IMPLEMENTATION OF VAT

ON PETROLEUM PRODUCTS
ALERT

ALGERIA

BOTSWANA

ETHIOPIA

GUINEA

KENYA

MADAGASCAR

MALAWI

MAURITIUS

MOROCCO

MOZAMBIQUE

NIGERIA

RWANDA

SUDAN

TANZANIA

UGANDA

ZAMBIA

REGIONAL OFFICE:
UAE
Introduction
On 1 September 2018, the Kenya Revenue Authority (the KRA) issued a press statement confirming
that VAT at a rate of 16 percent would be applied on petroleum products with effect from 1 September
2018, following the lapse of the 2 year VAT exempt transition period which had been extended effective
from 1 September 2016. The press statement was issued for the attention of the general public, oil
marketers, resellers, retailers, importers, depots, distributors and pump stations.

Following the end of the transition period, VAT at 16 percent is now applicable on petroleum products
such as petroleum oils, motor spirit, aviation spirit, kerosene, medium petroleum oils and preparations,
gas oil and natural gas in a gaseous state (except Liquefied Petroleum Gas (LPG) which is zero rated).

The content of this alert is intended to be of general use only and should not be relied upon without seeking
specific legal advice on any matter

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BACKGROUND
Petroleum products had been exempt from VAT since 1 September 2013 (when the Value Added Tax
Act, 2013 (the VATA) became effective) for a transition period of 3 years, which was due to expire on 1
September 2016. On 9 June 2016, the National Assembly through the Finance Act, 2016, approved a 2
year extension to the exempt status of petroleum products to 1 September 2018. This has meant that
the sale of petroleum products has not been a taxable supply for purposes of the VATA (either at a rate
of 0 percent (zero rated) or 16 percent (standard rated)) and hence players in the value chain have not
been required to charge VAT.

The petroleum products that had been exempt from VAT during the transition period are set out below:

a. Petroleum oils;

b. Motor spirit – regular and premium;

c. Aviation spirit and spirit type jet fuel;

d. Special boiling point spirit and white spirit;

e. Light spirits and preparations;

f. Partly refined crude;

g. Kerosene – jet fuel and illuminating kerosene;

h. Medium petroleum oils and preparations;

i. Gas oil – automotive, light, amber – for high speed engines; and

j. All natural gas in a gaseous state.

The supply of LPG remained zero rated and as such unaffected by the lapse of the exemption.

IMPLEMENTATION OF VAT ON PETROLEUM PRODUCTS PAGE 1

PRACTICAL

IMPLICATIONS

The importation and sale of these petroleum products is now subject to VAT at 16percent of their
taxable value, which would mean that all importers, resellers, distributors, depots and downstream oil
marketers are required to register, charge, account for and submit VAT returns on a monthly basis. This
registration is individual to all players in the value chain, for example, where a pump station is owned
and managed by a third party reseller and not the downstream oil marketer (multinational, national and
independent operators), the third party reseller would also be required to register for VAT and charge
VAT on the petroleum products.

VAT on importation is the obligation of the importer and as such would apply on the petroleum products
imported through the Open Tender System (OTS) regulated by the Ministry of Energy and the Energy
Regulatory Commission (the ERC). The obligation to pay the import VAT would be on the respective oil
marketing company which wins the OTS tender to import petroleum products in a specific period.

Registration for VAT

Only persons who are registered for VAT can charge VAT. A person is required to register for VAT through
the KRA’s online iTax portal if they have or expect to make a turnover in taxable supplies of KES 5 million
(approximately USD 50,000) annually. Owing to the huge volumes of petroleum products consumed in
Kenya, both for personal and commercial use, players in the value chain would be required to register for
VAT (to the extent that they are currently not registered) within a period of 30 days from 1 September
2018. The KRA is however empowered to register for VAT any person who is eligible for registration
who fails to do so within this 30 day period. It is however likely to be the case that the KRA will seek to
treat the players as being liable for VAT registration as from 1 September 2018.

All registered persons are required to account for and submit VAT returns on a monthly basis by the 20th
of the subsequent month to which transactions relate. The VAT payable on the sale of taxable supplies
(output VAT) is set off against VAT on taxable supplies purchased by such a supplier (input VAT), and
where such input VAT exceeds output VAT, such balance is carried forward to the next month.

The ERC, pursuant to the Energy (Petroleum Pricing) Regulations, 2010 (LN 196 of 2010), is empowered
to calculate and issue maximum retail pump prices of petroleum products, which will be in force from
15th of every month. The formula applied in determining the maximum wholesale/retail price of super/
regular petrol, kerosene or automotive diesel ought to factor in, among other factors, the weighted
average cost per litre, the transportation cost from Mombasa to the nearest depot and the allowed oil
marketing company’s gross wholesale/retail margin. Since the review of the petroleum product price
should now take into account the requirements of the VATA, then the revised maximum retail pump

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price set by the ERC in September is likely to be increased by the applicable VAT.

Currently, petroleum products are subject to excise duty, road maintenance levy, petroleum development
levy, petroleum regulation levy, import declaration fees and Kipevu Oil Storage Facility charges. This
means that the application of VAT would be a significant portion of the total taxes due on petroleum
products due from the final consumer. For consumers of petroleum products who are not registered for
VAT, the tax on petroleum products will be an extra cost as they are the final persons on the value chain
and they cannot therefore claim any input VAT incurred on the purchase of their petroleum products.

However, consumers who are registered for VAT and who provide taxable supplies are entitled to claim
the input VAT incurred on the purchase of petroleum products. In this regard therefore, service providers
who provide exempt supplies (for example transportation of passengers by public service vehicles) who
cannot recover the input VAT suffered on petroleum products are likely to increase their charges to
recover the input VAT.

There has also been some uncertainty regarding the “taxable value” on which the 16% VAT ought to be
levied. The VATA provides that such taxable value ought to be the aggregate of the consideration paid
for the petroleum product and all taxes, levies and charges paid or payable on the supply. This means
that at importation, the 16 percent VAT would be applicable on excise duty, import duty and all levies
paid on importation by the oil marketer who wins the OTS tender. This “tax on tax” may therefore carry
an additional inflationary burden across the value chain above the absolute value of 16 percent. It is
likely that guidance will be issued by the KRA and the National Treasury on what the “taxable value” for
petroleum products should be, in light of the uncertainty highlighted above.

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TIMING OF THE

FINANCE BILL, 2018

The National Assembly on 29 August 2018 approved an amendment to the VATA intended to extend the
transition period for exemption of VAT on petroleum products for a further period of 2 years (expiring
1 September 2020).

It is our understanding that the Finance Bill has now been presented to the President for assent and he
has a 14 day period from the date he receives it from the National Assembly to assent to it. The President
has the power to either assent to a Bill as presented or to refer it back to the National Assembly for
reconsideration noting any reservations that the President may have concerning the Bill.

It is worth noting that the Public Finance Management Act, No 18 of 2012 provides that the National
Assembly shall consider and approve the Finance Bill with or without amendments no later than 90
days after passing the Appropriation Bill. The relevance of the Appropriation Bill is that once it is signed
into law, it gives the government the power to withdraw money from the Consolidated Fund to fund
government expenditure.

The Appropriation Bill was signed into law on 29 June 2018 by the President. This therefore means
that the Bill, as is or with relevant changes, ought to have been passed by the National Assembly by 30
September 2018. Having been passed by 30 August 2018, the President would have until approximately
mid-September to assent to the Bill or make his reservations. However, even where the President
refuses to assent to a Bill and makes recommendation for its amendment, the National Assembly still
has the power to pass a Bill a second time without implementing the President’s recommendations. The
Constitution provides that where the President refers a Bill to the National Assembly for reconsideration,
the National Assembly may either:

a. amend the Bill in light of the President’s reservations;

b. pass the Bill a second time without amendment; or

c. pass the Bill a second time with amendments that do not fully accommodate the President’s
reservations.

However, for the National Assembly to pass a Bill that has been referred to them for reconsideration
without amendment or with amendments that do not fully accommodate the President’s reservations,
they must have a vote supported by two-thirds of the National Assembly.

Article 116(3) of the Constitution of Kenya, 2010 provides that an Act of Parliament comes into force
on the fourteenth day after its publication in the Gazette, unless the Act stipulates a different date or
time at which it will come into force.

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As such, the provisions of the VATA imposing 16 percent VAT on petroleum products are in force with
effect from 1 September 2018, until the Finance Bill, 2018 is assented to by the President and the
provisions extending the VAT exemption period for petroleum products are effective.

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THE TEAM

Should you require more information, please do not hesitate to contact Daniel Ngumy at
dng@africalegalnetwork.com, Kenneth Njuguna at kkn@africalegalnetwork.com or the Tax team at
taxteam@africalegalnetwork.com

Daniel Ngumy Kenneth Njuguna

Partner Senior Associate

E: dng@africalegalnetwork.com E: kkn@africalegalnetwork.com

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