Abolish VAT On Petroleum Products To Revive Kenya's SME Sector, Economy

The Kenyan economy, particularly within the small and medium-sized enterprises (SMEs) sector, is currently grappling with severe economic hardships that threaten its very foundation.

A pivotal moment in this tumultuous journey can be traced back to 2018 when the government implemented a value-added tax (VAT) on petroleum products.

The consequences of this decision have rippled through the fabric of our economy, putting legitimate businesses at a disadvantage while seemingly favouring multinationals and financial institutions.

How VAT on fuel affects economy

As an essential energy source, petroleum plays a crucial role not only in Kenya but across Sub-Saharan Africa. The interconnectedness of the economy means that any increase in the price of petroleum inevitably sends shockwaves through all sectors.

The ripple effects of rising petroleum costs manifest as increased operational expenses for businesses, leading to reduced affordability for consumers.

This downward spiral threatens the very existence of many SMEs, compelling them to make difficult choices, including laying off employees.

It is critical to underscore that the private sector is a predominant employer in any economy, and in Kenya’s context, this reality holds particularly true for SMEs. The heart of our local economy beats through these enterprises, which are the backbone of employment.

As SMEs struggle under the weight of rising costs driven by VAT on petroleum products, we face an unsettling increase in unemployment levels.

The burden of economic hardship is acutely felt by countless families, with an unfortunate ripple effect that can destabilize our communities.

What govt should do about VAT on fuel

In light of these challenges, it is imperative that we urge the government to reconsider the tax dynamics surrounding petroleum products, most notably by abolishing the VAT.

While this move may initially seem to result in a loss of 16% VAT revenue, the broader implications of fostering a more vibrant economy are worth the sacrifice.

Reducing energy prices has the potential to revive SMEs, resulting in heightened levels of employment and economic activity.

By prioritizing the welfare of local businesses, we can breathe life into a stagnant economy.

The simple truth is that higher production costs limit SMEs' capacity to operate effectively. When input costs skyrocket, businesses have no choice but to increase the prices of goods and services.

This scenario creates a cascading effect where affordability diminishes, leading to decreased consumer spending – the lifeblood of our economy.

As a result, local companies may find themselves in an unsustainable position, ultimately leading to layoffs and a weakened workforce.

Benefits of eliminating VAT on fuel

Bold decisions are necessary to break this cycle of stagnation. Eliminating VAT on petroleum products would be a courageous step to bolster our local economy. While critics may argue against such a measure, it is crucial to recognize the larger picture.

The benefits anticipatable through revitalizing SMEs would lead not only to increased employment opportunities but also to a stronger base of tax contributors.

A flourishing economy will inevitably yield more substantial tax revenue, ultimately offsetting the initial loss attributed to the removal of VAT.

Here in Kenya, we must acknowledge the stark reality that the current value derived from our petroleum products is limited. Taxing these products adds an unreasonable economic burden without fair justification.

It is evident that the current VAT system disproportionately favours financial institutions and multinationals, which are not genuine reflections of the working Kenyan population.

In an economy where a small faction thrives while the vast majority struggle, we must re-evaluate our approach to taxation and its downstream impacts on local businesses.

Can we afford to remain passive in the face of growing economic adversity? Will we continue to allow our local economy to suffer while the larger players benefit disproportionately?

The time has come for us to advocate for a shift in tax policy that aligns with the fundamental principles of fairness and equity in business practices. By doing so, we safeguard our local interests and ensure that the playing field is levelled for SMEs.

Furthermore, the government has undertaken other noble measures aimed at bolstering the economy. Still, it is vital that these initiatives are accompanied by bold actions that directly target the challenges facing SMEs.

A multi-faceted strategy that focuses on reducing operational costs while simultaneously promoting business growth can yield transformative results.

Encouraging investments in alternative energy, enhancing access to credit, and promoting local goods and services are just a few ways we could strengthen the economic landscape for SMEs.

Set aside outdated tax structures

It’s my considered view that the survival of our local economy hinges on our willingness to make tough choices.

Abolishing VAT on petroleum products is not merely a fiscal decision; it represents a strategic manoeuvre that can catalyze significant economic revival.

By casting aside outdated tax structures and focusing on the revitalization of SMEs, we can alter the trajectory of unemployment and foster an environment conducive to growth and prosperity.

The challenges facing our economy are daunting, but they are not insurmountable. Those in positions of authority must muster the courage to take the unpopular path, for it is by doing so that we will safeguard the livelihoods of countless Kenyans.

If we commit to substantive change and support our SMEs through thoughtful policy decisions, we can chart a new course for Kenya’s economy—one that resonates with the aspirations of both businesses and workers alike.

The future of our economy depends on our collective ability to envision a more equitable and thriving landscape—let us rise to the occasion.

The writer is Martin Chomba Muriithi, Chairman of the Petroleum Outlest Association of Kenya (POAK).

The views expressed here are the writer’s and do not in any way represent the position of TUKO.co.ke.

Proofreading by Mercy Nyambura Guthua, journalist and copy editor at TUKO.co.ke

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The government implemented VAT on petroleum products in 2018.

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