IMF who are understood to have pressured the Treasury to hike petroleum taxes as a conditionality for funding budgetary deficits.
I am sure the IMF will comprehend the simple economics of reasonably priced energy acting as a catalyst for growing economies to yield more tax revenues for the exchequer.
A comparative analysis of other countries will advise what percentage of taxes and levies are affordable by developing economies. Kenya’s petroleum taxes and levies amount to about 40 percent of retail pump prices.
The concept of price subsidies should not be allowed to feature back in petroleum tax policies as this is administratively inefficient and often open to budgetary maladministration as price stabilisation funds are often redirected to other uses.
The petroleum taxes and levies that should be re-evaluated for policy reasonableness are Petroleum Development Levy, Road Maintenance Levy, and VAT.