State's appetite for fuel taxes pushes up pump prices

Following Monday’s hike on the cost of fuel, focus is shifting to taxes on petroleum, now priced higher than the cost of the fuel.

For every litre of super petrol, the government is making Sh82.33, higher than the cost of the product at Sh81.88, with Kenyans now increasingly calling on the government to tame its appetite for taxes and consider the implications on the economy and livelihoods.

The product cost, or landed cost, is the price of fuel when it is delivered in Mombasa before taxes and levies, distribution costs and oil marketers’ margins are loaded. 

Taxes and levies have over time risen to being the largest component in fuel prices, accounting for 44 per cent of retail cost of a litre of super petrol.

It is a near similar case for diesel where at Sh69.67, taxes and levies account for 40.6 per cent of the pump price of Sh171.59 per litre. It is, however, lower in the case of kerosene where taxes account for 35 per cent of the pump price.

Analysts noted that the government has over the years viewed taxing petroleum as an easy way to raise taxes. It is no different for President William Ruto’s Kenya Kwanza government.

Last year, the government increased taxes and levies by nearly Sh8 per litre of fuel. This was through the hiking of the Road Maintenance Levy by Sh7 to Sh25 per litre of super petrol and diesel as well as the 200 per cent increase of the Epra levy to 75 cents from Sh25 cents.

An earlier, the Finance Act 2023 had in June of that year doubled Value Added Tax (VAT) to the standard rate of 16 per cent.

Introducing VAT on fuel at eight per cent had been seen as a compromise that enabled the government to raise taxes but was also aware of the critical nature of fuel in an economy.

Martin Chomba, chairman of Petroleum Outlets Association of Kenya, said fuel consumption is high at about 400 million litres per month and introduction of a new levy pushes up government revenues by a significant margin.

“The government relies heavily on petroleum as the lowest hanging fruit where the government goes for money. Today if the country needs money, for whatever reason, the first thing that Treasury considers are levies on petroleum products,” he said.

Chomba added that some of the taxes may not be justified. “One of the components that I feel is not well justified is VAT. From face value, it means that the industry adds value to the fuel but we do not have a petroleum industry but a petroleum logistics industry… we sell the petroleum in the same way that we have imported. There is no value added whatsoever,” he said.

“The VAT component is just designed to draw cash from the industry and this is lopsided because the amount of VAT from petroleum is huge.”

The government also increased the Railway Development Levy through the Tax Laws (Amendment) Act of 2024 to two per cent from 1.5 per cent.

It also increased the Import Declaration Fee to 3.5 per cent  from 2.5 per cent. The two taxes had been reduced in the Finance Act 2023 to 1.5 per cent (RDL) and 2.5 per cent (IDF).

The Institute of Economic Affairs observed a trend where fuel prices are through piecemeal reviews that end up being significant, cautioning that it is becoming a new normal in the country.

“Over the past two years, Kenya’s fuel pricing structure has undergone a series of notable shifts, with each one quietly adding weight to the final pump price.

"These incremental adjustments are shaping a new normal in Kenya’s fuel pricing and deserve a closer look,” said IEA in an analysis of fuel pricing regime in Kenya. 

On Tuesday, Kiharu MP Ndindi Nyoro said the real problem in the cost of fuel lies in excessive taxation and the securitisation of fuel levies. “The only effective tool a government has to stabilise fuel prices is by adjusting the taxes. Unfortunately, that’s where the government is failing,” he said.

Despite the government's hike in different taxes over time, Energy and Petroleum Cabinet Secretary Opiyo Wandayi only acknowledged last year's increase in the Road Maintenance Levy.

He further downplayed the impact that taxes had on petroleum pump prices, attributing the surge to withdrawal of subsidies on petroleum products.

“The Road Maintenance Levy was reviewed in July 2024 to Sh25 from Sh18 on super petrol and diesel…. Since then there has been no revision of taxes as alluded in the press statements.

"The only change is due to the changes in ad valorem taxes – Railway Development Levy and Import Declaration Fee – which depend on the Cost of Insurance Freight (CIF) of the products,” he said in a statement on Wednesday.

“It also suffices to note that the government has in previous pricing cycles intervened in the market and applied stabilisation to cushion consumers by keeping pump prices lower than the actual prices in times where the published prices would otherwise have been higher.”

The stabilisation component is funded by motorists, who pay Sh5.40 per litre of diesel and super petrol. The money should be used to reduce the harsh impact a sudden increase in pump prices would have on the economy.

Observers have questioned why the government did not deploy the subsidy in this month's pricing to reduce the impact of the sharp rice.

In hiking taxes on petroleum products, President Ruto is following in the footsteps of his former boss, President Uhuru Kenyatta under whose watch, there was was significant hike in taxes in levies.

These included the introduction of VAT on fuel in 2018 through the Finance Act. The government had been trying to introduce VAT on fuel since 2013 but there were concerns about the impact it would have on the economy.

It finally succeeded in 2018, introducing VAT at eight per cent following heated debate in Parliament. President Ruto succeeded in introducing VAT at the standard rate of 16 per cent in 2023.

In 2020, President Kenyatta’s administration hiked the Petroleum Development Levy by 1,000 per cent to Sh5.40 per litre of diesel and super petrol.

This was through review of PDL regulations that also said the PDL kitty would be used in certain instances to cushion motorists from a sudden spike in the cost of petroleum products.

Before going up to Sh25 in 2024, the Road Maintenance Levy has in the last decade been through a series of hikes going to Sh18 per litre in 2016 from Sh12 in 2014. It had earlier been set at Sh9 per litre.

Other notable taxes over the last decade include the anti-adulteration levy on Kerosene at Sh18 per litre in 2018, which raised its cost to be at par with that of diesel in a bid to dissuade unscrupulous businesses from lacing the kerosene with diesel to push up volumes cheaply but illegally.

This was in addition to an increase in excise duty that was also aimed at fighting adulteration. In his statement yesterday, Wandayi defended the retail price hike, noting the cost of petroleum products globally had gone up. He said fuel products had increased by between 6.72 per cent and 9.33 per cent. 

“In the latest released prices for the period July 15 to August 14 2025, the Authority considered two cargoes of super petrol, two cargoes of diesel and one cargo of Jet A1 fuel. All these cargoes were delivered between June 10 and July 9,” Wandayi explained.