EXPLAINER: The tax and cost chain behind Kenya's record high fuel prices

While the government has stepped in to cushion consumers through tax cuts and price stabilisation, the latest pricing cycle has seen diesel and petrol now retail at Ksh.206 per litre, with kerosene remaining unchanged. Here is a breakdown that now reveals exactly how those final pump prices were arrived at.

The starting point in determining fuel prices is the landed cost. This is essentially the total cost incurred to buy and transport petroleum products from global markets to the Port of Mombasa.

In the latest cycle, that cost rose sharply, with super petrol landing at Ksh.107 per litre, diesel at Ksh.133, and kerosene even higher at Ksh.170 per litre. This reflects a tightening global supply linked to the conflict in the Middle East.

From there, additional costs are layered on.

Distribution through pipelines and storage adds roughly Ksh.4 to Ksh.5 per litre.

Next are oil importers’ and dealers’ margins, which in this cycle averaged about Ksh.17 per litre.

Then the biggest chunk comes from taxes and levies. The government has imposed nine different taxes and levies on petroleum products, including excise duty, value-added tax, the petroleum development levy, the petroleum regulatory levy, the railway development levy, the anti-adulteration levy and the merchant shipping levy.

These taxes and levies added another Ksh.82 on petrol, about Ksh.75 for diesel, and Ksh.68 for kerosene, making taxation one of the largest drivers of the final pump price.

“Certain jurisdictions in East Africa like Uganda, Rwanda, Tanzania, they do not have VAT on petroleum products. For that reason, what they have done is to have a slightly higher excise duty on them,” stated Hadijah Nannyomo, Tax Partner, EY.

The government attempted to cushion consumers on two fronts. First, it cut VAT from 16 percent to 13 percent, slightly reducing the tax burden.

“The Tax Procedures Act empowers the minister to reduce the VAT rate by 25 percent, to reduce or increase by 25 percent. When you look at the 3 percent, it is still within the limit,” Hadijah added. 

Second, it tapped into the petroleum development levy fund, injecting Ksh.6.2 billion in this pricing cycle alone to stabilise prices.

That intervention appears as a price stabilisation adjustment, shaving Ksh.4 for every litre of petrol, Ksh.23 for diesel, and a whopping Ksh.107 for kerosene.

This means that without the stabilisation, diesel for instance would have jumped by Ksh.64 instead of Ksh.40.

But even with these interventions, the increase in import costs led to a rise in pump prices.

In Nairobi, petrol and diesel now retail at Ksh.206, while kerosene remains unchanged at Ksh.152 per litre.

“When you look at fuel, it touches all sectors, so the impact it will have will spiral across all sectors. So to you as the consumer, you are being hit from all angles,” Hadijah noted. 

And now, the big question is what happens next should the war persist. With a huge part of the stabilisation kitty already spent, attention is turning to what Kenyans will face when that buffer runs out, and whether the government can afford further tax cuts at a time when the Kenya Revenue Authority is missing targets.