Over the past few days, Kenyans have heard of the developments in our national budget and the newly passed Finance Bill 2023.
One thing that has been a hot issue is the 16% Value Added Tax (VAT) on petroleum products, an increase from the 8% tax previously imposed.
This simply means that, petrol pump prices will increase by upto KSh12 for every litre from 1st July after Members of Parliament voted to double the VAT rate on petroleum products.
In this explainer, we highlight what this increased VAT means for the ordinary Kenyan.
Every aspect of economic life
A general rule of business is that the costs incurred by the manufacturer or producer are passed down to the consumer. This is the reality of capitalism.
The thing is, almost every aspect of our economic lives is hinged on the prices at the pump. This therefore means that from 1st July, the cost of electricity, bus fare, food prices and other basic goods and services will go up significantly.
To many Kenyans, the prices of the above said commodities are already high. Things are seemingly gearing up to get worse.
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Let us know what you think about the increased VAT and what cost-cutting measures you will be using to survive these tough economic times.
With the increased prices in basic commodities, the burden falls disproportionately on the middle and lower income groups, who often rely on public transportation or own small vehicles for their daily commute. These individuals and families, already grappling with limited disposable income, will face additional financial strain due to the increased cost of fuel. The higher fuel prices may force them to cut back on other essential expenses, such as education, healthcare, and basic household needs.
Inflationary pressures
Further, small businesses, which form a huge part of the Kenyan economy, will be significantly affected. Many micro-entrepreneurs rely on transportation for the distribution of their goods or services. The rise in fuel prices will directly translate into higher transportation costs, reducing their profit margins and potentially leading to job losses. This, in turn, could have a cascading effect on the overall economy, as small businesses play a crucial role in generating employment and contributing to economic growth.
One other effect that we cannot ignore is the inflationary pressure on the economy overall. The increased cost of fuel will have a cascading effect on various sectors of the economy. Higher transportation costs will increase the prices of goods and services, as businesses pass on their increased expenses to consumers.
Tighten your belt as MPs endorse 16pc VAT on fuel. #AMLiveNTVhttps://t.co/XVV1L3c8DC pic.twitter.com/jAiuQG4Mjj
— NTV Kenya (@ntvkenya) June 22, 2023
This inflationary pressure will erode the purchasing power of ordinary citizens, leading to a decline in their overall standard of living since most people will not be able to afford the basic goods and services. Worse still, most people cannot even afford them now and it only stands to worsen the situation. It may also contribute to a decrease in consumer spending, affecting economic growth and stability.
What are the options?
The question then is, what are the alternatives and possible mitigation strategies?
The implementation of increased fuel taxes necessitates a consideration of alternative strategies and measures to mitigate its impact on the common citizen.
First, the government should focus on promoting and investing in renewable energy sources, such as solar and wind power, as well as exploring other sustainable transportation options.
Additionally, targeted social safety net programs can be implemented to assist vulnerable populations and provide them with the necessary support to cope with the rising cost of living. For the ordinary citizen, the only options are to speak up against such strenuous taxes and tightening our belts and cutting back on our expenses.
Whether on not the increased taxes will achieve the desired outcome of increasing government revenue is another conversation altogether.
[Cover photo: Business Daily]
