Experts say proposed VAT on fuel is toxic to economy

Top audit firms PwC and KPMG have added their voice to the debate on proposed increase in Value Added Taxes (VAT) on petroleum products saying the move will have adverse consequences on the economy.

Their concern comes in the wake a proposal in the Kenya’s Finance Bill 2023 which introduces a clause to increase Value Added Tax (VAT) on petroleum products from the current rate of 8 per cent to 16 per cent.

The announcement has sparked queries among tax and economic experts over potential adverse effects on the cost of living and inflationary pressure in the country.

PwC Kenya argues that the increase will significantly affect the cost of living, at a time Kenyans are still grappling with already high fuel costs.

Dependency on fossil fuel

“We expect to have a significant adverse effect on the cost of living taking into consideration Kenya’s dependency on fossil fuel and the already high global oil prices,” PwC said in its review of the Bill.

KPMG Kenya has also weighed in on the issue saying the proposed VAT increase on petroleum products is likely to impact the prices of certain key goods and services, leading to an increase in inflationary pressure in the economy. The firm said anticipated rise in prices could potentially put a strain on businesses and households alike.

“This proposal is likely to impact the prices of transport and production of goods increasing the inflationary pressure in the economy,” said the accounting firm.

The proposed VAT increase comes at a time when the global oil prices have been soaring, exerting additional pressure on consumers’ wallets.

Eyeing additional revenue

In such a scenario, the implementation of a VAT hike will further burden businesses and individuals already struggling to recover from shocks of a pandemic induced economic downturn.

The Finance Bill 2023 is part of the government’s effort to generate additional revenue for funding public expenditure and addressing fiscal deficits to fund an anbitious Sh3.6 trillion budget. However, the proposal to increase VAT on petroleum products has raised concerns about its potential impact on the overall economy.

While the government aims to shore up its revenues, critics suggest that alternative measures to increase revenue, such as diversifying the tax base or reducing non-essential government expenditures, should be explored to mitigate the potential adverse effects on consumers and businesses.

As the Finance Bill 2023 continues to be debated and reviewed, stakeholders from various sectors will closely monitor the outcome as fears of  its potential implications swell.

The final decision on the proposed VAT increase will be crucial in determining its impact on the cost of living, inflationary pressure, and the overall economic well-being of Kenyan citizens and businesses.